FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2008
Commission File No. 001-14793
First BanCorp.
(Exact name of registrant as specified in its charter)
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Puerto Rico
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66-0561882 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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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 office) |
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Registrants telephone number, including area code:
(787) 729-8200
Securities registered under Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock ($1.00 par value)
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New York Stock Exchange |
7.125% Noncumulative Perpetual Monthly Income
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New York Stock Exchange |
Preferred Stock, Series A (Liquidation Preference $25 per share) |
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8.35% Noncumulative Perpetual Monthly Income
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New York Stock Exchange |
Preferred Stock, Series B (Liquidation Preference $25 per share) |
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7.40% Noncumulative Perpetual Monthly Income
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New York Stock Exchange |
Preferred Stock, Series C (Liquidation Preference $25 per share) |
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7.25% Noncumulative Perpetual Monthly Income
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New York Stock Exchange |
Preferred Stock, Series D (Liquidation Preference $25 per share) |
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7.00% Noncumulative Perpetual Monthly Income
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New York Stock Exchange |
Preferred Stock, Series E (Liquidation Preference $25 per share) |
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Securities registered under Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well- known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15 (d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definite proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. 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
The aggregate market value of the voting common equity held by non affiliates of the
registrant as of June 30, 2008 (the last day of the registrants most recently completed second
quarter) was $527,602,809 based on the closing price of $6.34 per share of common stock on the New
York Stock Exchange on June 30, 2008. The registrant had no nonvoting common equity outstanding as
of June 30, 2008. For the purposes of the foregoing calculation only, registrant has treated as
common stock held by affiliates only common stock of the registrant held by its directors and
executive officers and voting stock held by the registrants employee benefit plans. The
registrants response to this item is not intended to be an admission that any person is an
affiliate of the registrant for any purposes other than this response.
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date: 92,546,749 shares as of January 31, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
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PART III |
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Item 10
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Directors, Executive Officers
and Corporate Governance.
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Information in response to
this Item is incorporated
into this Annual Report on
Form 10-K by reference from
the sections entitled
Information with Respect
to Nominees for Director of
First BanCorp and Executive
Officers of the
Corporation, Corporate
Governance and Related
Matters and Section 16(a)
Beneficial Ownership
Reporting Compliance in
First BanCorps definitive
Proxy Statement for use in
connection with its 2009
Annual Meeting of
stockholders (the Proxy
Statement) to be filed
with the Securities and
Exchange Commission within
120 days of the close of
First BanCorps 2008 fiscal
year. |
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Item 11
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Executive Compensation.
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Information in response to
this Item is incorporated
into this Annual Report on
Form 10-K by reference from
the sections entitled
Compensation Committee
Interlocks and Insider
Participation,
Compensation of
Directors, Compensation
Discussion and Analysis,
Compensation Committee
Report and Tabular
Executive Compensation
Disclosure in First
BanCorps Proxy Statement. |
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Item 12
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Security Ownership of Certain
Beneficial Owners and
Management and Related
Stockholder Matters.
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Information in response to
this Item is incorporated
into this Annual Report on
Form 10-K by reference from
the section entitled
Beneficial Ownership of
Securities in First
BanCorps Proxy Statement. |
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Item 13
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Certain Relationships and
Related Transactions, and
Director Independence.
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Information in response to
this Item is incorporated
into this Annual Report on
Form 10-K by reference from
the sections entitled
Certain Relationships and
Related Person
Transactions and
Corporate Governance and
Related Matters in First
BanCorps Proxy Statement. |
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Item 14
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Principal Accounting Fees and
Services.
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Information in response to
this Item is incorporated
into this Annual Report on
Form 10-K by reference from
the section entitled Audit
Fees in First BanCorps
Proxy Statement. |
2
FIRST BANCORP
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Forward Looking Statements
This Form 10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this Form 10-K 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 stockholder communications, or in oral
statements made with the approval of an authorized executive officer, the word or phrases would
be, will allow, intends to, will likely result, are expected to, should, anticipate
and similar expressions are meant to identify forward-looking statements.
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 and commercial 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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decreased demand for our products and services and lower revenue and earnings because of
a recession in the United States, a continued recession in Puerto Rico and current fiscal
problems and budget deficit of the Puerto Rico government; |
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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 specific measures that could be adopted by the Puerto Rico government
in response to its fiscal situation and the impact of those measures in several sectors of
Puerto Ricos economy; |
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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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changes in the fiscal and monetary policies and regulations
of the federal government,
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 associated with the soundness of other financial institutions; |
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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 the financial condition of Doral Financial Corporation (Doral) and R&G
Financial Corporation (R&G Financial) 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;
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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, in this Annual Report on Form 10-K.
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PART I
Item 1. Business
GENERAL
First BanCorp (the Corporation) is a publicly-owned financial holding company that is
subject to regulation, supervision and examination by the Federal Reserve Board (the FED). The
Corporation was incorporated under the laws of the Commonwealth of Puerto Rico to serve as the bank
holding company for FirstBank Puerto Rico (FirstBank or the Bank). The Corporation is a full
service provider of financial services and products with operations in Puerto Rico, the United
States and the US and British Virgin Islands. As of December 31, 2008, the Corporation had total
assets of $19.5 billion, total deposits of $13.1 billion and total stockholders equity of $1.5
billion.
The Corporation provides a wide range of financial services for retail, commercial and
institutional clients. As of December 31, 2008, the Corporation controlled four wholly-owned
subsidiaries: FirstBank, FirstBank Insurance Agency, Inc. (FirstBank Insurance Agency), Grupo
Empresas de Servicios Financieros (d/b/a PR Finance Group) and Ponce General Corporation (Ponce
General). FirstBank is a Puerto Rico-chartered commercial bank, FirstBank Insurance Agency is a
Puerto Rico-chartered insurance agency, PR Finance Group is a domestic corporation and Ponce
General is the holding company of a federally chartered stock savings and loan association,
FirstBank Florida.
FirstBank is subject to the supervision, examination and regulation of both the Office of the
Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (OCIF) and the Federal
Deposit Insurance Corporation (the FDIC). Deposits are insured through the FDIC Deposit Insurance
Fund. In addition, within FirstBank, the Banks Virgin Islands operations are subject to regulation
and examination by the United States Virgin Islands Banking Board, and the British Virgin Islands
operations are subject to regulation by the British Virgin Islands Financial Services Commission.
FirstBank Insurance Agency is subject to the supervision, examination and regulation of the Office
of the Insurance Commissioner of the Commonwealth of Puerto Rico and operates nine offices in
Puerto Rico. PR Finance Group is subject to the supervision, examination and regulation of the
OCIF. FirstBank Florida is subject to the supervision, examination and regulation of the Office of
Thrift Supervision (the OTS).
As of December 31, 2008, FirstBank conducted its business through its main office located in
San Juan, Puerto Rico, forty-eight full service banking branches in Puerto Rico, sixteen branches
in the United States Virgin Islands (USVI) and British Virgin Islands (BVI) and a loan production
office in Miami, Florida (USA). FirstBank had four wholly-owned subsidiaries with operations in
Puerto Rico: First Leasing and Rental Corporation, a vehicle leasing and daily rental company with
nine offices in Puerto Rico; First Federal Finance Corp. (d/b/a Money Express La Financiera), a
finance company specialized in the origination of small loans with
thirty-seven offices in Puerto
Rico; First Mortgage, Inc. (First Mortgage), a residential mortgage loan origination company with
thirty-six offices in FirstBank branches and at stand-alone sites; and FirstBank Overseas
Corporation, an international banking entity organized under the International Banking Entity Act
of Puerto Rico. FirstBank had three subsidiaries with operations outside of Puerto Rico: First
Insurance Agency VI, Inc., an insurance agency with four offices that sells insurance products in
the USVI; First Express, a finance company specializing in the origination of small loans with four
offices in the USVI; and First Trade, Inc., which is inactive.
The Corporation also operates in the United States mainland through its federally chartered
stock savings and loan association FirstBank Florida and through its loan production office located
in Miami, Florida. FirstBank Florida provides a wide range of banking services to individual and
corporate customers through its nine branches in the U.S. mainland.
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BUSINESS SEGMENTS
The Corporation has four reportable segments: Commercial and Corporate Banking; Mortgage
Banking; Consumer (Retail) Banking; and Treasury and Investments. These segments are described
below:
Commercial and Corporate Banking
The Commercial and Corporate Banking segment consists of the Corporations lending and other
services for large customers represented by the private and the public sector as well as
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. A substantial portion of the commercial loan
portfolio is secured either by the underlying value of the real estate collateral, and collateral
and the personal guarantees of the borrowers are taken in abundance of caution. Although commercial
loans involve greater credit risk than a typical residential mortgage loan because they are larger
in size and more risk is concentrated in a single borrower, the Corporation has and maintains an
effective credit risk management infrastructure designed to mitigate potential losses associated
with commercial lending, including strong underwriting and loan review functions, sales of loan
participations and continuous monitoring of concentrations within portfolios.
Mortgage Banking
The Mortgage Banking segment conducts its operations mainly through FirstBank and its mortgage
origination subsidiary, FirstMortgage. These operations consist of the origination, sale and
servicing of a variety of residential mortgage loan products. Originations are sourced through
different channels, such as stand-alone offices, mortgage centers within FirstBank branches and
mortgage and real estate brokers, and in association with new project developers. FirstMortgage
focuses on originating residential real estate loans, some of which conform to Federal Housing
Administration (FHA), Veterans Administration (VA) and Rural Development (RD) standards.
Loans originated that meet FHA standards qualify for the federal agencys insurance program whereas
loans that meet VA and RD standards are guaranteed by their respective federal agencies. In
December 2008, the Corporation obtained from the Government National Mortgage Association (GNMA)
Commitment Authority to issue GNMA mortgage-backed securities. Under this program the Corporation
will begin securitizing and selling FHA/VA mortgage loan production into the secondary markets.
Mortgage loans that do not qualify under the aforementioned programs are commonly referred to
as conventional loans. Conventional real estate loans could be conforming and non-conforming.
Conforming loans are residential real estate loans that meet the standards for sale under the
Fannie Mae (FNMA) and Freddie Mac (FHLMC)
programs whereas loans that do not meet these standards
are referred to as non-conforming residential real estate loans. The Corporations strategy is to
penetrate markets by seeking to provide customers with a variety of high quality mortgage products
to serve their financial needs faster and more easily than the competition and at competitive
prices. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets.
Residential real estate conforming loans are sold to investors like FNMA and FHLMC. More than 90%
of the Corporations residential mortgage loan portfolio consists of fixed-rate, fully amortizing,
full documentation loans that have a lower risk than the typical sub-prime loans that have
adversely affected the U.S. real estate market. The Corporation is not active in negative
amortization loans or option adjustable rate mortgage loans (ARMs) including ARMs with teaser
rates.
Consumer (Retail) Banking
The Consumer (Retail) Banking segment consists of the Corporations consumer lending and
deposit-taking activities conducted mainly through its branch network and loan centers. Loans to
consumers include auto, boats, lines of credit and personal loans. Deposit products include
interest-bearing and non-interest bearing checking and savings accounts, Individual Retirement
Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch of
FirstBanks retail network serve as one of the funding sources for lending and investment
activities.
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Consumer lending has been mainly driven by auto loan originations. The Corporation follows a
strategy of providing outstanding service to selected auto dealers who provide the channel for the
bulk of the Corporations auto loan originations. This strategy is directly linked to the
Corporations commercial lending activities as the Corporation maintains strong and stable auto
floor plan relationships, which are the foundation of a successful auto loan generation operation.
The Corporations commercial relations with floor plan dealers is strong and directly benefits the
consumer lending operation and are managed as part of the consumer banking
activities.
Personal loans and, to a lesser extent, marine financing also contribute to interest income
generated on consumer lending. Management plans to continue to be active in the consumer loans
market, applying the Corporations strict underwriting standards. Through an alliance reached with
FIA Card Services (Bank of America), after the acquisition by FIA of the Citibank Puerto Rico
credit card portfolio, credit cards are issued under the FirstBank name. FIA bears the credit risk
for these accounts.
Treasury and Investments
The Treasury and Investments segment is responsible for the Corporations investment portfolio
and treasury functions designed to manage and enhance liquidity. This segment sells funds to the
Commercial and Corporate Banking, Mortgage Banking, and Consumer (Retail) Banking segments to
finance their lending activities and purchases funds gathered by those segments.
The interest rates charged or credited by Treasury and Investments are based on market rates.
For information regarding First BanCorps reportable segments, please refer to Note 31,
Segment Information, to the Corporations financial statements for the year ended December 31,
2008 included in Item 8 of this Form 10-K.
Employees
As of December 31, 2008, the Corporation and its subsidiaries employed 2,995 persons. None of
its employees are represented by a collective bargaining group. The Corporation considers its
employee relations to be good.
RECENT SIGNIFICANT EVENTS
Participation in the U.S. Treasury Departments Capital Purchase Program
On January 16, 2009, the Corporation entered into a Letter Agreement with the United States
Department of the Treasury (Treasury) pursuant to which Treasury invested $400,000,000 in
preferred stock of the Corporation under the Treasurys Troubled Asset Relief Program Capital
Purchase Program. Under the Letter Agreement, which incorporates the Securities Purchase Agreement
Standard Terms (the Purchase Agreement), the Corporation issued and sold to Treasury (1)
400,000 shares of the Corporations Fixed Rate Cumulative Perpetual Preferred Stock, Series F,
$1,000 liquidation preference per share (the Series F Preferred Stock), and (2) a warrant dated
January 16, 2009 (the Warrant) to purchase 5,842,259 shares of the Corporations common stock
(the Warrant shares) at an exercise price of $10.27 per share. The exercise price of the Warrant
was determined based upon the average of the closing prices of the Corporations common stock
during the 20-trading day period ended December 19, 2008, the last trading day prior to the date
the Corporations application to participate in the program was preliminarily approved. The
Purchase Agreement is incorporated into Exhibit 10.4 hereto by reference to Exhibit 10.1 of the
Corporations Form 8-K filed with the SEC on January 20, 2009.
The Series F Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on
the Series F Preferred Stock will accrue on the liquidation preference amount on a quarterly basis
at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum, but
will only be paid when, as and if declared by the Corporations Board of Directors out of assets
legally available therefore. The Series F Preferred Stock will rank pari passu with the
Corporations existing 7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A,
8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B, 7.40% Noncumulative
Perpetual Monthly Income Preferred Stock, Series C, 7.25% Noncumulative Perpetual Monthly Income
Preferred Stock, Series D, and 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series
E, in terms of
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dividend payments and distributions upon liquidation, dissolution and winding up of the
Corporation. The Purchase Agreement contains limitations on the payment of dividends on common
stock, including limiting regular quarterly cash dividends to an amount not exceeding the last
quarterly cash dividend paid per share, or the amount publicly announced (if lower), of common
stock prior to October 14, 2008, which is $0.07 per share. The ability of the Corporation to
purchase, redeem or otherwise acquire for consideration, any shares of its common stock, preferred
stock or trust preferred securities will be subject to restrictions outlined in the Purchase
Agreement. These restrictions will terminate on the earlier of (a) January 16, 2012 and (b) the
date on which the Series F Preferred Stock is redeemed in whole or Treasury transfers all of the
Series F Preferred Stock to third parties that are not affiliates of Treasury.
The shares of Series F Preferred Stock are non-voting, other than having class voting rights
on certain matters that could adversely affect the Series F Preferred Stock. If dividends on the
Series F Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or
more, whether or not consecutive, the Corporations authorized number of directors will be
increased automatically by two and the holders of the Series F Preferred Stock, voting together
with holders of any then outstanding parity stock, will have the right to elect two directors to
fill such newly created directorships at the Corporations next annual meeting of stockholders or
at a special meeting of stockholders called for that purpose prior to such annual meeting. These
preferred share directors will be elected annually and will serve until all accrued and unpaid
dividends on the Series F Preferred Stock have been declared and paid in full.
On January 13, 2009, the Corporation filed a Certificate of Designations (theCertificate of
Designations) with the Puerto Rico Department of State for the purpose of amending its Certificate
of Incorporation to fix the designations, preferences, limitations and relative rights of the
Series F Preferred Stock.
As per the Purchase Agreement, prior to January 16, 2012, the Corporation may redeem, subject
to the approval of the Board of Governors of the Federal Reserve System, the shares of Series F
Preferred Stock only with proceeds from one or more Qualified Equity Offerings, as such term is
defined in the Certificate of Designations. After January 16, 2012, the Corporation may redeem,
subject to the approval of the Board of Governors of the Federal Reserve System, in whole or in
part, out of funds legally available therefore, the shares of Series F Preferred Stock then
outstanding. Pursuant to the recently enacted American Recovery and Reinvestment Act of 2009,
subject to consultation with the appropriate Federal banking agency, the Secretary of Treasury may
permit a TARP recipient to repay any financial assistance previously provided under TARP without
regard as to whether the financial institution has replaced such funds from any other source.
The Warrant has a ten-year term and is exercisable at any time for 5,842,259 shares of First
BanCorp common stock at an exercise price of $10.27. The exercise price and the number of shares
of common stock issuable upon exercise of the Warrant are adjustable in a number of circumstances,
as discussed below. The exercise price and the number of shares of common stock issuable upon
exercise of the Warrant will be adjusted proportionately:
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in the event of a stock split, subdivision, reclassification or combination of the
outstanding shares of common stock; |
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until the earlier of the date the Treasury no longer holds the Warrant or any portion
thereof or January 16, 2012, if the Corporation issues shares of common stock or securities
convertible into common stock for no consideration or at a price per share that is less
than 90% of the market price on the last trading day preceding the date of the pricing of
such sale. Any amounts that the Corporation receives in connection with the issuance of
such shares or convertible securities will be deemed to be equal to the sum of the net
offering price of all such securities plus the minimum aggregate amount, if any, payable
upon exercise or conversion of any such convertible securities; no adjustment will be
required with respect to (i) consideration for or to fund business or asset acquisitions,
(ii) shares issued in connection with employee benefit plans and compensation arrangements
in the ordinary course consistent with past practice approved by the Corporations Board of
Directors, (iii) a public or broadly marketed offering and sale by the Corporation or its
affiliates of the Corporations common stock or convertible securities for cash pursuant to
registration under the Securities Act or issuance under Rule 144A on a basis consistent
with capital raising transactions by comparable financial institutions, and (iv) the
exercise of preemptive rights on terms existing on January 16, 2009; |
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in connection with the Corporations distributions to security holders (e.g., stock
dividends); |
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in connection with certain repurchases of common stock by the Corporation; and |
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in connection with certain business combinations. |
None of the shares of Series F Preferred Stock, the Warrant, or the Warrant shares are subject
to any contractual restriction on transfer, except that Treasury may not transfer or exercise an
aggregate of more than one-half of the Warrant shares prior to the earlier of the date on which the
Corporation receives proceeds from one or more Qualified Equity Offerings in an aggregate amount of
at least $400,000,000 and December 31, 2009.
The Series F Preferred Stock and the Warrant were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On February 13,
2009, the Corporation filed a Form S-3 registering the resale of the shares of Series F Preferred
Stock, the Warrant and the Warrant shares, and the sale of the Warrant shares by the Corporation to
purchasers of the Warrant. In addition, under the shelf registration filed on February 13, 2009,
the Corporation registered the resale of 9,250,450 shares of common stock by or on behalf of the
Bank of Nova Scotia, its pledges, donees, transferees or other successors in interest.
Under the terms of the Purchase Agreement, (i) the Corporation amended its compensation,
bonus, incentive and other benefit plans, arrangements and agreements (including severance and
employment agreements), to the extent necessary to be in compliance with the executive compensation
and corporate governance requirements of Section 111(b) of the Emergency Economic Stability Act of
2008 and applicable guidance or regulations issued by the Secretary
of the Treasury on or prior to
January 16, 2009 and (ii) each Senior Executive Officer, as defined in the Purchase Agreement,
executed a written waiver releasing Treasury and the Corporation from any claims that such officers
may otherwise have as a result of the Corporations amendment of such arrangements and agreements
to be in compliance with Section 111(b). Until such time as Treasury ceases to own any debt or
equity securities of the Corporation acquired pursuant to the Purchase Agreement, the Corporation
must maintain compliance with these requirements.
Regulatory Actions
On June 24, 2008, the FED, under the delegated authority of the Board of Governors of the
Federal Reserve System, terminated the Order to Cease and Desist dated March 16, 2006 related to
the mortgage-related transactions with other financial institutions.
On January 16, 2009, the OTS rescinded the restrictions imposed in February 2006 on FirstBank
Florida as a result of safety and soundness concerns derived from the Corporations announcement in
December 2005 that it would restate its financial statements going back to 2002.
The Corporation has continued working on the reduction of its credit exposure with Doral and
R&G Financial. The outstanding balance of loans to Doral and R&G Financial amounted to $348.8
million and $218.9 million, respectively, as of December 31, 2008.
Surrender of the license to transact business as an International Bank Agency in Florida
Effective September 3, 2008, FirstBank surrendered its International Bank Agency license
granted on October 1, 2004 by the Financial Services Commission of the Financial Regulation of the
State of Florida. FirstBank continues offering essentially the same services offered by its former
International Bank Agency through a loan production office in Florida.
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Business Developments
On January 28, 2008, FirstBank acquired Virgin Islands Community Bank (VICB) in St. Croix,
U.S. Virgin Islands. VICB had three branches on the island of St. Croix and deposits of approximately
$56 million at the time of acquisition.
On July 31, 2008, the Corporation acquired a $218 million auto loan portfolio from Chrysler
Financial Services Caribbean, LLC (Chrysler).
Credit Ratings
FirstBanks long-term senior debt rating is currently rated Ba1 by Moodys Investor Service
(Moodys) and BB+ by Standard & Poors (S&P), one notch under their definition of investment
grade. Fitch Ratings Ltd. (Fitch) has rated the Corporations long-term senior debt a rating of
BB, which is two notches under investment grade. However, the credit ratings outlook for Moodys
and S&P are stable while Fitchs is negative.
WEBSITE ACCESS TO REPORT
The Corporation makes available annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge on or through its
internet website at www.firstbankpr.com, (under the Investor Relations section), as soon
as reasonably practicable after the Corporation electronically files such material with, or
furnishes it to, the SEC.
The Corporation also makes available the Corporations corporate governance standards, the
charters of the audit, asset/liability, compensation and benefits, credit, corporate governance and
nominating committees and the codes mentioned below, free of charge on or through its internet
website at www.firstbankpr.com (under the Investor Relations section):
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Code of Ethics for Senior Financial Officers |
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Code of Ethics applicable to all employees |
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Independence Principles for Directors |
The corporate governance standards, and the aforementioned charters and codes may also be
obtained free of charge by sending a written request to Mr. Lawrence Odell, Executive Vice
President and General Counsel, PO Box 9146, San Juan, Puerto Rico 00908.
The public may read and copy any materials First BanCorp files with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, the public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy, and information statements, and other
information regarding issuers that file electronically with the SEC at its website
(www.sec.gov).
MARKET AREA AND COMPETITION
Puerto Rico, where the banking market is highly competitive, is the main geographic service
area of the Corporation. As of December 31, 2008, the Corporation also had a presence through its
subsidiaries in the United States and British Virgin Islands and through its loan production office
and its federally chartered stock savings and loan association in Florida (USA). Puerto Rico banks
are subject to the same federal laws, regulations and supervision that apply to similar
institutions in the United States mainland.
Competitors include other banks, insurance companies, mortgage banking companies, small loan
companies, automobile financing companies, leasing companies, vehicle rental companies, brokerage
firms with retail
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operations, and credit unions in Puerto Rico, the Virgin Islands and the state of Florida. The
Corporations businesses compete with these other firms with respect to the range of products and
services offered and the types of clients, customers, and industries served.
The Corporations ability to compete effectively depends on the relative performance of its
products, the degree to which the features of its products appeal to customers, and the extent to
which the Corporation meets clients needs and expectations. The Corporations ability to compete
also depends on its ability to attract and retain professional and other personnel, and on its
reputation.
The Corporation encounters intense competition in attracting and retaining deposits and its
consumer and commercial lending activities. The Corporation competes for loans with other financial
institutions, some of which are larger and have greater resources available than those of the
Corporation. Management believes that the Corporation has been able to compete effectively for
deposits and loans by offering a variety of transaction account products and loans with competitive
features, by pricing its products at competitive interest rates, by offering convenient branch
locations, and by emphasizing the quality of its service. The Corporations ability to originate
loans depends primarily on the rates and fees charged and the service it provides to its borrowers
in making prompt credit decisions. There can be no assurance that in the future the Corporation
will be able to continue to increase its deposit base or originate loans in the manner or on the
terms on which it has done so in the past.
SUPERVISION AND REGULATION
Bank Holding Company Activities and Other Limitations
The Corporation is subject to ongoing regulation, supervision, and examination by the Federal
Reserve Board, and is required to file with the Federal Reserve Board periodic and annual reports
and other information concerning its own business operations and those of its subsidiaries. In
addition, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as
amended (Bank Holding Company Act). Under the provisions of the Bank Holding Company Act, a bank
holding company must obtain Federal Reserve Board approval before it acquires direct or indirect
ownership or control of more than 5% of the voting shares of another bank, or merges or
consolidates with another bank holding company. The Federal Reserve Board also has authority under
certain circumstances to issue cease and desist orders against bank holding companies and their
non-bank subsidiaries.
A bank holding company is prohibited under the Bank Holding Company Act, with limited
exceptions, from engaging, directly or indirectly, in any business unrelated to the businesses of
banking or managing or controlling banks. One of the exceptions to these prohibitions permits
ownership by a bank holding company of the shares of any corporation if the Federal Reserve Board,
after due notice and opportunity for hearing, by regulation or order has determined that the
activities of the corporation in question are so closely related to the businesses of banking or
managing or controlling banks as to be a proper incident thereto.
Under the Federal Reserve Board policy, a bank holding company such as the Corporation is
expected to act as a source of financial strength to its banking subsidiaries and to commit support
to them. This support may be required at times when, absent such policy, the bank holding company
might not otherwise provide such support. In the event of a bank holding companys bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a
subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment.
In addition, any capital loans by a bank holding company to any of its subsidiary banks must be
subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary
bank. As of December 31, 2008, FirstBank and FirstBank Florida were the only depository institution
subsidiaries of the Corporation.
The Gramm-Leach-Bliley Act (the GLB Act) revised and expanded the provisions of the Bank
Holding Company Act by including a section that permits a bank holding company to elect to become a
financial holding company and to permits to engage in a full range of financial activities. In
April 2000, the Corporation filed an election with the Federal Reserve Board and became a financial
holding company under the GLB Act. The GLB Act requires a bank holding company that elects to
become a financial holding company to file a written declaration with the appropriate Federal
Reserve Bank and comply with the following (and such compliance must continue while the entity is
treated as a financial holding company): (i) state that the bank holding company elects to become
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a financial holding company; (ii) provide the name and head office address of the bank holding
company and each depository institution controlled by the bank holding company; (iii) certify that
all depository institutions controlled by the bank holding company are well-capitalized as of the
date the bank holding company files for the election; (iv) provide the capital ratios for all
relevant capital measures as of the close of the previous quarter for each depository institution
controlled by the bank holding company; and (v) certify that all depository institutions controlled
by the bank holding company are well-managed as of the date the bank holding company files the
election. All insured depository institutions controlled by the bank holding company must have also
achieved at least a rating of satisfactory record of meeting community credit needs under the
Community Reinvestment Act during the depository institutions most recent examination.
A financial holding company ceasing to meet these standards is subject to a variety of
restrictions, depending on the circumstances. If the Federal Reserve Board determines that any of
the financial holding companys subsidiary depository institutions are either not well-capitalized
or not well-managed, it must notify the financial holding company. Until compliance is restored,
the Federal Reserve Board has broad discretion to impose appropriate limitations on the financial
holding companys activities. If compliance is not restored within 180 days, the Federal Reserve
Board may ultimately require the financial holding company to divest its depository institutions or
in the alternative, to discontinue or divest any activities that are permitted only to
non-financial holding company bank holding companies.
The potential restrictions are different if the lapse pertains to the Community Reinvestment
Act requirement. In that case, until all the subsidiary institutions are restored to at least
satisfactory Community Reinvestment Act rating status, the financial holding company may not
engage, directly or through a subsidiary, in any of the additional activities permissible under the
GLB Act nor make additional acquisitions of companies engaged in the additional activities.
However, completed acquisitions and additional activities and affiliations previously begun are
left undisturbed, as the GLB Act does not require divestiture for this type of situation.
Financial holding companies may engage, directly or indirectly, in any activity that is
determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii)
complementary to a financial activity and does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The GLB Act specifically
provides that the following activities have been determined to be financial in nature: (a)
lending, trust and other banking activities; (b) insurance activities; (c) financial or economic
advice or services; (d) pooled investments; (e) securities underwriting and dealing; (f) existing
bank holding company domestic activities; (g) existing bank holding company foreign activities; and
(h) merchant banking activities. The Corporation offers insurance agency services through its
wholly-owned subsidiary, FirstBank Insurance Agency and through First Insurance Agency V. I., Inc.,
a subsidiary of FirstBank.
In addition, the GLB Act specifically gives the Federal Reserve Board the authority, by
regulation or order, to expand the list of financial or incidental activities, but requires
consultation with the Treasury, and gives the Federal Reserve Board authority to allow a financial
holding company to engage in any activity that is complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally.
Under the GLB Act, if the Corporation fails to meet any of the requirements for being a
financial holding company and is unable to resolve such deficiencies within certain prescribed
periods of time, the Federal Reserve Board could require the Corporation to divest control of one
or more of its depository institution subsidiaries or alternatively cease conducting financial
activities that are not permissible for bank holding companies that are not financial holding
companies.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (SOA) implemented a range of corporate governance and
accounting measures to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of disclosures under federal securities laws. In addition,
SOA have established membership requirements and responsibilities for the audit committee, imposed
restrictions on the relationship between the Corporation and external auditors, imposed additional
responsibilities for the external financial statements on our chief executive officer and chief
financial
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officer, expanded the disclosure requirements for corporate insiders, required management to
evaluate its disclosure controls and procedures and its internal control over financial reporting,
and required the auditors to issue a report on the internal controls over financial reporting.
Since the 2004 Annual Report on Form 10-K, the Corporation has included its management
assessment regarding the effectiveness of the Corporations internal control over financial
reporting. The internal control report includes a statement of managements responsibility for
establishing and maintaining adequate internal control over financial reporting for the
Corporation; managements assessment as to the effectiveness of the Corporations internal control
over financial reporting based on managements evaluation, as of year-end; and the framework used
by management as criteria for evaluating the effectiveness of the Corporations internal control
over financial reporting. As of December 31, 2008, First BanCorps management concluded that its
internal control over financial reporting was effective. The Corporations independent registered
public accounting firm reached to the same conclusion.
Emergency Economic Stabilization Act of 2008
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the EESA) was signed
into law. The EESA authorized the Treasury to access up to $700 billion to protect the U.S.
economy and restore the confidence and stability to the financial markets. One such program under
the Treasury Departments Troubled Asset Relief Program (TARP) was action by Treasury to make
significant investments in U.S. financial institutions through the Capital Purchase Program (CPP).
The Treasurys stated purpose for implementing the CPP was to improve the capitalization of healthy
institutions, which would improve the flow of credit to businesses and consumers, and boost the
confidence of depositors, investors, and counterparties alike. All federal banking and thrift
regulatory agencies encouraged eligible institutions to participate in the CPP.
The Corporation applied for, and the Treasury approved, a capital purchase in the amount of
$400,000,000. The Corporation entered into a Letter Agreement with the Treasury, pursuant to which
the Corporation issued and sold to the Treasury for an aggregate purchase price of $400,000,000 in
cash (i) 400,000 shares of the Series F Preferred Stock, and (2) the Warrant to purchase 5,842,259
shares of the Corporations common stock at an exercise price of $10.27 per share, subject to
certain anti-dilution and other adjustments. The TARP transaction closed on January 16, 2009.
The Federal Reserve has also developed an Asset-Backed Commercial Paper Money Market Fund
Liquidity Facility (AMLF) and the Commercial Paper Funding Facility (CPFF). The AMLF provides
loans to depository institutions to purchase asset-backed commercial paper from money market mutual
funds. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper. These
facilities are presently authorized through April 30, 2009.
Future Legislation
From time to time, legislation is introduced in Congress and state legislatures with respect
to the regulation of financial institutions. It is anticipated that the 111th Congress will
consider legislation affecting financial institutions in its upcoming session. Such legislation
may change banking statutes and our operating environment or that of our subsidiaries in
substantial and unpredictable ways. We cannot determine the ultimate effect that potential
legislation, if enacted, or any regulations issued to implement it, would have upon our financial
condition or results of operations.
Financial Stability Plan
On February 10, 2009, Treasury Secretary Timothy Geithner outlined the Financial Stability
Plan, a comprehensive plan to restore stability to the U.S. financial system. The Financial
Stability Plan addresses the governments strategy to strengthen the economy by getting credit
flowing again to families and businesses, while imposing new measures and conditions to strengthen
accountability, oversight and transparency on the financial institutions receiving funds from the
government. These stronger monitoring conditions will be the new standards
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applicable to new TARP recipients subsequent to the enactment of the Financial Stability Plan
and such conditions do not apply retroactively to TARP recipients under EESA.
American Recovery and Reinvestment Act of 2009
On February 17, 2009, the Congress enacted the American Recovery and Reinvestment Act of 2009
(Stimulus Act). The Stimulus Act includes federal tax cuts, expansion of unemployment benefits
and other social welfare provisions, and domestic spending in education, health care, and
infrastructure, including the energy sector. The Stimulus Act includes new provisions relating to
compensation paid by institutions that receive government assistance under TARP, including
institutions that have already received such assistance. The provisions include restrictions on
the amounts and forms of compensation payable, provision for possible reimbursement of previously
paid compensation and a requirement that compensation be submitted to non-binding say on pay
shareholders votes.
Homeowner Affordability and Stability Plan
The Homeowner Affordability and Stability Plan is part of the U.S. government stimulus plan.
The plan will help homeowners restructure or refinance their mortgages to avoid foreclosure.
Treasury is expected to issue detailed protocols and guidelines for loss mitigation programs by
March 4, 2009.
Temporary Liquidity Guarantee Program
On November 21, 2008, following a determination by the Secretary of the Treasury that systemic
risk existed in the nations financial sector, the FDIC adopted a Final Rule to implement its
Temporary Liquidity Guarantee Program (TLG Program). The TLG Program, designed to avoid or
mitigate adverse effects of economic conditions on financial stability, has two primary components:
The Debt Guarantee Program, by which the FDIC will guarantee the payment of certain newly issued
senior unsecured debt issued by the depository institution, and the Transaction Account Guarantee
Program, by which the FDIC will guarantee certain noninterest-bearing transaction accounts. The
goal of the TLG Program is to decrease the cost of funding to the bank so that bank lending to
consumers and businesses will normalize.
The Debt Guarantee Program temporarily would guarantee all newly issued senior unsecured debt
up to prescribed limits issued by participating entities on or after October 14, 2008, through and
including June 30, 2009. As a result of this guarantee, the unpaid principal and contract interest
of an entitys newly issued senior unsecured debt would be paid by the FDIC upon a payment default.
The debt eligible for coverage under the Debt Guarantee Program has to be issued by participating
entities on or before June 30, 2009. The FDIC agreed to guarantee such debt until the earlier of
the maturity date of the debt or until June 30, 2012.
The Transaction Account Guarantee Program provides for a temporary full guarantee by the FDIC
for funds held at FDIC-insured depository institutions in non interest-bearing transaction accounts
above the existing deposit insurance limit. This coverage became effective on October 14, 2008, and
would continue through December 31, 2009 (assuming that the insured depository institution does not
opt-out of this component of the TLG Program). Under the Transaction Account Guarantee Program, a
participating institution will be able to provide customers full coverage on non-interest bearing
transaction accounts, as defined in the Interim Rule, for an annual fee of 10 basis points. The
coverage will be in effect for participating institutions until the end of 2009. After that date
these accounts will be subject to the basic insurance amount.
FirstBank is participating in the TLG; however, to date, no senior unsecured debt has been
issued under this program by FirstBank.
USA Patriot Act
Under Title III of the USA Patriot Act, also known as the International Money Laundering
Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required to,
among other things, identify their customers, adopt formal and comprehensive anti-money laundering
programs, scrutinize or prohibit altogether certain transactions of special concern, and be
prepared to respond to inquiries from U.S. law enforcement agencies
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concerning their customers and their transactions. Presently, only certain types of financial
institutions (including banks, savings associations and money services businesses) are subject to
final rules implementing the anti-money laundering program requirements of the USA Patriot Act.
Failure of a financial institution to comply with the USA Patriot Acts requirements could
have serious legal and reputational consequences for the institutions. The Corporation has adopted
appropriate policies, procedures and controls to address compliance with the USA Patriot Act and
Treasury regulations.
Privacy Policies
Under Title V of the GLB Act, all financial institutions are required to adopt privacy
policies, restrict the sharing of nonpublic customer data with parties at the customers request
and establish policies and procedures to protect customer data from unauthorized access. The
Corporation and its subsidiaries have adopted policies and procedures in order to comply with the
privacy provisions of the GLB Act and the Fair and Accurate Credit Transaction Act of 2003 and the
regulations issued thereunder.
State Chartered Non-Member Bank; Federal Savings Bank; Banking Laws and Regulations in General
FirstBank is subject to regulation and examination by the OCIF and the FDIC, and is subject to
certain requirements established by the Federal Reserve Board. FirstBank Florida is a federally
regulated savings and loan bank subject to regulation and examination by the OTS, and subject to
certain Federal Reserve regulations. The federal and state laws and regulations which are
applicable to banks and savings banks regulate, among other things, the scope of their businesses,
their investments, their reserves against deposits, the timing and availability of deposited funds,
and the nature and amount of and collateral for certain loans. In addition to the impact of
regulations, commercial banks are affected significantly by the actions of the Federal Reserve
Board as it attempts to control the money supply and credit availability in order to influence the
economy. Among the instruments used by the Federal Reserve Board to implement these objectives are
open market operations in U.S. government securities, adjustments of the discount rate, and changes
in reserve requirements against bank deposits. These instruments are used in varying combinations
to influence overall economic growth and the distribution of credit, bank loans, investments and
deposits. Their use also affects interest rates charged on loans or paid on deposits. The
monetary policies and regulations of the Federal Reserve Board have had a significant effect on the
operating results of commercial banks in the past and are expected to continue to do so in the
future. The effects of such policies upon our future business, earnings, and growth cannot be
predicted.
References herein to applicable statutes or regulations are brief summaries of portions
thereof which do not purport to be complete and which are qualified in their entirety by reference
to those statutes and regulations. Any change in applicable laws or regulations may have a material
adverse effect on the business of commercial banks, thrifts and bank holding companies, including
FirstBank, FirstBank Florida and the Corporation. However, management is not aware of any current
proposals by any federal or state regulatory authority that, if implemented, would have or would be
reasonably likely to have a material effect on the liquidity, capital resources or operations of
FirstBank, FirstBank Florida or the Corporation.
As a creditor and financial institution, FirstBank is subject to certain regulations
promulgated by the Federal Reserve Board, including, without limitation, Regulation B (Equal Credit
Opportunity Act), Regulation DD (Truth in Savings Act), Regulation E (Electronic Funds Transfer
Act), Regulation F (Limits on Exposure to Other Banks), Regulation O (Loans to Executive Officers,
Directors and Principal Shareholders), Regulation W (Transactions Between Member Banks and Their
Affiliates), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds Availability Act),
Regulation X (Real Estate Settlement Procedures Act), Regulation BB (Community Reinvestment Act)
and Regulation C (Home Mortgage Disclosure Act).
During 2008, federal agencies adopted revisions to several rules and regulations that will
impact lenders and secondary market activities. In 2008, the Federal Reserve Bank revised
Regulation Z, adopted under the Truth in Lending Act (TILA) and the Home Ownership and Equity
Protection Act (HOEPA), by adopting a final rule which prohibits unfair, abusive or deceptive home
mortgage lending practices and restricts certain mortgage lending practices. The final rule also
establishes advertisement standards and requires certain mortgage disclosures to be given to the
consumers earlier in the transaction. The rule is effective in October 2009. The final rule
regarding the
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TILA also includes amendments revising disclosures in connection with credit cards accounts
and other revolving credit plans to ensure that information provided to customers is provided in a
timely manner and in a form that is readily understandable.
Other
changes to regulations that will enter into effect during 2009 and
2010 which may require
a review of procedures and disclosure to customers are: Home Mortgage Disclosure Act (HMDA)
changes in the rate spread to be reported under HMDA (effective in October 2009); Real Estate
Settlement and Procedures Act (RESPA) which provides a new standard three page Good Faith Estimate
(GFE) with additional disclosures and requirements for lenders (main changes are effective in
January 2010); Flood Insurance changes in the Standard Flood and Hazard Determination Form
(effective in June 2009); Unfair and Deceptive Practices Act with prohibitions from engaging in
certain acts or practices in connection with consumer credit card accounts and Truth in Savings
Act new special disclosures covering overdraft lines of credit (effective in January, 2010).
There are periodic examinations by the OCIF and the FDIC of FirstBank and by the OTS of
FirstBank Florida to test each banks compliance with various statutory and regulatory
requirements. This regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection of the FDICs
insurance fund and depositors. The regulatory structure also gives the regulatory authorities
discretion in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations of laws and
regulations and for engaging in unsafe or unsound practices. In addition, certain bank actions are
required by statute and implementing regulations. Other actions or failure to act may provide the
basis for enforcement action, including the filing of misleading or untimely reports with
regulatory authorities.
Dividend Restrictions
The Corporation is subject to certain restrictions generally imposed on Puerto Rico
corporations with respect to the declaration and payment of dividends (i.e., that dividends may be
paid out only from the Corporations net assets in excess of capital or, in the absence of such
excess, from the Corporations net earnings for such fiscal year and/or the preceding fiscal year).
The Federal Reserve Board has also issued a policy statement that as a matter of prudent banking, a
bank holding company should generally not maintain a given rate of cash dividends unless its net
income available to common shareholders has been sufficient to fund fully the dividends and the
prospective rate of earnings retention appears to be consistent with the organizations capital
needs, asset quality, and overall financial condition.
As of December 31, 2008, the principal source of funds for the Corporations parent holding
company is dividends declared and paid by its subsidiary, FirstBank. The ability of FirstBank to
declare and pay dividends on its capital stock is regulated by the Puerto Rico Banking Law, the
Federal Deposit Insurance Act (the FDIA), and FDIC regulations. In general terms, the Puerto Rico
Banking Law provides that when the expenditures of a bank are greater than receipts, the excess of
expenditures over receipts shall be charged against undistributed profits of the bank and the
balance, if any, shall be charged against the required reserve fund of the bank. If the reserve
fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be
charged against the banks capital account. The Puerto Rico Banking Law provides that, until said
capital has been restored to its original amount and the reserve fund to 20% of the original
capital, the bank may not declare any dividends.
In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a
bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are
safety and soundness concerns regarding such bank.
In addition, the Purchase Agreement entered into with the Treasury contains limitations on the
payment of dividends on common stock, including limiting regular quarterly cash dividends to an
amount not exceeding the last quarterly cash dividend paid per share, or the amount publicly
announced (if lower), of common stock prior to October 14, 2008, which is $0.07 per share. Also,
upon issuance of the Series F Preferred Stock, the ability of the Corporation to purchase, redeem
or otherwise acquire for consideration, any shares of its common stock, preferred
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stock or trust preferred securities will be subject to restrictions. These restrictions will
terminate on the earlier of (a) the third anniversary of the closing date of the issuance of the
Series F Preferred Stock and (b) the date on which the Series F Preferred Stock has been redeemed
in whole or Treasury has transferred all of the Series F Preferred Stock to third parties that are
not affiliates of Treasury. The restrictions described in this paragraph are set forth in the
Purchase Agreement.
Limitations on Transactions with Affiliates and Insiders
Certain transactions between financial institutions such as FirstBank and FirstBank Florida
and affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and by Regulation W.
An affiliate of a financial institution is any corporation or entity, that controls, is controlled
by, or is under common control with the financial institution. In a holding company context, the
parent bank holding company and any companies which are controlled by such parent bank holding
company are affiliates of the financial institution. Generally, Sections 23A and 23B of the Federal
Reserve Act (i) limit the extent to which the financial institution or its subsidiaries may engage
in covered transactions (defined below) with any one affiliate to an amount equal to 10% of such
financial institutions capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such financial institutions capital
stock and surplus and (ii) require that all covered transactions be on terms substantially the
same, or at least as favorable to the financial institution or affiliate, as those provided to a
non-affiliate. The term covered transaction includes the making of loans, purchase of assets,
issuance of a guarantee and other similar transactions. In addition, loans or other extensions of
credit by the financial institution to the affiliate are required to be collateralized in
accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
The GLB Act requires that financial subsidiaries of banks be treated as affiliates for
purposes of Sections 23A and 23B of the Federal Reserve Act, but (i) the 10% capital limitation on
transactions between the bank and such financial subsidiary as an affiliate is not applicable, and
(ii) notwithstanding other provisions in Sections 23A and 23B, the investment by the bank in the
financial subsidiary does not include retained earnings of the financial subsidiary. The GLB Act
provides that: (1) any purchase of, or investment in, the securities of a financial subsidiary by
any affiliate of the parent bank is considered a purchase or investment by the bank; and (2) if the
Federal Reserve Board determines that such treatment is necessary, any loan made by an affiliate of
the parent bank to the financial subsidiary is to be considered a loan made by the parent bank.
The Federal Reserve Board has adopted Regulation W which interprets the provisions of Sections
23A and 23B. The regulation unifies and updates staff interpretations issued over the years,
incorporates several new interpretations and provisions (such as to clarify when transactions with
an unrelated third party will be attributable to an affiliate), and addresses new issues arising as
a result of the expanded scope of nonbanking activities engaged in by banks and bank holding
companies in recent years and authorized for financial holding companies under the GLB Act.
In addition, Sections 22(h) and (g) of the Federal Reserve Act, implemented through Regulation
O, place restrictions on loans to executive officers, directors, and principal stockholders. Under
Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer, a greater than
10% stockholder of a financial institution, and certain related interests of these, may not exceed,
together with all other outstanding loans to such persons and affiliated interests, the financial
institutions loans-to-one borrower limit, generally equal to 15% of the institutions unimpaired
capital and surplus. Section 22(h) of the Federal Reserve Act also requires that loans to
directors, executive officers, and principal stockholders be made on terms substantially the same
as offered in comparable transactions to other persons and also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a financial institution
to insiders cannot exceed the institutions unimpaired capital and surplus. Furthermore, Section
22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.
Federal Reserve Board Capital Requirements
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it
assesses the adequacy of capital in examining and supervising a bank holding company and in
analyzing applications to it under the Bank
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Holding Company Act. The Federal Reserve Board capital adequacy guidelines generally require
bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at
least one-half of that amount consisting of Tier I or core capital and up to one-half of that
amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies
generally consists of the sum of common stockholders equity and perpetual preferred stock, subject
in the case of the latter to limitations on the kind and amount of such perpetual preferred stock
that may be included as Tier I capital, less goodwill and, with certain exceptions, other
intangibles. Tier II capital generally consists of hybrid capital instruments, perpetual preferred
stock that is not eligible to be included as Tier I capital, term subordinated debt and
intermediate-term preferred stock and, subject to limitations, allowances for loan losses. Assets
are adjusted under the risk-based guidelines to take into account different risk characteristics,
with the categories ranging from 0% (requiring no additional capital) for assets such as cash to
100% for the bulk of assets, which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business loans and commercial
loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve Board requires bank
holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of
3.0%. Total assets for purposes of this calculation do not include goodwill and any other
intangible assets and investments that the Federal Reserve Board determines should be deducted. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the
minimum for the top-rated bank holding companies without supervisory, financial or operational
weaknesses or deficiencies or those which are not experiencing or anticipating significant growth.
Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% or more, depending on their overall condition. The Federal Reserve Boards guidelines
also provide that bank holding companies experiencing internal growth or making acquisitions are
expected to maintain capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal
Reserve Board will continue to consider a tangible tier 1 leverage ratio (i.e., after deducting
all intangibles) in evaluating proposals for expansion or new activities. As of December 31, 2008,
the Corporation exceeded each of its capital requirements and was a well-capitalized institution as
defined in the Federal Reserve Board regulations.
The federal banking agencies are currently analyzing regulatory capital requirements as part
of an effort to implement the Basel Committee on Banking Supervisions new capital adequacy
framework for large, internationally active banking organizations (Basel II), as well as to update
their risk-based capital standards to enhance the risk-sensitivity of the capital charges, to
reflect changes in accounting standards and financial markets, and to address competitive equity
questions that may be raised by U.S. implementation of the Basel II framework. Accordingly, the
federal agencies, including the Federal Reserve Board and the FDIC, are considering several
revisions to regulations issued in response to an earlier set of standards published by the Basel
Committee in 1988 (Basel I). On September 25, 2006, the banking agencies proposed in a notice of
proposal a new risk-based capital adequacy framework under Basel II. The framework is intended to
produce risk-based capital requirements that are more risk-sensitive than the existing risk-based
capital rules. On February 15, 2007, U.S. banking agencies released proposed supervisory guidance
to accompany the September Basel II notice of proposed rulemaking. The guidance includes standards
to promote safety and soundness and to encourage the comparability of regulatory capital measures
across banks.
A final rule implementing advanced approaches of Basel II was published jointly by the U.S.
banking agencies on December 7, 2007. This rule establishes regulatory capital requirements and
supervisory expectations for credit and operational risks for banks that choose or are required to
adopt the advanced approaches, and articulates enhanced standards for the supervisory review of
capital adequacy for those banks. The final rule retains the three groups of banks identified in
the proposed rule: (i) large or internationally active banks that are required to adopt advanced
capital approaches under Basel II (core banks); (ii) banks that voluntarily decide to adopt the
advance approaches (opt-in banks); and (iii) banks that do not adopt the advanced approaches
(general banks), and for which the provisions of the final rule are inapplicable. The final rule
also retains the proposed rule definition of a core bank as a bank that meets either of two
criteria: (i) consolidated assets of $250 billion or more, or (ii) consolidated total
on-balance-sheet foreign exposure of $10 billion or more. Also, a bank is a core bank if it is a
subsidiary of a bank or bank holding company that uses advanced approaches. At this moment, the
provisions of the final rule are not applicable to the Corporation.
19
The agencies expect to publish in the near future a proposed rule that would provide all
non-core banks with the option to adopt a standardized approach under Basel II. Implementation of
Basel II may be delayed, or Basel II may be modified to address issues related to the financial
crisis of 2008.
FDIC Risk-Based Assessment System
Under the Federal Deposit Insurance Reform Act of 2005, the FDIC adopted a new risk-based
premium system for FDIC deposit insurance, providing for quarterly assessments of FDIC insured
institutions based on their respective rankings in one of four risk categories depending upon their
examination ratings and capital ratios. Beginning in 2007, well-capitalized institutions with
certain CAMELS ratings (under the Uniform Financial Institutions Examination System adopted by
the Federal Financial Institutions Examination Council) were grouped in Risk Category I and were
assessed for deposit insurance premiums at an annual rate, with the assessment rate for the
particular institution to be determined according to a formula based on a weighted average of the
institutions individual CAMELS component ratings plus either a set of financial ratios or the
average ratings of its long-term debt. Institutions in Risk Categories II, III and IV are assessed
premiums at progressively higher rates. Both, FirstBank and FirstBank Florida are presently
designated a Risk Category I institution.
After the passage of the EESA, the FDIC also increased deposit insurance for all deposit
accounts up to $250,000 per account as of October 3, 2008 and ending December 31, 2009. On
December 16, 2008, the FDIC Board of Directors determined deposit insurance assessment rates for
the first quarter of 2009. Risk Category I Institutions were assessed at a rate between 12 and
14 basis points, for every $100 of deposits, an increase from last years rate range of 5 to 7
basis points. Effective April 1, 2009, the FDIC will change the way its assessment system
differentiates for risk, making corresponding changes to assessment rates beginning with the second
quarter of 2009, and make certain technical and other changes to these rules.
On February 27, 2009, the FDIC approved charging banks an emergency
special assessment of 20 cents per $100 insured deposits that would
be collected in the third quarter of 2009 and agreed to increase fees
it will begin charging banks in April 2009 to a range of 12 cents to
16 cents per $100 deposit. The Corporation expects an estimated
charge of approximately $25 million resulting from the emergency
special assessment in 2009 and an increase of approximately $13
million in the deposit insurance premium expense for 2009, as
compared to 2008, as a result of the increase in the regular
assessment rate.
The FDIC is required
by law to return the insurance reserve ratio to a 1.15 percent ratio no later than the end of 2013.
Recent failures caused that ratio to fall to 0.40 percent at the
end of the fourth quarter of 2008.
FDIC Capital Requirements
The FDIC has promulgated regulations and a statement of policy regarding the capital adequacy
of state-chartered non-member banks like FirstBank. These requirements are substantially similar to
those adopted by the Federal Reserve Board regarding bank holding companies, as described above. In
addition, FirstBank Florida must comply with similar capital requirements adopted by the OTS.
The regulators require that banks meet a risk-based capital standard. The risk-based capital
standard for banks requires the maintenance of total capital (which is defined as Tier I capital
and supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, weights used (ranging from 0% to 100%) are based on the risks inherent in the
type of asset or item. The components of Tier I capital are equivalent to those discussed below
under the 3.0% leverage capital standard. The components of supplementary capital include certain
perpetual preferred stock, mandatorily convertible securities, subordinated debt and intermediate
preferred stock and, generally, allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of
core capital.
The capital regulations of the FDIC and the OTS establish a minimum 3.0% Tier I capital to
total assets requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member
banks, which effectively will increase the minimum Tier I leverage ratio for such other banks from
4.0% to 5.0% or more. Under these regulations, the highest-rated banks are those that are not
anticipating or experiencing significant growth and have well-diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity and good earnings and, in
general, are considered a strong banking organization and are rated composite I under the Uniform
Financial Institutions Rating System. Leverage or core capital is defined as the sum of common
stockholders equity including retained earnings, non-cumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries,
20
minus all intangible assets other than certain qualifying supervisory goodwill and certain
purchased mortgage servicing rights.
In August 1995, the FDIC and OTS published a final rule modifying their existing risk-based
capital standards to provide for consideration of interest rate risk when assessing the capital
adequacy of a bank. Under the final rule, the FDIC must explicitly include a banks exposure to
declines in the economic value of its capital due to changes in interest rates as a factor in
evaluating a banks capital adequacy. In June 1996, the FDIC and OTS adopted a joint policy
statement on interest rate risk. Because market conditions, bank structure, and bank activities
vary, the agencies concluded that each bank needs to develop its own interest rate risk management
program tailored to its needs and circumstances. The policy statement describes prudent principles
and practices that are fundamental to sound interest rate risk management, including appropriate
board and senior management oversight and a comprehensive risk management process that effectively
identifies, measures, monitors and controls such interest rate risk.
Failure to meet capital guidelines could subject an insured bank to a variety of prompt
corrective actions and enforcement remedies under the FDIA (as amended by Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), and the Riegle Community Development and Regulatory
Improvement Act of 1994, including, with respect to an insured bank, the termination of deposit
insurance by the FDIC, and certain restrictions on its business.
Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized
institution may be treated as if the institution were in the next lower capital category. A
depository institution is generally prohibited from making capital distributions, (including paying
dividends), or paying management fees to a holding company if the institution would thereafter be
undercapitalized. Institutions that are adequately capitalized but not well-capitalized cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or, in certain cases, required to take
certain actions with respect to institutions falling within one of the three undercapitalized
categories. Depending on the level of an institutions capital, the agencys corrective powers
include, among other things:
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prohibiting the payment of principal and interest on subordinated debt; |
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prohibiting the holding company from making distributions without prior regulatory
approval; |
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placing limits on asset growth and restrictions on activities; |
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placing additional restrictions on transactions with affiliates; |
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restricting the interest rate the institution may pay on deposits; |
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prohibiting the institution from accepting deposits from correspondent banks; and |
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in the most severe cases, appointing a conservator or receiver for the institution. |
A banking institution that is undercapitalized is required to submit a capital restoration
plan, and such a plan will not be accepted unless, among other things, the banking institutions
holding company guarantees the plan up to a certain specified amount. Any such guarantee from a
depository institutions holding company is entitled to a priority of payment in bankruptcy.
As of December 31, 2008, FirstBank and FirstBank Florida were well-capitalized. A banks
capital category, as determined by applying the prompt corrective action provisions of law,
however, may not constitute an accurate representation of the overall financial condition or
prospects of the Bank, and should be considered in conjunction with other available information
regarding financial condition and results of operations.
21
Set forth below are the Corporations, FirstBanks and FirstBank Floridas capital ratios as
of December 31, 2008, based on Federal Reserve, FDIC and OTS guidelines, respectively.
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Banking Subsidiaries |
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FirstBank |
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Well-Capitalized |
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First BanCorp |
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FirstBank |
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Florida |
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Minimum |
As of December 31, 2008 |
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Total capital (Total capital to risk-weighted assets) |
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12.80 |
% |
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12.23 |
% |
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13.53 |
% |
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10.00 |
% |
Tier 1 capital ratio (Tier 1 capital to
risk-weighted assets) |
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11.55 |
% |
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10.98 |
% |
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12.43 |
% |
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6.00 |
% |
Leverage ratio(1) |
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8.30 |
% |
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7.90 |
% |
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8.78 |
% |
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5.00 |
% |
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(1) |
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Tier 1 capital to average assets for First BanCorp and
FirstBank and Tier 1 Capital to adjusted total assets for
FirstBank Florida. |
22
Activities and Investments
The activities as principal and equity investments of FDIC-insured, state-chartered banks
such as FirstBank are generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state-chartered bank generally may not
directly or indirectly acquire or retain any equity investments of a type, or in an amount, that is
not permissible for a national bank.
Federal Home Loan Bank System
FirstBank is a member of the Federal Home Loan Bank (FHLB) system. The FHLB system consists of
twelve regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance
Agency. The Federal Home Loan Banks serve as reserve or credit facilities for member institutions
within their assigned regions. They are funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB system, and they make loans (advances) to members in
accordance with policies and procedures established by the FHLB system and the board of directors
of each regional FHLB.
FirstBank is a member of the FHLB of New York (FHLB-NY) and as such is required to acquire and
hold shares of capital stock in that FHLB for a certain amount, which is calculated in accordance
with the requirements set forth in applicable laws and regulations. FirstBank is in compliance with
the stock ownership requirements of the FHLB-NY. All loans, advances and other extensions of credit
made by the FHLB-NY to FirstBank are secured by a portion of FirstBanks mortgage loan portfolio,
certain other investments and the capital stock of the FHLB-NY held by FirstBank.
FirstBank Florida is a member of the FHLB of Atlanta and is subject to similar requirements as
those of FirstBank.
Ownership and Control
Because of FirstBanks status as an FDIC-insured bank, as defined in the Bank Holding Company
Act, First BanCorp, as the owner of FirstBanks common stock, is subject to certain restrictions
and disclosure obligations under various federal laws, including the Bank Holding Company Act and
the Change in Bank Control Act (the CBCA). Regulations pursuant to the Bank Holding Company Act
generally require prior Federal Reserve Board approval for an acquisition of control of an insured
institution (as defined in the Act) or holding company thereof by any person (or persons acting in
concert). Control is deemed to exist if, among other things, a person (or persons acting in
concert) acquires more than 25% of any class of voting stock of an insured institution or holding
company thereof. Under the CBCA, control is presumed to exist subject to rebuttal if a person (or
persons acting in concert) acquires more than 10% of any class of voting stock and either (i) the
corporation has registered securities under Section 12 of the Securities Exchange Act of 1934, or
(ii) no person will own, control or hold the power to vote a greater percentage of that class of
voting securities immediately after the transaction. The concept of acting in concert is very broad
and also is subject to certain rebuttable presumptions, including among others, that relatives,
business partners, management officials, affiliates and others are presumed to be acting in concert
with each other and their businesses. The regulations of the FDIC and the OTS implementing the CBCA
are generally similar to those described above.
The Puerto Rico Banking Law requires the approval of the OCIF for changes in control of a
Puerto Rico bank. See Puerto Rico Banking Law.
Cross-Guarantees
Under the FDIA, a depository institution (which term includes both banks and savings
associations), the deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default
of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the
FDIC to any commonly controlled FDIC-insured depository institution in danger of default.
Default is defined generally as the appointment of a conservator or a receiver and in danger of
default is defined generally as the existence
of certain conditions indicating that a default is likely to occur in the absence of
regulatory assistance. In some circumstances (depending upon the amount of the loss or anticipated
loss
23
suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or
insolvency of one or more insured depository institutions liable to the FDIC, and any obligations
of that bank to its parent corporation are subordinated to the subsidiary banks cross-guarantee
liability with respect to commonly controlled insured depository institutions. FirstBank and
FirstBank Florida are currently the only FDIC-insured depository institutions controlled by the
Corporation and therefore subject to this guaranty provision.
Standards for Safety and Soundness
The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement
Act of 1994, requires the FDIC and the other federal bank regulatory agencies to prescribe
standards of safety and soundness, by regulations or guidelines, relating generally to operations
and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC
and the other federal bank regulatory agencies adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDIA, as amended. The guidelines
establish general standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or disproportionate to
the services performed by an executive officer, employee, director or principal shareholder.
Brokered Deposits
FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks.
Well-capitalized institutions are not subject to limitations on brokered deposits, while
adequately-capitalized institutions are able to accept, renew or rollover brokered deposits only
with a waiver from the FDIC and subject to certain restrictions on the interest paid on such
deposits. Undercapitalized institutions are not permitted to accept brokered deposits. As of
December 31, 2008, FirstBank was a well-capitalized institution and was therefore not subject to
these limitations on brokered deposits.
Puerto Rico Banking Law
As a commercial bank organized under the laws of the Commonwealth, FirstBank is subject to
supervision, examination and regulation by the Commonwealth of Puerto Rico Commissioner of
Financial Institutions (Commissioner) pursuant to the Puerto Rico Banking Law of 1933, as amended
(the Banking Law). The Banking Law contains provisions governing the incorporation and
organization, rights and responsibilities of directors, officers and stockholders as well as the
corporate powers, lending limitations, capital requirements, investment requirements and other
aspects of FirstBank and its affairs. In addition, the Commissioner is given extensive rule-making
power and administrative discretion under the Banking Law.
The Banking Law authorizes Puerto Rico commercial banks to conduct certain financial and
related activities directly or through subsidiaries, including the leasing of personal property and
the operation of a small loan business.
The Banking Law requires every bank to maintain a legal reserve which shall not be less than
twenty percent (20%) of its demand liabilities, except government deposits (federal, state and
municipal) that are secured by actual collateral. The reserve is required to be composed of any of
the following securities or combination thereof: (1) legal tender of the United States; (2) checks
on banks or trust companies located in any part of Puerto Rico that are to be presented for
collection during the day following the day on which they are received; (3) money deposited in
other banks provided said deposits are authorized by the Commissioner, subject to immediate
collection; (4) federal funds sold to any Federal Reserve Bank and securities purchased under
agreements to resell executed by the bank with such funds that are subject to be
repaid to the bank on or before the close of the next business day; and (5) any other asset
that the Commissioner identifies from time to time.
24
The Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm,
partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the sum of: (i)
the banks paid-in capital; (ii) the banks reserve fund; (iii) 50% of the banks retained
earnings; subject to certain limitations; and (iv) any other components that the Commissioner may
determine from time to time. If such loans are secured by collateral worth at least twenty five
percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third
(33.33%) of the sum of the banks paid-in capital, reserve fund, 50% of retained earnings and such
other components that the Commissioner may determine from time to time. There are no restrictions
under the Banking Law on the amount of loans that are wholly secured by bonds, securities and other
evidence of indebtedness of the Government of the United States, or of the Commonwealth of Puerto
Rico, or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of
Puerto Rico. The revised classification of the mortgage-related transactions as secured commercial
loans to local financial institutions included in the Corporations restatement of previously
issued financial statements (Form 10-K/A 2004), caused the mortgage-related transactions to be
treated as two secured commercial loans in excess of the lending limitations imposed by the Banking
Law. In this regard, FirstBank received a ruling from the Commissioner that results in FirstBank
being considered in continued compliance with the lending limitations. The Puerto Rico Banking Law
authorizes the Commissioner to determine other components which may be considered for purposes of
establishing its lending limit, which components may lie outside the traditional elements mentioned
in Section 17. After consideration of other components, the Commissioner authorized the Corporation
to retain the secured loans to Doral and R&G as it believed that these loans were secured by
sufficient collateral to diversify, disperse and significantly diffuse the risks connected to such
loans thereby satisfying the safety and soundness considerations mandated by Section 28 of the
Banking Law.
The Banking Law prohibits Puerto Rico commercial banks from making loans secured by their own
stock, and from purchasing their own stock, unless such purchase is made pursuant to a stock
repurchase program approved by the Commissioner or is necessary to prevent losses because of a debt
previously contracted in good faith. The stock purchased by the Puerto Rico commercial bank must be
sold by the bank in a public or private sale within one year from the date of purchase.
The Banking Law provides that no officers, directors, agents or employees of a Puerto Rico
commercial bank may serve or discharge a position of officer, director, agent or employee of
another Puerto Rico commercial bank, financial corporation, savings and loan association, trust
corporation, corporation engaged in granting mortgage loans or any other institution engaged in the
money lending business in Puerto Rico. This prohibition is not applicable to the affiliates of a
Puerto Rico commercial bank.
The Banking Law requires that Puerto Rico commercial banks prepare each year a balance summary
of their operations, and submit such balance summary for approval at a regular meeting of
stockholders, together with an explanatory report thereon. The Banking Law also requires that at
least ten percent (10%) of the yearly net income of a Puerto Rico commercial bank be credited
annually to a reserve fund. This credit is required to be done every year until such reserve fund
shall be equal to the total paid-in-capital of the bank.
The Banking Law also provides that when the expenditures of a Puerto Rico commercial bank are
greater than receipts, the excess of the expenditures over receipts shall be charged against the
undistributed profits of the bank, and the balance, if any, shall be charged against the reserve
fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole
or in part, the outstanding amount shall be charged against the capital account and no dividend
shall be declared until said capital has been restored to its original amount and the reserve fund
to twenty percent (20%) of the original capital.
The Banking Law requires the prior approval of the Commissioner with respect to a transfer of
capital stock of a bank that results in a change of control of the bank. Under the Banking Law, a
change of control is presumed to occur if a person or a group of persons acting in concert,
directly or indirectly, acquire more than 5% of the outstanding voting capital stock of the bank.
The Commissioner has interpreted the restrictions of the Banking Law as applying to acquisitions of
voting securities of entities controlling a bank, such as a bank holding company. Under the Banking
Law, the determination of the Commissioner whether to approve a change of control filing is final
and non-appealable.
25
The Finance Board, which is composed of the Commissioner, the Secretary of the Treasury, the
Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Economic Development
Bank, the President of the Government Development Bank, and the President of the Planning Board,
has the authority to regulate the maximum interest rates and finance charges that may be charged on
loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the
Finance Board provide that the applicable interest rate on loans to individuals and unincorporated
businesses, including real estate development loans but excluding certain other personal and
commercial loans secured by mortgages on real estate properties, is to be determined by free
competition. Accordingly, the regulations do not set a maximum rate for charges on retail
installment sales contracts, small loans, and for credit card purchases and set aside previous
regulations which regulated these maximum finance charges. Furthermore, there is no maximum rate
set for installment sales contracts involving motor vehicles, commercial, agricultural and
industrial equipment, commercial electric appliances and insurance premiums.
International Banking Act of Puerto Rico (IBE Act)
The business and operations of First BanCorp Overseas (First BanCorp IBE, the IBE division
of First BanCorp), FirstBank International Branch (FirstBank IBE, the IBE division of FirstBank)
and FirstBank Overseas Corporation (the IBE subsidiary of FirstBank) are subject to supervision and
regulation by the Commissioner. Under the IBE Act, certain sales, encumbrances, assignments,
mergers, exchanges or transfers of shares, interests or participation(s) in the capital of an
international banking entity (an IBE) may not be initiated without the prior approval of the
Commissioner. The IBE Act and the regulations issued thereunder by the Commissioner (the IBE
Regulations) limit the business activities that may be carried out by an IBE. Such activities are
limited in part to persons and assets located outside of Puerto Rico.
Pursuant to the IBE Act and the IBE Regulations, each of First BanCorp IBE, FirstBank IBE and
FirstBank Overseas Corporation must maintain books and records of all its transactions in the
ordinary course of business. First BanCorp IBE, FirstBank IBE and FirstBank Overseas Corporation
are also required thereunder to submit to the Commissioner quarterly and annual reports of their
financial condition and results of operations, including annual audited financial statements.
The IBE Act empowers the Commissioner to revoke or suspend, after notice and hearing, a
license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE
Regulations or the terms of its license, or if the Commissioner finds that the business or affairs
of the IBE are conducted in a manner that is not consistent with the public interest.
Puerto Rico Income Taxes
Under the Puerto Rico Internal Revenue Code of 1994 (the Code), all companies are treated as
separate taxable entities and are not entitled to file consolidated tax returns. The Corporation,
and each of its subsidiaries are subject to a maximum statutory corporate income tax rate of 39% or
an alternative minimum tax (AMT) on income earned from all sources, whichever is higher. The
excess of AMT over regular income tax paid in any one year may be used to offset regular income tax
in future years, subject to certain limitations. The Code provides for a dividend received
deduction of 100% on dividends received from wholly owned subsidiaries subject to income taxation
in Puerto Rico and 85% on dividends received from other taxable domestic corporations.
In computing the interest expense deduction, the Corporations interest deduction will be
reduced in the same proportion that the average exempt assets bear to the average total assets.
Therefore, to the extent that the Corporation holds certain investments and loans that are exempt
from Puerto Rico income taxation, part of its interest expense will be disallowed for tax purposes.
The Corporation has maintained an effective tax rate lower than the maximum statutory tax rate
of 39% during 2008 mainly by investing in government obligations and mortgage-backed securities
exempt from U.S. and Puerto Rico income tax combined with income from the IBE units of the
Corporation and the Bank and the Banks subsidiary, FirstBank Overseas Corporation. The IBE, and
FirstBank Overseas
Corporation were created under the IBE Act, which provides for Puerto Rico tax exemption on
net income derived by IBEs operating in Puerto Rico. Pursuant to the provisions of Act No. 13 of
January 8, 2004, the IBE Act was amended to impose income tax at regular rates on an IBE that
operates as a unit of a bank, to the extent that the IBE net income exceeds 25% of the banks total
net taxable income (including net income generated by the IBE unit) for taxable years that
commenced
26
on July 1, 2005, and thereafter. These amendments apply only to IBEs that operate as
units of a bank; they do not impose income tax on an IBE that operates as a subsidiary of a bank.
United States Income Taxes
The Corporation is also subject to federal income tax on its income from sources within the
United States and on any item of income that is, or is considered to be, effectively connected with
the active conduct of a trade or business within the United States. The U.S. Internal Revenue Code
provides for tax exemption of portfolio interest received by a foreign corporation from sources
within the United States; therefore, the Corporation is not subject to federal income tax on
certain U.S. investments which qualify under the term portfolio interest.
Insurance Operations Regulation
FirstBank Insurance Agency is registered as an insurance agency with the Insurance
Commissioner of Puerto Rico and is subject to regulations issued by the Insurance Commissioner
relating to, among other things, licensing of employees, sales, solicitation and advertising
practices, and by the FED as to certain consumer protection provisions mandated by the GLB Act and
its implementing regulations.
Community
Reinvestment Act
Under the Community Reinvestment Act (CRA), federally insured banks have a continuing and
affirmative obligation to meet the credit needs of their entire community, including low- and
moderate-income residents, consistent with their safe and sound operation. The CRA does not
establish specific lending requirements or programs for financial institutions nor does it limit an
institutions discretion to develop the type of products and services that it believes are best
suited to its particular community, consistent with the CRA. The CRA requires the federal
supervisory agencies, as part of their general examination of supervised banks, to assess the banks
record of meeting the credit needs of its community, assign a performance rating, and take such
record and rating into account in their evaluation of certain applications by such bank. The CRA
also requires all institutions to make public disclosure of their CRA ratings. FirstBank and
FirstBank Florida received a satisfactory CRA rating in their most recent examinations by the
FDIC and the OTS, respectively.
Mortgage Banking Operations
FirstBank is subject to the rules and regulations of the FHA, VA, FNMA, FHLMC, HUD and GNMA
with respect to originating, processing, selling and servicing mortgage loans and the issuance and
sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines that include provisions for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with
respect to VA loans, fix maximum interest rates. Moreover, lenders such as FirstBank are required
annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD audited financial statements, and each
regulatory entity has its own financial requirements. FirstBanks affairs are also subject to
supervision and examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance
with the applicable regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, and the
Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. FirstBank is licensed by the Commissioner
under the Puerto Rico Mortgage Banking Law, and as such is subject to regulation by the
Commissioner, with respect to, among other things, licensing requirements and establishment of
maximum origination fees on certain types of mortgage loan products.
Section 5 of the Puerto Rico Mortgage Banking Law requires the prior approval of the
Commissioner for the acquisition of control of any mortgage banking institution licensed under such
law. For purposes of the Puerto Rico Mortgage Banking Law, the term control means the power to
direct or influence decisively, directly or indirectly, the management or policies of a mortgage
banking institution. The Puerto Rico Mortgage Banking Law provides that a transaction that results
in the holding of less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change in control.
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Item 1A. Risk Factors
Certain risk factors that may affect the Corporations future results of operations are
discussed below.
Risks Relating to the Corporations Business
Fluctuations in interest rates may impact the Corporations results of operations
Significant variances in interest rates are the primary market risk affecting the Corporation.
Interest rates are highly sensitive to many factors, such as government monetary policies and
domestic and international economic and political conditions that are beyond the control of the
Corporation.
Interest rate shifts may reduce net interest income
Shifts in short-term interest rates may reduce net interest income, which is the principal
component of the Corporations earnings. Net interest income is the difference between the amount
received by the Corporation on its interest-earning assets and the interest paid by the Corporation
on its interest-bearing liabilities. When interest rates rise, the Corporation must pay more in
interest on its liabilities while the interest earned on its assets does not rise as quickly. This
may cause the Corporations profits to decrease. This adverse impact on earnings is greater when
the slope of the yield curve flattens, that is, when short-term interest rates increase more than
long-term rates.
Increases in interest rates may reduce the value of holdings of securities
Fixed-rate securities acquired by the Corporation are generally subject to decreases in market
value when interest rates rise, which may require recognition of a loss, (e.g., the identification
of other-than-temporary impairment on its available-for-sale or
held-to-maturity investments
portfolio) thereby potentially affecting adversely the results of operations. Market related
reductions in value also affect the capabilities of financing these securities.
Increases in interest rates may reduce demand for mortgage and other loans
Higher interest rates increase the cost of mortgage and other loans to consumers and
businesses and may reduce demand for such loans, which may negatively impact the Corporations
profits by reducing the amount of loan origination income.
Decreases
in interest rates may increase the pre-payment of certain assets
Future net interest income could be affected by the Corporations holding of
callable securities. The recent drop in the long term interest rates has the effect of increasing
the probability of the exercise of embedded calls in the approximately $945 million U.S. Agency
securities portfolio that if substituted with new lower-yielding investments may negatively impact the
Corporations interest income.
Net
interest income of future periods may also be affected by the acceleration in pre-payments of
mortgage-backed securities and loan portfolios. Acceleration in the
pre-payments of mortgage-backed securities and loan portfolios
implies that the replacement of such assets would be at lower rates
and therefore threatening the net interest margin to the extent that
the related funding of those assets does not re-price by a similar
rate of change.
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Decreases in interest rates may reduce net interest income due to the current unprecedented
re-pricing mismatch of assets and liabilities tied to short-term interest rates (Basis Risk)
Basis risk occurs when market rates for different financial instruments, or the indices used
to price assets and liabilities, change at different times or by different amounts. Recent
liquidity pressures affecting the U.S. financial markets have caused a wider than historical spread
between brokered CDs costs and LIBOR rates for similar terms. This in turn, is preventing the
Corporation from capturing the full benefit of recent drops in interest rates as the Corporations
loan portfolio funded by LIBOR-based brokered CDs continues to maintain the same historical spread
to short-term LIBOR rates. To the extent that such pressures fail to subside in the near future,
the margin between the Corporations LIBOR-based assets and LIBOR-based liabilities may compress
and adversely affect net interest income.
Downgrades
to the Corporations credit ratings could potentially increase the cost of borrowing
funds
Fitch Ratings Ltd. (Fitch) has rated the Corporations long-term senior debt a rating of BB,
which is two notches under investment grade. Moodys Investor Service (Moodys) has rated
FirstBanks long-term senior debt at Ba1, and Standard & Poors (S&P) has rated it at BB+, one
notch under their definition of investment grade. However, the credit ratings outlook for Moodys
and S&P are stable while Fitchs is negative. The Corporation does not have any outstanding debt or
derivative agreements that would be affected by a credit downgrade. The Corporations liquidity is
contingent upon its ability to obtain external sources of funding to finance its operations. Any
future downgrades in credit ratings can hinder the Corporations access to external funding and/or
cause external funding to be more expensive, which could in turn adversely affect the results of
operations. Also, any change in credit ratings may affect the fair value of certain liabilities and
unsecured derivatives, measured at fair value in the financial statements, for which the
Corporations own credit risk is an element considered in the fair value determination.
These debt and financial strength ratings are current opinions of the rating agencies. As
such, they may be changed, suspended or withdrawn at any time by the rating agencies as a result of
changes in, or unavailability of, information or based on other circumstances.
Unforeseen disruptions in the brokered CDs market could compromise the
Corporations liquidity position
A large portion of the Corporations funding is retail brokered CDs issued by FirstBank. Total
brokered CDs increased from $7.2 billion at year end 2007 to $8.4 billion as of December 31, 2008.
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Should an
unforeseen disruption in the brokered CDs market, stemming from
factors such as legal, regulatory or financial risks, compromise the
Corporations ability to continue funding its operations and/or
meet its obligations, it could be obligated to liquidate assets in a
relatively short period of time to cover its liquidity needs.
Adverse credit market conditions may affect the Corporations ability to meet liquidity needs
The credit markets have recently been experiencing extreme volatility and disruption. In the
second half of 2008, the volatility and disruptions have reached unprecedented levels. In some
cases, the markets have exerted downward pressures on availability of liquidity and credit capacity
for certain issuers.
The Corporation needs liquidity to, among other things, pay its operating expenses, interest
on its debt and dividends on its capital stock, maintain its lending activities and replace certain
maturing liabilities. Without sufficient liquidity, the Corporation may be forced to curtail its
operations. The availability of additional financing will depend on a variety of factors such as
market conditions, the general availability of credit and the Corporations credit ratings and
credit capacity. The Corporations financial condition and cash flows could be materially affected
by continued disruptions in financial markets.
The Corporation is subject to default risk on loans, which may adversely affect its results
The Corporation is subject to the risk of loss from loan defaults and foreclosures with
respect to the loans it originates. The Corporation establishes a provision for loan losses, which
leads to reductions in its income from operations, in order to maintain its allowance for inherent
loan losses at a level which its management deems to be appropriate based upon an assessment of the
quality of its loan portfolio. Although the Corporations management utilizes its best judgment in
providing for loan losses, there can be no assurance that management has accurately estimated the
level of inherent loan losses or that the Corporation will not have to increase its provision for
loan losses in the future as a result of future increases in non performing loans or for other
reasons beyond its control. Any such increases in the Corporations provision for loan losses or
any loan losses in excess of its provision for loan losses would have an adverse effect on the
Corporations future financial condition and results of
operations. Given the difficulties on the
Corporations largest borrowers, Doral and R&G Financial, the Corporation can give no assurance
that these borrowers will continue to repay their secured loans on a timely basis or that the
Corporation will continue to be able to accurately assess any risk of loss from the loans to these
financial institutions.
Changes in collateral valuation for properties located in stagnant or distressed economies may
require increased reserves
Substantially all of the loan portfolio of the Corporation is located within the boundaries of
the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. Virgin Islands,
British Virgin Islands or the U.S. mainland, the performance of the Corporations loan portfolio
and the collateral value backing the transactions are dependent upon the performance of and
conditions within each specific areas real estate market. Recent economic reports related to the
real estate market in Puerto Rico indicate that certain pockets of the real estate market are
subject to readjustments in value driven not by demand but more by the purchasing power of the
consumers and general economic conditions. In South Florida we are seeing the negative impact
associated with low absorption rates and property value adjustments due to overbuilding. A
significant decline in collateral valuations for collateral dependent loans may require increases
in the Corporations specific provision for loan losses and an increase in the general valuation
allowance. Any such increase would have an adverse effect on the Corporations future financial
condition and results of operations.
30
The Corporations business concentration in Puerto Rico imposes risks
The Corporation conducts its operations in a geographically concentrated area, as its main
market is Puerto Rico. This imposes risks from lack of diversification in the geographical
portfolio. The Corporations financial condition and results of operations are highly dependent on
the economic conditions of Puerto Rico, where adverse political or economic developments, natural
disasters, etc., could affect the volume of loan originations, increase the level of nonperforming
assets, increase the rate of foreclosure losses on loans, and reduce the value of the Corporations
loans and loan servicing portfolio.
First BanCorps credit quality may be adversely affected by Puerto Ricos current economic
condition
Beginning in March 2006 and continuing through 2008, a number of key economic indicators
showed that the economy of Puerto Rico has been under a recession during that period of time.
Construction remained weak during 2008, as the combination of rising interest rates, the
Commonwealths fiscal situation and decreasing public investment in construction projects affected
the sector. During the period from January to December 2008, cement sales, an indicator of
construction activity, declined by 16% as compared to 2007. As of September 2008, exports decreased
by 11.7%, while imports decreased by 8.9%, a negative trade, which continues since the first
negative trade balance of the last decade was registered in November 2006. Tourism activity has
also declined during 2008. Total hotel registrations for January to October 2008 declined 2% as
compared to the same period for 2007. During 2008 new vehicle sales decreased by 13%, the lowest
since 1993. In December 2008, unemployment in Puerto Rico
reached 13.1% up 2.6% compared with the
same period in 2007.
On February 9, 2009 the Puerto Rico Planning Board announced the release of Puerto Ricos
macroeconomic data for fiscal year 2008, as well as projected figures for fiscal years 2009 and
2010. The Planning Boards revision for fiscal year 2008 shows the growth of the Puerto Rico
economy slowing down by 2.5%. The Planning Boards projections point toward an economy that will
have contracted by 3.4% during the current fiscal year of 2009 (ending on June 30, 2009) and that
will suffer an estimated reduction of 2.0% during fiscal year 2010. In general, the Puerto Rico
economy continued its trend of decreasing growth, primarily due to weaker manufacturing, softer
consumption and decreased government investment in construction.
The above economic concerns and uncertainty in the private and public sectors may also have an
adverse effect on the credit quality of the Corporations loan portfolios, as delinquency rates are
expected to increase in the short-term, until the economy stabilizes. Also, a potential reduction
in consumer spending may also impact growth in other interest and non-interest revenue sources of
the Corporation.
Rating downgrades on the Government of Puerto Ricos debt obligations may affect the Corporations
credit exposure
Even though Puerto Ricos economy is closely integrated to that of the U.S. mainland and its
government and many of its instrumentalities are investment-grade rated borrowers in the U.S.
capital markets, the current fiscal situation of the Government of Puerto Rico has led nationally
recognized rating agencies to downgrade its debt obligations in the past.
In May 2006, Moodys Investors Service downgraded the Governments general obligation bond
rating to Baa3 from Baa2, and put the credit on watch list for possible further downgrades. The
Commonwealths appropriation bonds and some of the subordinated revenue bonds were also downgraded
by one notch and are now rated below investment grade at Ba1. Moodys commented that its action
reflected the Governments strained financial condition, the ongoing political conflict and lack of
agreement regarding the measures necessary to end the governments multi-year trend of financial
deterioration. In November 2007, Moodys Investors Services removed the negative outlook and
changed to stable as a reflection of measures the Commonwealth took to reduce the budget deficits
such as implementation of the Fiscal Reform and Sales and use Tax.
In May 2007, S&P downgraded their credit ratings on the Commonwealth General Obligation debt,
and removed the negative outlook and changed to stable. This action reflected factors such as the
Governments ability to implement meaningful steps to curb operating expenditures, improve
managerial and budgetary controls, high debt
31
levels, chronic deficits, and eliminate the
governments reliance on operating budget loans from the Government Development Bank for Puerto
Rico. At the present both rating agencies maintain the stable outlook for the Puerto Rico general
obligation bonds.
It is uncertain how the financial markets may react to any potential future ratings downgrade
in Puerto Ricos debt obligations. However, the fallout from the recent budgetary crisis and a
possible ratings downgrade could adversely affect the value of Puerto Ricos Government
obligations.
Difficult market conditions have affected the financial industry and may adversely affect the
Corporation in the future
Given that almost all of our business is in Puerto Rico and the United States and given the
degree of interrelation between Puerto Ricos economy and that of the United States, the
Corporation is particularly exposed to downturns in the U.S. economy. Dramatic declines in the U.S.
housing market over the past year, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the credit performance of mortgage
loans and resulted in significant write-downs of asset values by financial institutions, including
government-sponsored entities as well as major commercial banks and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit default swaps and
other derivative and cash securities, in turn, have caused many financial institutions to seek
additional capital from private and government entities, to merge with larger and stronger
financial institutions and, in some cases, fail.
Reflecting concern about the stability of the financial markets in general and the strength of
counterparties, many lenders and institutional investors have reduced or ceased providing funding
to borrowers, including other financial institutions. This market turmoil and tightening of credit
have led to an increased level of commercial and consumer delinquencies, erosion of consumer
confidence, increased market volatility and widespread reduction of business activity in general.
The resulting economic pressure on consumers and erosion of confidence in the financial markets has
already adversely affected our industry and may adversely affect our business, financial condition
and results of operations. The Corporation does not expect that the difficult conditions in the
financial markets are likely to improve in the near future. A worsening of these conditions would
likely exacerbate the adverse effects of these difficult market conditions on the Corporation and
others in the financial institutions industry. In particular, the Corporation may face the
following risks in connection with these events:
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The Corporation expects to face increased regulation of the financial
industry resulting from the recent instability in capital markets,
financial institutions and financial system in general. Compliance
with such regulation may increase our costs and limit our ability to
pursue business opportunities. |
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The Corporations ability to assess the creditworthiness of our
customers may be impaired if the models and approaches we use to
select, manage, and underwrite the loans become less predictive of
future behaviors. |
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The models used to estimate losses inherent in the credit exposure
requires difficult, subjective, and complex judgments, including
forecasts of economic conditions and how these economic predictions
might impair the ability of the borrowers to repay their loans, which
may no longer be capable of accurate estimation and which may, in
turn, impact the reliability of the models. |
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The Corporations ability to borrow from other financial institutions
or to engage in sales of mortgage loans to third parties (including
mortgage loan securitization transactions with government sponsored
entities) on favorable terms, or at all could be adversely affected
by further disruptions in the capital markets or other events,
including deteriorating investor expectations. |
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Competitive dynamics in the industry could change as a result of
consolidation of financial services companies in connection with
current market conditions. |
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A prolonged economic slowdown or the decline in the real estate market in the U.S. mainland could
continue to harm the results of operations
The residential mortgage loan origination business has historically been cyclical, enjoying
periods of strong growth and profitability followed by periods of shrinking volumes and
industry-wide losses. The market for residential mortgage loan originations is currently in decline
and this trend could also reduce the level of mortgage loans the Corporation may produce in the
future and adversely impact our business. During periods of rising interest rates, refinancing
originations for many mortgage products tend to decrease as the economic incentives for borrowers
to refinance their existing mortgage loans are reduced. In addition, the residential mortgage loan
origination business is impacted by home values. Over the past eighteen months, residential real
estate values in many areas of the U.S. mainland have decreased greatly, which has led to lower
volumes and higher losses across the industry, adversely impacting our mortgage business.
The actual rates of delinquencies, foreclosures and losses on loans have been higher during
the current economic slowdown. Rising unemployment, higher interest rates or declines in housing
prices have had a greater negative effect on the ability of borrowers to repay their mortgage
loans. Any sustained period of increased delinquencies, foreclosures or losses could continue to
harm the Corporations ability to sell loans, the prices the Corporation receives for loans, the
values of mortgage loans held-for-sale or residual interests in securitizations, which could harm
the Corporations financial condition and results of operations. In addition, any material decline
in real estate values would weaken the collateral loan-to-value ratios and increase the possibility
of loss if a borrower defaults. In such event, the Corporation will be subject to the risk of loss
on such mortgage asset arising from borrower defaults to the extent not covered by third-party
credit enhancement.
There can be no assurance that actions of the U.S. Government, Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect
In response to the financial crisis affecting the banking system and financial markets and
going concern threats to investment banks and other financial institutions, on October 3, 2008,
President Bush signed the Emergency Economic Stabilization Act (EESA) into law. Pursuant to the
EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of
mortgage-backed and other securities from financial institutions for the purpose of stabilizing the
financial markets. Also a $787 billion package of spending and tax cuts was approved in early 2009
to stimulate the economy. The Federal Government, Federal Reserve and other governmental and
regulatory bodies have taken or are considering taking other actions to address the financial
crisis. There can be no assurance as to what impact such actions will have on the financial
markets, including the extreme levels of volatility currently being experienced. Such continued
volatility could adversely affect our business, financial condition and results of operations, or
the trading price of our common stock.
Unexpected losses in future reporting periods may require the Corporation to adjust the
valuation allowance against our deferred tax assets
The Corporation evaluates the deferred tax assets for recoverability based on all available
evidence. This process involves significant management judgment about assumptions that are subject
to change from period to period based on changes in tax laws or variances between the future
projected operating performance and the actual results. The Corporation is required to establish a
valuation allowance for deferred tax assets if the Corporation determines, based on available
evidence at the time the determination is made, that it is more likely than not that some portion
or all of the deferred tax assets will not be realized. In determining the more-likely-than-not
criterion, the Corporation evaluates all positive and negative evidence as of the end of each
reporting period. Future adjustments, either increases or decreases, to the deferred tax asset
valuation allowance will be determined based upon changes in the expected realization of the net
deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence
of sufficient taxable income in either the carryback or carryforward periods under the tax law. Due
to significant estimates utilized in establishing the valuation allowance and the potential for
changes in facts
and circumstances, it is reasonably possible that the Corporation will be required to record
adjustments to the valuation allowance in future reporting periods. Such a charge could have a
material adverse effect on our results of operations, financial condition and capital position.
If the
Corporations goodwill or amortizable
intangible assets become impaired, it may adversely affect the operating results
If the
Corporations goodwill or amortizable intangible assets become impaired
the Corporation may be required to record a significant charge to earnings.
Under generally accepted accounting principles, the Corporation reviews its
amortizable intangible assets for impairment when events or changes in
circumstances indicate the
carrying value may not be recoverable. Goodwill is tested for
impairment at least annually. Factors that may be considered a
change in circumstances, indicating that the carrying value
of the goodwill or amortizable intangible assets may
not be recoverable, include a reduced future cash flow
estimates, and slower growth rates in the industry.
If the Corporation is required to record a significant
charge to earnings in the consolidated financial
statements because an impairment of the goodwill or
amortizable intangible assets is determined, the
Corporations results of operations will be adversely
affected.
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Stock price volatility
The trading price of the Corporations stock could be subject to significant fluctuations due
to a change in sentiment in the market regarding the operations, business prospects or industry
outlook. Risk factors may include the following:
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operating results that may be worse than the expectations of management, securities analysts and
investors; |
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developments in the business or in the financial sector in general; |
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regulatory changes affecting the industry in general or the business and operations; |
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the operating and securities price performance of peer financial institutions; |
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announcements of strategic developments, acquisitions and other material events by the
Corporation or its competitors; |
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changes in the credit, mortgage and real estate markets, including the markets for
mortgage-related securities; and |
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changes in global financial markets and global economies and general market conditions. |
Stock markets, in general, and the Corporations common stock in particular, have recently
experienced significant price and volume volatility and the market price of the common stock may
continue to be subject to similar market fluctuations that may be unrelated to the operating
performance or prospects. Increased volatility could result in a decline in the market price of the
common stock.
Inability to pay dividends on the common stock.
Holders of the Corporations common stock are only entitled to receive such dividends as our
board of directors may declare out of funds legally available for such payments. Although we have
historically declared cash dividends on the common stock, we are not required to do so. The
Corporation expects to continue to pay dividends but its ability to pay future dividends at current
levels or to pay dividends at all, will necessarily depend upon its earnings and financial
condition. Any reduction of, or the elimination of, the common stock dividend in the future could
adversely affect the market price of the common stock.
Downgrades
in the Corporations and its subsidiaries regulatory ratings
could limit the Corporations ability to engage in certain
activities
The Corporation is subject to supervision and regulation by the FED. The Corporation is a bank
holding company that qualifies as a financial holding corporation. As such, the Corporation is
permitted to engage in a broader spectrum of activities than those permitted to bank holding
companies that are not financial holding companies. To continue to qualify as a financial holding
corporation, each of the Corporations banking subsidiaries must continue to qualify as
well-capitalized and well-managed. As of December 31, 2008, the Corporation and its banking
subsidiaries continue to satisfy all applicable capital guidelines. This, however, does not prevent
banking regulators from taking adverse actions against the Corporation if they should conclude that
such actions are appropriate. If the Corporation were not to continue to qualify as a financial
holding corporation, it might be required to discontinue certain activities and may be prohibited
from engaging in new activities without prior regulatory approval. The FED, in the performance of
its supervisory and enforcement duties, has significant discretion and power to initiate
enforcement actions for violations of laws and regulations and unsafe or unsound practices.
Changes in regulations and legislation could have a financial impact on the Corporation
As a financial institution, the Corporation is subject to the legislative and rulemaking
authority of various regulatory and legislative bodies. Any change in regulations and/or
legislation, whether in the United States or Puerto Rico, could have a financial impact on the
results of operations of the Corporation.
From time to time, legislation is introduced in Congress and state legislatures with respect
to the regulation of financial institutions. It is anticipated that the 111th Congress will
consider legislation affecting financial institutions in its upcoming session. Such legislation
may change banking statutes and the operating environment or
34
that of the Corporations subsidiaries
in substantial and unpredictable ways. We cannot determine the ultimate effect that potential
legislation, if enacted, or any regulations issued to implement it, would have upon the
Corporations financial condition or results of operations.
The FDIC may increase deposit insurance premium.
The FDIC insures deposits at FDIC insured financial institutions up to certain limits. The
FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund.
Current economic conditions have increased expectations for bank failures, in which case the FDIC
would take control of failed banks and ensure payment of deposits up to insured limits using the
resources of the Deposit Insurance Fund. In such case, the FDIC may increase premium assessments to
maintain adequate funding of the Deposit Insurance Fund.
The EESA included a provision for an increase in the amount of deposits insured by the FDIC to
$250,000 up to December 31, 2009. On October 14, 2008, the FDIC announced a new program the
Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in
noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000. The Corporation decided to participate in this Temporary Liquidity
Program.
On
February 27, 2009, the FDIC approved an emergency special
assessment of 20 cents per $100 insured deposits that
would be collected in the third quarter of 2009 and
agreed to increase fees it will begin charging banks in
April to a range of 12 cents to 16 cents per $100 deposit.
Further increases may be necessary in the future due to,
among other things, additional increases in the number of
bank failures. The Corporation expects an estimated charge
of approximately $25 million resulting from the emergency
special assessment in 2009 and an increase of approximately $13
million in the deposit insurance premium expense for 2009, as
compared to 2008, as a result of the increase in the regular
assessment rate. Any additional increase in the deposit
insurance premium could have a material adverse effect
on the Corporations financial statements.
The failure of other financial institutions could adversely affect the Corporation
The Corporations ability to engage in routine funding transactions could be adversely
affected by the actions and commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. The Corporation has exposure to different industries and counterparties, and
routinely execute transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, investment companies and other
institutional clients. In certain of these transactions the Corporation is required to post
collateral to secure the obligations to the counterparties. In the event of a bankruptcy or
insolvency proceeding involving one of such counterparties, the Corporation may experience delays
in recovering the assets posted as collateral or may incur a loss to the extent that the
counterparty was holding collateral in excess of the obligation to such counterparty. There is no
assurance that any such losses would not materially and adversely affect the Corporations
financial condition and results of operations.
In
addition, many of these transactions expose the Corporation to credit risk in the event of
a default by our counterparty or client. In addition, the credit risk may be exacerbated when the
collateral held by the Corporation cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the loan or derivative exposure due to the Corporation.
There is no assurance that any such losses would not materially and adversely affect the
Corporations financial condition and results of operations.
Risks of not being able to recover all assets pledged to Lehman Brothers Special Financing,
Inc.
Lehman Brothers Special Financing, Inc. (Lehman) was the 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. In connection with
the unpaid net cash settlement due as of December 31, 2008, under the swap agreements, 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 as of December 31, 2008. The
Corporation had pledged collateral with Lehman to guarantee its
performance under the swap agreements in the event payment thereunder
was required. The market value of pledged securities
with Lehman as of December 31, 2008 amounted to approximately $62 million.
The
position of the Corporation with respect to the recovery of the
collateral, after discussion with its outside legal counsel, is that
at all times title to the collateral has been vested in the
Corporation and that, therefore, this collateral should not, for any
purpose, be considered property of the bankruptcy estate available
for distribution among Lehmans creditors. On January 30, 2009, the
Corporation filed a customer claim with the trustee and at this time the Corporation is unable to
determine the timing of the claim resolution or whether it will succeed in recovering all or a
substantial portion of the collateral or its equivalent value. As
additional relevant facts become available in future periods, a need
to recognize a partial or full reserve of this claim may arise.
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Changes in accounting standards issued by the Financial Accounting Standards Board or other
standard-setting bodies may adversely affect the Corporations financial statements
The Corporations financial statements are subject to the application of Generally Accepted
Accounting Principles in the United States (GAAP), which is periodically revised and/or expanded.
Accordingly, from time to time the Corporation is required to adopt new or revised accounting
standards issued by the FASB. Market conditions have prompted accounting standard setters to
promulgate new guidance which further interprets or seeks to revise accounting pronouncements
related to financial instruments, structures or transactions as well as to issue new standards
expanding disclosures. The impact of accounting pronouncements that have been issued but not yet
implemented is disclosed in the Corporations annual and quarterly reports on Form 10-K and Form
10-Q. An assessment of proposed standards is not provided as such proposals are subject to change
through the exposure process and, therefore, the effects on the Corporations financial statements
cannot be meaningfully assessed. It is possible that future accounting standards that the
Corporation is required to adopt could change the current accounting treatment that the Corporation
applies to its consolidated financial statements and that such changes could have a material
adverse effect on the Corporations financial condition and results of operations.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2008, First BanCorp owned the following three main offices located in
Puerto Rico:
Main offices:
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Headquarters Located at First Federal Building, 1519 Ponce de León Avenue,
Santurce, Puerto Rico, a 16 story office building. Approximately 60% of the building, an
underground three level parking lot and an adjacent parking lot are owned by the
Corporation. |
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EDP & Operations Center A five-story structure located at 1506 Ponce de León
Avenue, Santurce, Puerto Rico. These facilities are fully occupied by the Corporation. |
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Consumer Lending Center A three-story building with a three-level parking lot
located at 876 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. These facilities are fully
occupied by the Corporation. |
|
|
|
|
In addition, during 2006, First BanCorp purchased the following office located in
Puerto Rico: |
A building located on 1130 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. These facilities are
being renovated and expanded to accommodate branch operations, data processing, administrative and
certain headquarter offices. FirstBank expects to commence occupancy as soon as practicable but not
earlier than 2010.
The Corporation owned 25 branch and office premises and auto lots and leased 118 branch
premises, loan and office centers and other facilities. In certain situations, financial services
such as mortgage, insurance businesses and commercial banking services are located in the same
building. All of these premises are located in Puerto Rico, Florida and in the U.S. and British
Virgin Islands. Management believes that the Corporations properties are well maintained and are
suitable for the Corporations businesses as presently conducted.
Item 3. Legal Proceedings
The Corporation and its subsidiaries are defendants in various lawsuits arising in the
ordinary course of business. In the opinion of the Corporations management the pending and
threatened legal proceedings of which management is aware will not have a material adverse effect
on the financial condition or results of operations of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
37
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market and Holders Information
The Corporations common stock is traded on the New York Stock Exchange (NYSE) under the
symbol FBP. On December 31, 2008, there were 543 holders of record of the Corporations common
stock.
The following table sets forth, for the calendar quarters indicated, the high and low closing
sales prices and the cash dividends declared on the Corporations common stock during such periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
Quarter Ended |
|
High |
|
Low |
|
Last |
|
per Share |
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
$ |
12.17 |
|
|
$ |
7.91 |
|
|
$ |
11.14 |
|
|
$ |
0.07 |
|
September |
|
|
12.00 |
|
|
|
6.05 |
|
|
|
11.06 |
|
|
|
0.07 |
|
June |
|
|
11.20 |
|
|
|
6.34 |
|
|
|
6.34 |
|
|
|
0.07 |
|
March |
|
|
10.97 |
|
|
|
7.56 |
|
|
|
10.16 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
$ |
10.16 |
|
|
$ |
6.15 |
|
|
$ |
7.29 |
|
|
$ |
0.07 |
|
September |
|
|
11.06 |
|
|
|
8.62 |
|
|
|
9.50 |
|
|
|
0.07 |
|
June |
|
|
13.64 |
|
|
|
10.99 |
|
|
|
10.99 |
|
|
|
0.07 |
|
March |
|
|
13.52 |
|
|
|
9.08 |
|
|
|
13.26 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
$ |
10.79 |
|
|
$ |
9.39 |
|
|
$ |
9.53 |
|
|
$ |
0.07 |
|
September |
|
|
11.15 |
|
|
|
8.66 |
|
|
|
11.06 |
|
|
|
0.07 |
|
June |
|
|
12.22 |
|
|
|
8.90 |
|
|
|
9.30 |
|
|
|
0.07 |
|
March |
|
|
13.15 |
|
|
|
12.20 |
|
|
|
12.36 |
|
|
|
0.07 |
|
First BanCorp has five outstanding series of non convertible preferred stock: 7.125%
non-cumulative perpetual monthly income preferred stock, Series A (liquidation preference $25 per
share); 8.35% non-cumulative perpetual monthly income preferred stock, Series B (liquidation
preference $25 per share); 7.40% non-cumulative perpetual monthly income preferred stock, Series C
(liquidation preference $25 per share); 7.25% non-cumulative perpetual monthly income preferred
stock, Series D (liquidation preference $25 per share,); and 7.00% non-cumulative perpetual monthly
income preferred stock, Series E (liquidation preference $25 per share) (collectively Preferred
Stock), which trade on the NYSE.
On January 16, 2009, the Corporation issued to Treasury the Series F Preferred Stock and the
Warrant, which is described in Item 1 Recent Significant Events on page 8.
The Series A, B, C, D, E and F Preferred Stock rank on parity with respect to dividend rights
and rights upon liquidation, winding up or dissolution. Holders of each series of preferred stock
will be entitled to receive cash dividends, when, as and if declared by the board of directors of
First BanCorp out of funds legally available for dividends. The Purchase Agreement of the Series
F Preferred stock contains limitations on the payment of dividends on common stock, including
limiting regular quarterly cash dividends to an amount not exceeding the last quarterly cash
dividend paid per share, or the amount publicly announced (if lower), of common stock prior to
October 14, 2008, which is $0.07 per share.
The terms of the Corporations preferred stock do not permit the Corporation to declare, set
apart or pay any dividend or make any other distribution of assets on, or redeem, purchase, set
apart or otherwise acquire shares of common stock or of any other class of stock of First BanCorp
ranking junior to the preferred stock, unless all accrued and unpaid dividends on the preferred
stock and any parity stock, for the twelve monthly dividend periods ending on the immediately
preceding dividend payment date, shall have been paid or are paid contemporaneously; the full
monthly dividend on the preferred stock and any parity
stock for the then current month has been or is
38
contemporaneously declared and paid or
declared and set apart for payment; and the Corporation has not defaulted in the payment of the
redemption price of any shares of the preferred stock and any parity stock called for redemption.
If the Corporation is unable to pay in full the dividends on the preferred stock and on any other
shares of stock of equal rank as to the payment of dividends, all dividends declared upon the
preferred stock and any such other shares of stock will be declared pro rata.
The Corporation may not issue shares ranking, as to dividend rights or rights on liquidation,
winding up and dissolution, senior to the Series A, B, C, D, E and F Preferred Stock, except with
the consent of the holders of at least two-thirds of the outstanding aggregate liquidation
preference of the Series A, B, C, D, E and F Preferred Stock.
Dividends
The Corporation has a policy of paying quarterly cash dividends on its outstanding shares of
common stock. Accordingly, the Corporation declared a cash dividend of $0.07 per share for each
quarter of 2008, 2007 and 2006. The Corporation expects to continue to pay dividends but its
ability to pay future dividends at current levels or to pay dividends at all, will necessarily
depend upon its earnings and financial condition. See the discussion under Dividend Restrictions
under Item 1 for additional information concerning restrictions on the payment of dividends that
apply to the Corporation and FirstBank.
First BanCorp did not purchase any of its equity securities during 2008 or 2007.
The Puerto Rico Internal Revenue Code requires the withholding of income tax from dividend
income derived by resident U.S. citizens, special partnerships, trusts and estates and non-resident
U.S. citizens, custodians, partnerships, and corporations from sources within Puerto Rico.
Resident U.S. Citizens
A special tax of 10% is imposed on eligible dividends paid to individuals, special
partnerships, trusts, and estates to be applied to all distributions unless the taxpayer
specifically elects otherwise. Once this election is made it is irrevocable. However, the taxpayer
can elect to include in gross income the eligible distributions received and take a credit for the
amount of tax withheld. If the taxpayer does not make this election on the tax return, then he can
exclude from gross income the distributions received and reported without claiming the credit for
the tax withheld.
Nonresident U.S. Citizens
Nonresident U.S. citizens have the right to certain exemptions when a Withholding Tax
Exemption Certificate (Form 2732) is properly completed and filed with the Corporation. The
Corporation, as withholding agent, is authorized to withhold a tax of 10% only from the excess of
the income paid over the applicable tax-exempt amount.
U.S. Corporations and Partnerships
Corporations and partnerships not organized under Puerto Rico laws that have not engaged in
trade or business in Puerto Rico during the taxable year in which the dividend is paid are subject
to the 10% dividend tax withholding. Corporations or partnerships not organized under the laws of
Puerto Rico that have engaged in trade or business in Puerto Rico are not subject to the 10%
withholding, but they must declare the dividend as gross income on their Puerto Rico income tax
return.
39
Securities authorized for issuance under equity compensation plans
The following summarizes equity compensation plans approved by security holders and equity
compensation plans that were not approved by security holders as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
Weighted-Average |
|
|
Remaining Available for |
|
|
|
Number of Securities |
|
|
Exercise Price of |
|
|
Future Issuance Under |
|
|
|
to be Issued Upon |
|
|
Outstanding |
|
|
Equity Compensation |
|
|
|
Exercise of Outstanding |
|
|
Options, warrants |
|
|
Plans (Excluding Securities |
|
|
|
Options |
|
|
and rights |
|
|
Reflected in Column (A)) |
|
Plan category |
|
(A) |
|
|
(B) |
|
|
(C) |
|
|
Equity compensation plans approved by stockholders |
|
|
3,910,910 |
(1) |
|
$ |
12.82 |
|
|
|
3,763,757 |
(2) |
Equity compensation plans not approved by stockholders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,910,910 |
|
|
$ |
12.82 |
|
|
|
3,763,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options granted under the 1997 stock option plan which expired on January 21, 2007. All
outstanding awards under the stock option plan continue in full forth and effect, subject to their
original terms and the shares of common stock underlying the options are subject to adjustments for
stock splits, reorganization and other similar events. |
|
(2) |
|
Securities available for future issuance under the First BanCorp 2008 Omnibus Incentive Plan
(the Omnibus Plan) approved by stockholder on April 29, 2008. 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. |
40
STOCK PERFORMANCE GRAPH
The following Performance Graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Annual Report on Form 10-K into any filing under the
Securities Act of 1933, as amended (the Securities Act) or the Exchange Act, except to the extent
that First BanCorp specifically incorporates this information by reference, and shall not otherwise
be deemed filed under these Acts.
The graph below compares the cumulative total stockholder return of First BanCorp during the
measurement period with the cumulative total return, assuming reinvestment of dividends, of the S&P
500 Index and the S&P Supercom Banks Index (the Peer Group). The Performance Graph assumes that
$100 was invested on December 31, 2003 in each of First
BanCorps common stock, the S&P 500 Index
and the Peer Group. The comparisons in this table are set forth in response to SEC disclosure
requirements, and are therefore not intended to forecast or be indicative of future performance of
First BanCorps common stock.
The cumulative total stockholder return was obtained by dividing (i) the cumulative amount of
dividends per share, assuming dividend reinvestment since the measurement point, December 31, 2003,
plus (ii) the change in the per share price since the measurement date, by the share price at the
measurement date.
41
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data for each of the
five years in the period ended December 31, 2008. This information should be read in conjunction
with the audited consolidated financial statements and the related notes thereto.
SELECTED FINANCIAL DATA
(Dollars in thousands except for per share data and financial ratios results)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Condensed Income Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
1,126,897 |
|
|
$ |
1,189,247 |
|
|
$ |
1,288,813 |
|
|
$ |
1,067,590 |
|
|
$ |
690,334 |
|
Total interest expense |
|
|
599,016 |
|
|
|
738,231 |
|
|
|
845,119 |
|
|
|
635,271 |
|
|
|
292,853 |
|
Net interest income |
|
|
527,881 |
|
|
|
451,016 |
|
|
|
443,694 |
|
|
|
432,319 |
|
|
|
397,481 |
|
Provision for loan and lease losses |
|
|
190,948 |
|
|
|
120,610 |
|
|
|
74,991 |
|
|
|
50,644 |
|
|
|
52,800 |
|
Non-interest income |
|
|
74,643 |
|
|
|
67,156 |
|
|
|
31,336 |
|
|
|
63,077 |
|
|
|
59,624 |
|
Non-interest expenses |
|
|
333,371 |
|
|
|
307,843 |
|
|
|
287,963 |
|
|
|
315,132 |
|
|
|
180,480 |
|
Income before income taxes |
|
|
78,205 |
|
|
|
89,719 |
|
|
|
112,076 |
|
|
|
129,620 |
|
|
|
223,825 |
|
Income tax benefit (provision) |
|
|
31,732 |
|
|
|
(21,583 |
) |
|
|
(27,442 |
) |
|
|
(15,016 |
) |
|
|
(46,500 |
) |
Net income |
|
|
109,937 |
|
|
|
68,136 |
|
|
|
84,634 |
|
|
|
114,604 |
|
|
|
177,325 |
|
Net income attributable to common stockholders |
|
|
69,661 |
|
|
|
27,860 |
|
|
|
44,358 |
|
|
|
74,328 |
|
|
|
137,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share Results(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.75 |
|
|
$ |
0.32 |
|
|
$ |
0.54 |
|
|
$ |
0.92 |
|
|
$ |
1.70 |
|
Net income per common share diluted |
|
$ |
0.75 |
|
|
$ |
0.32 |
|
|
$ |
0.53 |
|
|
$ |
0.90 |
|
|
$ |
1.65 |
|
Cash dividends declared |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
Average shares outstanding |
|
|
92,508 |
|
|
|
86,549 |
|
|
|
82,835 |
|
|
|
80,847 |
|
|
|
80,419 |
|
Average shares outstanding diluted |
|
|
92,644 |
|
|
|
86,866 |
|
|
|
83,138 |
|
|
|
82,771 |
|
|
|
83,010 |
|
Book value per common share |
|
$ |
10.78 |
|
|
$ |
9.42 |
|
|
$ |
8.16 |
|
|
$ |
8.01 |
|
|
$ |
8.10 |
|
Tangible book value per common share |
|
$ |
10.22 |
|
|
$ |
8.87 |
|
|
$ |
7.50 |
|
|
$ |
7.29 |
|
|
$ |
7.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale |
|
$ |
13,088,292 |
|
|
$ |
11,799,746 |
|
|
$ |
11,263,980 |
|
|
$ |
12,685,929 |
|
|
$ |
9,697,994 |
|
Allowance for loan and lease losses |
|
|
281,526 |
|
|
|
190,168 |
|
|
|
158,296 |
|
|
|
147,999 |
|
|
|
141,036 |
|
Money market and investment securities |
|
|
5,709,154 |
|
|
|
4,811,413 |
|
|
|
5,544,183 |
|
|
|
6,653,924 |
|
|
|
5,699,201 |
|
Intangible assets |
|
|
52,083 |
|
|
|
51,034 |
|
|
|
54,908 |
|
|
|
58,292 |
|
|
|
16,014 |
|
Deferred tax asset, net |
|
|
128,039 |
|
|
|
90,130 |
|
|
|
162,096 |
|
|
|
130,140 |
|
|
|
75,077 |
|
Total assets |
|
|
19,491,268 |
|
|
|
17,186,931 |
|
|
|
17,390,256 |
|
|
|
19,917,651 |
|
|
|
15,637,045 |
|
Deposits |
|
|
13,057,430 |
|
|
|
11,034,521 |
|
|
|
11,004,287 |
|
|
|
12,463,752 |
|
|
|
7,912,322 |
|
Borrowings |
|
|
4,736,670 |
|
|
|
4,460,006 |
|
|
|
4,662,271 |
|
|
|
5,750,197 |
|
|
|
6,300,573 |
|
Total preferred equity |
|
|
550,100 |
|
|
|
550,100 |
|
|
|
550,100 |
|
|
|
550,100 |
|
|
|
550,100 |
|
Total common equity |
|
|
940,628 |
|
|
|
896,810 |
|
|
|
709,620 |
|
|
|
663,416 |
|
|
|
610,597 |
|
Accumulated other comprehensive gain (loss), net of tax |
|
|
57,389 |
|
|
|
(25,264 |
) |
|
|
(30,167 |
) |
|
|
(15,675 |
) |
|
|
43,636 |
|
Total equity |
|
|
1,548,117 |
|
|
|
1,421,646 |
|
|
|
1,229,553 |
|
|
|
1,197,841 |
|
|
|
1,204,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Ratios (In Percent): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets |
|
|
0.59 |
|
|
|
0.40 |
|
|
|
0.44 |
|
|
|
0.64 |
|
|
|
1.30 |
|
Return on Average Total Equity |
|
|
7.67 |
|
|
|
5.14 |
|
|
|
7.06 |
|
|
|
8.98 |
|
|
|
15.73 |
|
Return on Average Common Equity |
|
|
7.89 |
|
|
|
3.59 |
|
|
|
6.85 |
|
|
|
10.23 |
|
|
|
23.75 |
|
Average Total Equity to Average Total Assets |
|
|
7.74 |
|
|
|
7.70 |
|
|
|
6.25 |
|
|
|
7.09 |
|
|
|
8.28 |
|
Interest Rate Spread(2) |
|
|
2.83 |
|
|
|
2.29 |
|
|
|
2.35 |
|
|
|
2.87 |
|
|
|
3.06 |
|
Interest Rate Margin(2) |
|
|
3.20 |
|
|
|
2.83 |
|
|
|
2.84 |
|
|
|
3.23 |
|
|
|
3.37 |
|
Dividend payout ratio |
|
|
37.19 |
|
|
|
88.32 |
|
|
|
52.50 |
|
|
|
30.46 |
|
|
|
14.10 |
|
Efficiency ratio(3) |
|
|
55.33 |
|
|
|
59.41 |
|
|
|
60.62 |
|
|
|
63.61 |
|
|
|
39.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to loans receivable |
|
|
2.15 |
|
|
|
1.61 |
|
|
|
1.41 |
|
|
|
1.17 |
|
|
|
1.46 |
|
Net charge-offs to average loans |
|
|
0.87 |
|
|
|
0.79 |
|
|
|
0.55 |
|
|
|
0.39 |
|
|
|
0.48 |
|
Provision for loan and lease losses to net charge-offs |
|
|
1.76 |
x |
|
|
1.36 |
x |
|
|
1.16 |
x |
|
|
1.12 |
x |
|
|
1.38 |
x |
Non-performing assets to total assets |
|
|
3.27 |
|
|
|
2.56 |
|
|
|
1.54 |
|
|
|
0.75 |
|
|
|
0.69 |
|
Non-accruing loans to total loans receivable |
|
|
4.49 |
|
|
|
3.50 |
|
|
|
2.24 |
|
|
|
1.06 |
|
|
|
0.95 |
|
Allowance to total non-accruing loans |
|
|
47.95 |
|
|
|
46.04 |
|
|
|
62.79 |
|
|
|
110.18 |
|
|
|
153.86 |
|
Allowance to total non-accruing loans,
excluding residential real estate loans |
|
|
90.16 |
|
|
|
93.23 |
|
|
|
115.33 |
|
|
|
186.06 |
|
|
|
234.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price: End of period |
|
$ |
11.14 |
|
|
$ |
7.29 |
|
|
$ |
9.53 |
|
|
$ |
12.41 |
|
|
$ |
31.76 |
|
|
|
|
(1) |
|
Amounts presented were recalculated, when applicable, to retroactively
consider the effect of the June 30, 2005 two-for-one common stock split. |
|
(2) |
|
On a tax equivalent basis (see Net Interest Income discussion
below). |
|
(3) |
|
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. |
42
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations relates to the accompanying consolidated audited financial statements of First BanCorp
(the Corporation or First BanCorp) and should be read in conjunction with the audited financial
statements and the notes thereto.
DESCRIPTION OF BUSINESS
First BanCorp is a diversified financial holding company headquartered in San Juan, Puerto
Rico offering a full range of financial products to consumers and commercial customers through
various subsidiaries. First BanCorp is the holding company of FirstBank Puerto Rico (FirstBank or
the Bank), Ponce General Corporation (the holding company of FirstBank Florida), Grupo Empresas
de Servicios Financieros (d/b/a PR Finance Group) and FirstBank Insurance Agency. Through its
wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States and
British Virgin Islands and the State of Florida (USA) specializing in commercial banking,
residential mortgage loan originations, finance leases, personal loans, small loans, auto
loans,vehicle rental and insurance agency services.
ECONOMIC AND MARKET ENVIRONMENT
In the second half of 2008 the volatility and disruptions in the capital and credit markets
have reached dramatic 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 ad-hoc 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 was signed into law on
October 3, 2008 and a $787 billion package of spending and tax cuts was approved in early 2009 to
stimulate an economy that has been officially in recession since December 2007. Legislation has
also increased the limit on deposit insurance at banks and credit
unions and authorized the Federal
Reserve to pay interest on reserves. The credit market remained tight despite passage of the $700
billion rescue plan in 2008 and it is uncertain the effect of the economic stimulus package
recently approved by the new government in the United States. 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. Other Central Banks 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 $197 million condo-conversion loan portfolio
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 certificates of deposit
(CDs)
to increase its liquidity levels and the extension of the maturities of borrowings to reduce
exposure to high levels of market volatility. The Corporations results of operations are
sensitive to fluctuations in interest rates. Changes in interest rates can materially affect key
earnings drivers such as the volume of loan originations, net interest income earned, and
gains/losses on investment security holdings. The Corporation manages interest rate risk on an
ongoing basis through asset/liability management strategies, which have included the use of various
derivative instruments. The Corporation also manages credit risk inherent in loan portfolios
through underwriting, loan review and collection functions.
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
43
consists of fixed-rate, fully amortizing, full documentation loans and over 90% 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 (MBS) (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, protect debt and mortgage-backed
securities of the agencies. As of December 31, 2008 the Corporation had $4.0 billion and $0.9
billion in FNMA and FHLMC mortgage-backed securities and debt securities, respectively,
representing approximately 87% of the total investment portfolio. The Corporations investment in
equity securities is minimal, and it does not own any equity or debt securities of 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. 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 13, 29 and 30 to the Corporations audited
financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K.
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 Puerto Rico government budget shortfalls and diminished
consumer buying power. Nevertheless, the election of new governments in Puerto Rico and in the
United States and the expectations of new measures to positively impact the economy may renew the
confidence of consumers and businesses 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. The Corporation also
increased its reserves for the residential mortgage, commercial 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 and confidence. 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 consumer loans charge-offs and a relative stability in non-performing residential
mortgage loans (as a percentage of total 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. For 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 scheduled 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 losses upon default. For more information on credit
quality, see the Risk Management Allowance for Loan and Lease Losses and Non-performing Assets
discussion below.
44
OVERVIEW OF RESULTS OF OPERATIONS
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 incurred 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 year ended December 31, 2008 amounted to $109.9 million or $0.75 per
diluted common share, compared to $68.1 million or $0.32 per diluted common share for 2007 and
$84.6 million or $0.53 per diluted common share for 2006.
The Corporations financial performance for 2008, as compared to 2007, was principally
impacted by: (i) an increase of $76.9 million in net interest income, as the Corporation benefited
from lower short-term interest rates on its interest-bearing liabilities as compared to rate levels
during 2007 that more than offset lower loan yields on its commercial and construction loan
portfolio, (ii) an income tax benefit of $31.7 million for
2008 compared to an income tax expense of $21.6 million for 2007, a fluctuation mainly related to lower taxable income, the reversal of $10.6 million of
Unrecognized Tax Benefits (UTBs), and an income tax benefit of $5.4 million in connection with an
agreement entered into with the Puerto Rico taxing authority, as discussed below, and (iii) a net
gain on investments of $21.2 million in 2008 compared to a net
loss of $2.7 million in 2007, impacted by a gain of
$9.3 million on the mandatory redemption of a portion of the Corporations investment in VISA, Inc.
(VISA) as part of VISAs Initial Public Offering (IPO) in March 2008 and realized gains of
$17.9 million on the sale of fixed-rate MBS. These factors were partially offset by: (i) an
increase of $70.3 million in the provision for loan and lease losses due to the increase in
delinquency levels and increases in specific reserves for impaired commercial and construction
loans adversely impacted by deteriorating economic conditions, and (ii) an increase of $19.0
million in losses on real estate owned operations (REO) driven by a higher volume of repossessed
properties and declining real estate prices, mainly in the U.S. mainland, that have caused
write-downs in the value of repossessed properties.
45
The following table summarizes the effect of the aforementioned factors and other factors that
significantly impacted financial results in previous years on net income attributable to common
stockholders and earnings per common share for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Dollars |
|
|
Per Share |
|
|
Dollars |
|
|
Per Share |
|
|
Dollars |
|
|
Per Share |
|
|
|
(In thousands, except for per common share amounts) |
|
Net income attributable to common
stockholders for prior year |
|
$ |
27,860 |
|
|
$ |
0.32 |
|
|
$ |
44,358 |
|
|
$ |
0.53 |
|
|
$ |
74,328 |
|
|
$ |
0.90 |
|
Increase (decrease) from changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
76,865 |
|
|
|
0.88 |
|
|
|
7,322 |
|
|
|
0.09 |
|
|
|
11,375 |
|
|
|
0.14 |
|
Provision for loan and lease losses |
|
|
(70,338 |
) |
|
|
(0.81 |
) |
|
|
(45,619 |
) |
|
|
(0.55 |
) |
|
|
(24,347 |
) |
|
|
(0.29 |
) |
Net gain (loss) on investments and impairments |
|
|
23,919 |
|
|
|
0.28 |
|
|
|
5,468 |
|
|
|
0.06 |
|
|
|
(20,533 |
) |
|
|
(0.25 |
) |
Gain (loss) on partial extinguishment and
recharacterization of secured commercial loans to
local financial institutions |
|
|
(2,497 |
) |
|
|
(0.03 |
) |
|
|
13,137 |
|
|
|
0.16 |
|
|
|
(10,640 |
) |
|
|
(0.13 |
) |
Gain on sale of credit card portfolio |
|
|
(2,819 |
) |
|
|
(0.03 |
) |
|
|
2,319 |
|
|
|
0.03 |
|
|
|
500 |
|
|
|
0.01 |
|
Insurance reimbursement and other agreements
related to a contingency settlement |
|
|
(15,075 |
) |
|
|
(0.17 |
) |
|
|
15,075 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
Other non-interest income |
|
|
3,959 |
|
|
|
0.05 |
|
|
|
(179 |
) |
|
|
|
|
|
|
(1,068 |
) |
|
|
(0.01 |
) |
Employees compensation and benefits |
|
|
(1,490 |
) |
|
|
(0.02 |
) |
|
|
(12,840 |
) |
|
|
(0.15 |
) |
|
|
(25,445 |
) |
|
|
(0.31 |
) |
Professional fees |
|
|
4,942 |
|
|
|
0.06 |
|
|
|
11,344 |
|
|
|
0.13 |
|
|
|
(18,708 |
) |
|
|
(0.23 |
) |
Deposit insurance premium |
|
|
(3,424 |
) |
|
|
(0.04 |
) |
|
|
(5,073 |
) |
|
|
(0.06 |
) |
|
|
(366 |
) |
|
|
|
|
Provision for contingencies (SEC & Class Action suit settlements) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,750 |
|
|
|
1.00 |
|
Net loss on REO operations |
|
|
(18,973 |
) |
|
|
(0.22 |
) |
|
|
(2,382 |
) |
|
|
(0.03 |
) |
|
|
325 |
|
|
|
|
|
All other operating expenses |
|
|
(6,583 |
) |
|
|
(0.08 |
) |
|
|
(10,929 |
) |
|
|
(0.13 |
) |
|
|
(11,387 |
) |
|
|
(0.14 |
) |
Income tax provision |
|
|
53,315 |
|
|
|
0.61 |
|
|
|
5,859 |
|
|
|
0.07 |
|
|
|
(12,426 |
) |
|
|
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income after preferred stock dividends
and change in average common shares |
|
|
69,661 |
|
|
|
0.80 |
|
|
|
27,860 |
|
|
|
0.33 |
|
|
|
44,358 |
|
|
|
0.54 |
|
Change in average common shares (1) |
|
|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stockholders |
|
$ |
69,661 |
|
|
$ |
0.75 |
|
|
$ |
27,860 |
|
|
$ |
0.32 |
|
|
$ |
44,358 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2008, mainly attributed to the sale of 9.250 million common shares to the Bank of Nova
Scotia (Scotiabank) in the second half of 2007. |
|
|
Net income for the year ended December 31, 2008 was $109.9 million compared to $68.1
million and $84.6 million for the years ended December 31, 2007 and 2006, respectively. |
|
|
|
Diluted earnings per common share for the year ended December 31, 2008 amounted to $0.75
compared to $0.32 and $0.53 for the years ended December 31, 2007 and 2006, respectively. |
|
|
|
Net interest income for the year ended December 31, 2008 was $527.9 million compared to
$451.0 million and $443.7 million for the years ended December 31, 2007 and 2006,
respectively. Net interest spread and margin on an adjusted tax equivalent basis (for
definition and reconciliation of this non-GAAP measure, refer to the Net Interest Income
discussion below) were 2.83% and 3.20%, respectively, up 54 and 37 basis points from 2007.
The increase for 2008 compared to 2007 was mainly associated with a decrease in the average
cost of funds resulting from lower short-term interest rates and to a lesser extent to a
higher volume of interest earning assets. The decrease in funding costs more than offset
lower loan yields resulting from the repricing of variable-rate construction and commercial
loans tied to short-term indexes and from a higher volume of non-accrual loans. |
Approximately $14.2 million of the total net interest income increase is related to positive
fluctuations in the fair value of derivative instruments and financial liabilities elected to
be measured at fair value under Statement of Financial Accounting Standards No. (SFAS) 159,
The Fair Value Option for Financial Assets and Financial Liabilities. Most of the
Corporations derivative instruments are interest rate swaps used to economically hedge
callable brokered CDs and medium-term notes.
Average earning assets for 2008 increased by $1.3 billion, as compared to 2007, driven by
commercial and residential real estate loan originations, and to a lesser extent, purchases
of loans during 2008 that contributed to a wider spread. In addition, the Corporation
purchased approximately $3.2 billion in U.S. government agency fixed-rate MBS having an
average yield of 5.44% during 2008, which is higher than the cost of the borrowing 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 Incomediscussion below for additional
information.
46
The increase in net interest income for 2007, compared to 2006, was principally due to the
effect in the financial results of 2006 of unrealized losses related to changes in the fair
value of derivative instruments prior to the implementation of the long-haul method of
accounting on April 3, 2006. Prior to the second quarter of 2006, the Corporation
recorded changes in the fair value of derivative instruments as non-hedging instruments
through operations as part of interest expense. The adoption of fair value hedge accounting
in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the accounting
volatility that previously resulted from the accounting asymmetry created by accounting for
the financial liabilities at amortized cost and the derivatives at fair value. The
mark-to-market valuation changes for the year ended December 31, 2007 amounted to a net
non-cash loss of $9.1 million, compared to net non-cash losses of $58.2 million for 2006.
Net interest income on an adjusted tax equivalent basis decreased 10% for 2007, as compared
to 2006, (from $529.9 million in 2006 to $475.4 million in 2007). Adjusted tax equivalent
net interest income excludes the effect of mark-to-market valuation changes on derivative
instruments and financial liabilities measured at fair value and 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. The
decrease in adjusted tax equivalent net interest income in 2007, as compared to 2006, was
mainly driven by the continued pressure of the flattening of the yield curve during most of
2007 and the decrease in the average volume of interest earning assets primarily attributable
to the repayment of approximately $2.4 billion received from a local financial institution
reducing the balance of its secured commercial loan with the Corporation during the latter
part of the second quarter of 2006.
|
|
The provision for loan and lease losses for 2008 was $190.9 million compared to $120.6
million and $75.0 million for 2007 and 2006, respectively. The increase for 2008, as compared
to 2007, is mainly attributable to the significant increase in delinquency levels and
increases in specific reserves for impaired commercial and construction loans. During 2008,
the Corporation experienced continued stress in the credit quality of and worsening trends on
its construction loan portfolio, in particular, condo-conversion loans affected by the
continuing deterioration in the health of the economy, an oversupply of new homes and
declining housing prices in the United States and on its commercial loan portfolio adversely
impacted by deteriorating economic conditions in Puerto Rico. Also, higher reserves for
residential mortgage loans in Puerto Rico and in the United States were necessary to account
for the credit risk tied to recessionary conditions in the economy. The current economic
recession in Puerto Rico is expected to continue at least through the remainder of 2009. |
The increase in the Corporations provision for 2007, as compared to 2006, was due to a
deterioration in the credit quality of the Corporations loan portfolio which was associated
with the weakening economic conditions in Puerto Rico and the slowdown in the United States
housing sector. These conditions resulted in higher net charge-offs relating to Puerto Rico
consumer loans as well as commercial and construction loans, representing an increase of
$6.9 million and $8.7 million, respectively, as compared to 2006 and higher provisions
allocated to the Corporations construction loan portfolio originated by its Corporate
Banking operations in Miami, Florida (USA). During the second half of 2007, the Corporation
recorded a specific reserve of $8.1 million on four condo-conversion loans with an aggregate
principal balance at the date of the evaluation of $60.5 million extended to a single
borrower.
Refer to the Provision for Loan and Lease Losses and Risk Management discussions below
for additional information with respect to this troubled relationship and further analysis of
the allowance for loan and lease losses and non-performing assets and related ratios.
|
|
Non-interest income for the year ended December 31, 2008 was $74.6 million compared to
$67.2 million and $31.3 million for the years ended December 31, 2007 and 2006, respectively.
The increase in non-interest income in 2008, compared to 2007, is related to a realized gain
of $17.7 million on the sale of investment securities (mainly U.S. sponsored agency
fixed-rate MBS) and to the gain of $9.3 million on the sale of part of the Corporations
investment in VISA in connection with VISAs IPO. A surge in MBS prices, mainly due to the
recent announcement of the Federal Reserve (FED) that it will invest up to $600 billion in
obligations from U.S. government-sponsored agencies, including $500 billion in MBS, provided
an opportunity to realize a gain on the sale of approximately $284 million fixed-rate U.S.
agency MBS at a gain of $11.0 million. Early in 2008, a spike and subsequent contraction in
yield spread for U.S. agency MBS also provided an opportunity for the sale of approximately
$242 million and a realized gain of $6.9 million. |
47
Higher point of sale (POS) and ATM interchange fee income and an increase in fee income from
cash management services provided to corporate customers also contributed to the increase in
non-interest income. The increase in non-interest income attributable to these activities
was partially offset, when comparing 2008 to 2007, by isolated events such as the $15.1
million income recognition for reimbursement expenses related to the class action lawsuit
settled in 2007 (see below), and a gain of $2.8 million on the sale of a credit card
portfolio and $2.5 million on the partial extinguishment and recharacterization of a secured
commercial loan to a local financial institution that were all recognized in 2007.
The increase in non-interest income in 2007, compared to 2006, was mainly attributable
to the income recognition of approximately $15.1 million for reimbursement of expenses,
mainly from insurance carriers, related to the settlement of the class action lawsuit brought
against the Corporation, a decrease of $9.3 million in other-than-temporary impairment
charges related to the Corporations equity securities portfolio, the fluctuation resulting
from gains and losses recorded on partial repayments of certain secured commercial loans
extended to local financial institutions (a gain of $2.5 million recorded in 2007 compared to
a loss of $10.6 million recorded in 2006), a higher gain on the sale of its credit card
portfolio (a gain of $2.8 million recorded in 2007 compared to $0.5 million recorded in 2006)
pursuant to a strategic alliance reached with a U.S. financial institution and higher income
from service charges on loans (an increase of $0.9 million or 16% as compared to 2006) due to
the increase in the loan portfolio volume driven by new originations.
Refer to Non-Interest Incomediscussion below for additional information.
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Non-interest expenses for 2008 were $333.4 million compared to $307.8 million and $288.0
million for 2007 and 2006, respectively. The increase in non-interest expenses for 2008, as
compared to 2007, is principally attributable to: (i) a higher net loss on REO operations
that increased to $21.4 million for 2008 from $2.4 million for 2007, driven by a higher
inventory of repossessed properties and declining real estate prices, mainly in the U.S.
mainland, that have caused write-downs on the value of repossessed properties, and (ii) an
increase of $3.4 million in deposit insurance premium expense, as the Corporation used
available one-time credits to offset the premium increase in 2007 resulting from a new
assessment system adopted by the Federal Deposit Insurance Corporation (FDIC), and (iii)
higher occupancy and equipment expenses, an increase of $2.9 million tied to the growth of
the Corporations operations. The Corporation has been able to continue the growth of its
operations without incurring in substantial additional operating expenses as reflected by a
slight increase of 2% in operating expenses, excluding the increase in credit cost. Modest
increases were observed in occupancy and equipment expenses, an increase of $2.9 million, and
in employees compensation and benefits, an increase of $1.5 million. |
The increase in non-interest expenses for 2007, as compared to 2006, was mainly due to a
$12.8 million increase in employees compensation and benefits expense primarily due to
increases in the average compensation and related fringe benefits paid to employees, coupled
with the accrual of approximately $3.3 million for a voluntary separation program established
by the Corporation as part of its cost saving strategies, a $5.1 million increase in the
deposit insurance premium expense resulting from changes in the premium calculation by the
FDIC, a $4.5 million increase in occupancy and equipment expenses mainly attributable to
increases in costs associated with the expansion of the Corporations branch network and loan
origination offices and an increase of $6.4 million in other operating expenses primarily
attributable to a $3.3 million increase related to costs associated with capital raising
efforts in 2007 not qualifying for capitalization coupled with increased costs associated
with foreclosure actions on the aforementioned troubled loan relationship in Miami, Florida.
These factors were partially offset by an $11.3 million decrease in professional fees
attributable to the conclusion during 2006 of the Audit Committees review and the
restatement process.
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For 2008, the Corporation recorded an income tax benefit of $31.7 million, compared to an
income tax expense of $21.6 million for 2007. The fluctuation is mainly related to lower
taxable income. A significant portion of revenues was derived from tax-exempt assets and
operations conducted through the international banking entity, FirstBank Overseas
Corporation. Also, the positive fluctuation in financial results was impacted by two
transactions: (i) a reversal of $10.6 million of UTBs during the second quarter of 2008 for
positions taken on income tax returns recorded under the provisions of Financial Accounting
Standards Board Interpretation No. (FIN) 48 due to the lapse of the statute of limitations
for the 2003 taxable year, 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 established a multi-year allocation schedule for
deductibility of the $74.25 million payment made by the Corporation during 2007 to settle a
securities class action suit. |
48
Income tax expense for the year ended December 31, 2007 was $21.6 million (or 24% of
pre-tax earnings) compared to $27.4 million (or 24% of pre-tax earnings) for the year ended
December 31, 2006. The decrease in income tax expense in 2007 as compared to 2006 was
primarily due to lower taxable income coupled with the effect of a lower statutory tax rate
in Puerto Rico for 2007 (39% in 2007 compared to 43.5% in 2006). Refer to Income
Taxesdiscussion below for additional information.
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Total assets as of December 31, 2008 amounted to $19.5 billion, an increase of $2.3 billion
compared to $17.2 billion as of December 31, 2007. The Corporations loan portfolio increased
by $1.3 billion (before the allowance for loan and lease losses), driven by new originations,
mainly commercial and residential mortgage loans 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 fixed-rate U.S. government
agency MBS during the first half of 2008 as market conditions presented an opportunity to
obtain attractive yields, improve its net interest margin and replace $1.2 billion of U.S.
Agency debentures called by counterparties. The Corporation increased its cash and money
market investments by $26.8 million in part as a precautionary measure during the present
economic climate. |
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As of December 31, 2008, total liabilities amounted to $17.9 billion, an increase of
approximately $2.2 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 and accumulate
additional liquidity due to current market volatility, and an increase in repurchase
agreements issued to finance the purchase of MBS in the first half of 2008. Total deposits,
excluding brokered CDs, increased by $770.1 million from the balance as of December 31, 2007,
reflecting increases in deposits from all sectors; including individuals, commercial entities
and the government. |
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The Corporations stockholders equity amounted to $1.5 billion as of December 31, 2008, an
increase of $126.5 million compared to the balance as of December 31, 2007, driven by net
income of $109.9 million recorded for 2008 and a net unrealized gain of $82.7 million on the
fair value of available-for-sale securities recorded as part of comprehensive income. The
increase in the fair value of MBS was mainly in response to the announcement by the U.S.
government that it will invest up to $600 billion in obligations from housing-related
government-sponsored agencies, including $500 billion in MBS backed by FNMA, FHLMC and GNMA.
Partially offsetting these increases were dividends declared during 2008 amounting to $66.2
million ($25.9 million or $0.28 per common stock and $40.3 million in preferred stock). |
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Total loan production, including purchases, for the year ended December 31, 2008 was $4.2
billion compared to $4.1 billion and $4.9 billion for the years ended December 31, 2007 and
2006, respectively. The increase in loan production in 2008, as compared to 2007, is mainly
associated with an increase in commercial loan originations and the purchase of a $218
million auto loan portfolio. The decrease in loan production for 2007, as compared to 2006,
was mainly due to decreases in the origination of residential real estate and commercial
loans attributable, among other things, to the slowdown in the Puerto Rico and U.S. housing
market and to stricter underwriting standards. |
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Total non-performing assets as of December 31, 2008 were $637.2 million compared to $439.3
million as of December 31, 2007. The slumping 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 all of the Corporations loan portfolios. Total
non-performing assets in the U.S. mainland increased to $104.0 million as of December 31, 2008
from $58.5 million at the end of 2007, up $45.5 million or 78%. All segments were severely
affected by the economy and housing market crisis in the U.S. with the total variance
resulting from: (i) an increase of $13.8 million for residential real estate loans and $3.6
million for foreclosed residential properties; (ii) an increase of $4.1 million in
non-performing construction, land loans and foreclosed condo-conversion projects; (iii) an
increase of $23.3 million in commercial loans, mainly secured by real estate, and (iv) an
increase of $0.7 million in the consumer lending sector. Refer to the Risk Management
discussion below for additional information with respect to dispositions of non-performing
assets in the United States during 2008 and further analysis. |
Total non-performing assets in Puerto Rico increased to $512.6 million as of December 31,
2008 from $362.1 million at the end of 2007, up $150.5 million or 42%. The total variance
breakdown includes: (i) an
49
increase of $49.6 million for non-performing residential real estate loans and $7.6 million
in foreclosed real estate properties; (ii) an increase of $45.6 million in non-performing
construction and land loans, and (iii) an increase of $48.0 million in commercial loans. All
segments of the loan portfolios were impacted by the current economic crisis. On a positive
note, non-performing consumer assets (including finance leases) remained relatively unchanged
compared to December 31, 2007. This portfolio continues to show signs of stability and
benefited from changes in underwriting standards implemented in late
2005 and from
originations using these new underwriting standards of new consumer loans to replace maturing
consumer loans. This portfolio had an average life of approximately four years.
The Corporation may experience additional increases in the volume of its non-performing loan
portfolio due to Puerto Ricos current economic recession. During the third quarter of 2007,
the Corporation started a loan loss mitigation program providing homeownership preservation
assistance. Since the inception of the program in the third quarter of 2007, the Corporation
has completed approximately 367 loan modifications with an outstanding balance of
approximately $60.0 million as of December 31, 2008. Of this amount, $53.2 million have been
outstanding long enough to be considered for interest accrual of which $32.8 million have
been formally returned to accruing status after a sustained period of repayments.
50
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 (GAAP) 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.
Allowance for Loan and Lease Losses
The Corporation maintains the allowance for loan and lease losses at a level that management
considers adequate to absorb losses currently inherent in the loans and leases portfolio. The
adequacy of the allowance for loan and lease losses is reviewed on a quarterly basis as part of the
Corporations continued evaluation of its asset quality. Management allocates specific portions of
the allowance for loan and lease losses to problem loans that are identified through an asset
classification analysis. The portfolios of residential mortgage loans, consumer loans, auto loans
and finance leases are individually considered homogeneous and each portfolio is evaluated in as
pools of similar loans for impairment. The adequacy of the allowance for loan and lease losses is
based upon a number of factors including historical loan and lease loss experience that may not
fully represent current conditions inherent in the portfolio. For example, factors affecting the
Puerto Rico, Florida (USA), US Virgin Islands or British Virgin Islands economies may contribute
to delinquencies and defaults above the Corporations historical loan and lease losses. The
Corporation addresses this risk by actively monitoring the delinquency and default experience and
by considering current economic and market conditions and their probable impact on the borrowers.
Based on the assessments of current conditions, the Corporation makes appropriate adjustments to
the historically developed assumptions when necessary to adjust historical factors to account for
present conditions. The Corporation also takes into consideration information about trends on
non-accrual loans, delinquencies, changes in underwriting policies and other risk characteristics
relevant to the particular loan category.
The Corporation measures impairment individually for those commercial and real estate loans
with a principal balance of $1 million or more in accordance with the provisions of SFAS 114,
Accounting by Creditors for Impairment of a Loan (as amended by SFAS No. 118), and SFAS 5,
Accounting for Contingencies. A loan is impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect all amounts due according to the
contractual terms of the loan agreement. A specific reserve is determined for those commercial and
real estate loans classified as impaired, primarily based on each such loans collateral value (if
collateral dependent) or the present value of expected future cash flows discounted at the loans
effective interest rate. If foreclosure is probable, the creditor is required to measure the
impairment based on the fair value of the collateral. The fair value of the collateral is
generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines
that loans are impaired and for certain loans on a spot basis selected by specific characteristics
such as delinquency levels, age of the appraisal, and loan-to-value ratios. Should there be a
deficiency, the Corporation records a specific allowance for loan losses related to these loans.
As a general procedure, the Corporation internally reviews appraisals on a spot basis as part
of the underwriting and approval process. For construction loans related to the Miami Corporate
Banking operations, appraisals are reviewed by an outsourced contracted appraiser. Once a loan
backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full
assessment of the value of the collateral is performed. If the Corporation commences litigation to
collect an outstanding loan or commences foreclosure proceedings against a borrower (which includes
the collateral), a new appraisal report is requested and the book value is adjusted accordingly,
either by a corresponding reserve or a charge-off.
The Credit Risk area requests new collateral appraisals for impaired collateral dependent
loans. In order to determine present market conditions in Puerto Rico and the Virgin Islands, and
to gauge property appreciation rates,
51
opinions of value are requested for a sample of delinquent residential real estate loans. The
valuation information gathered through these appraisals is considered in the Corporations
allowance model assumptions.
Cash payments received on impaired loans are recorded in accordance with the contractual terms
of the loan. The principal portion of the payment is used to reduce the principal balance of the
loan, whereas the interest portion is recognized as interest income. However, when management
believes the ultimate collectibility of principal is in doubt, the interest portion is applied to
principal.
Other-than-temporary impairments
The Corporation evaluates for impairment its debt and equity securities when their fair market
value has remained below cost for six consecutive months or more, or earlier if other factors
indicative of potential impairment exist. Investments are considered to be impaired when their cost
exceeds fair market value.
The Corporation evaluates if the impairment is other-than-temporary depending upon whether the
portfolio is of fixed income securities or equity securities as further described below. The
Corporation employs a systematic methodology that considers all available evidence in evaluating a
potential impairment of its investments.
The impairment analysis of the fixed income investments places special emphasis on the
analysis of the cash position of the issuer and its cash and capital generation capacity, which
could increase or diminish the issuers ability to repay its bond obligations. In light of the
current crisis in the financial markets, the Corporation takes into consideration the latest
information available about the overall financial condition of issuers, credit ratings, recent
legislation and government actions affecting the issuers industry and actions taken by the issuers
to deal with the present economic climate. The Corporation also considers its intent and ability
to hold the fixed income securities until recovery. If management believes, based on the analysis,
that the issuer will not be able to service its debt and pay its obligations in a timely manner,
the security is written down to the estimated fair value. For securities written down to their
estimated fair value, any accrued and uncollected interest is also reversed. Interest income is
then recognized when collected.
The impairment analysis of equity securities is performed and reviewed on an ongoing basis
based on the latest financial information and any supporting research report made by a major
brokerage firm. This analysis is very subjective and based, among other things, on relevant
financial data such as capitalization, cash flow, liquidity, systematic risk, and debt outstanding
of the issuer. Management also considers the issuers industry trends, the historical performance
of the stock, credit ratings as well as the Corporations intent to hold the security for an
extended period. If management believes there is a low probability of recovering book value in a
reasonable time frame, then an impairment will be recorded by writing the security down to market
value. As previously mentioned, equity securities are monitored on an ongoing basis but special
attention is given to those securities that have experienced a decline in fair value for six months
or more. An impairment charge is generally recognized when the fair value of an equity security
has remained significantly below cost for a period of twelve consecutive months or more.
Income Taxes
The Corporation is required to estimate income taxes in preparing its consolidated financial
statements. This involves the estimation of current income tax expense together with an assessment
of temporary differences resulting from differences in the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The
determination of current income tax expense involves estimates and assumptions that require the
Corporation to assume certain positions based on its interpretation of current tax regulations.
Management assesses the relative benefits and risks of the appropriate tax treatment of
transactions, taking into account statutory, judicial and regulatory guidance and recognizes tax
benefits only when deemed probable. Changes in assumptions affecting estimates may be required in
the future and estimated tax liabilities may need to be increased or decreased accordingly. The
accrual of tax contingencies is adjusted in light of changing facts and circumstances, such as the
progress of tax audits, case law and emerging legislation. The Corporations effective tax rate
includes the impact of tax contingencies and changes to such accruals, as considered appropriate by
management. When particular matters arise, a number of years may elapse before such matters are
audited by the taxing authorities and finally resolved. Favorable resolution of such matters or the
expiration of the statute of
52
limitations may result in the release of tax contingencies which are recognized as a reduction
to the Corporations effective rate in the year of resolution. Unfavorable settlement of any
particular issue could increase the effective rate and may require the use of cash in the year of
resolution. As of December 31, 2008, there were no open income tax investigations. Information
regarding income taxes is included in Note 25 to the Corporations audited financial statements for
the year ended December 31, 2008 included in Item 8 of this Form 10-K.
The determination of deferred tax expense or benefit is based on changes in the carrying
amounts of assets and liabilities that generate temporary differences. The carrying value of the
Corporations net deferred tax assets assumes that the Corporation will be able to generate
sufficient future taxable income based on estimates and assumptions. If these estimates and related
assumptions change, the Corporation may be required to record valuation allowances against its
deferred tax assets resulting in additional income tax expense in the consolidated statements of
income. Management evaluates its deferred tax assets on a quarterly basis and assesses the need
for a valuation allowance, if any. A valuation allowance is established when management believes
that it is more likely than not that some portion of its deferred tax assets will not be realized.
Changes in valuation allowance from period to period are included in the Corporations tax
provision in the period of change (see Note 25 to the Corporations audited financial statements
for the year ended December 31, 2008 included in Item 8 of this Form 10-K).
SFAS 109, Accounting for Income Taxes, requires companies to make adjustments to their
financial statements in the quarter that new tax legislation is enacted. In the third quarter of
2005, the Puerto Rico legislature passed and the governor signed into law a temporary two-year
additional surtax of 2.5% applicable to corporations. The surtax was applicable to taxable years
after December 31, 2004 and increased the maximum marginal corporate income tax rate from 39% to
41.5% until December 31, 2006. On May 13, 2006, with an effective date of January 1, 2006, the
Government of Puerto Rico signed Law No. 89 which imposed an additional 2.0% income tax on all
companies covered by the Puerto Rico Banking Act which resulted in an additional tax provision of
$1.7 million for 2006. For 2007 and 2008 the maximum marginal corporate income tax rate was 39%.
The Corporation adopted FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS 109. This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Corporation classifies interest and penalties, if any, related to unrecognized tax portions as
components of income tax expense. Refer to Note 25 of the Corporations audited financial
statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K for required
disclosures and further information related to this accounting pronouncement.
Investment Securities Classification and Related Values
Management determines the appropriate classification of debt and equity securities at the time
of purchase. Debt securities are classified as held-to-maturity when the Corporation has the intent
and ability to hold the securities to maturity. Held-to-maturity (HTM) securities are stated at
amortized cost. Debt and equity securities are classified as trading when the Corporation has the
intent to sell the securities in the near term. Debt and equity securities classified as trading
securities are reported at fair value, with unrealized gains and losses included in earnings. Debt
and equity securities not classified as HTM or trading, except for equity securities that do not
have readily available fair values, are classified as available-for-sale (AFS). AFS securities
are reported at fair value, with unrealized gains and losses excluded from earnings and reported
net of deferred taxes in accumulated other comprehensive income (a component of stockholders
equity). Investments in equity securities that do not have publicly and readily determinable fair
values are classified as other equity securities in the statement of financial condition and
carried at the lower of cost or realizable value. The assessment of fair value applies to certain
of the Corporations assets and liabilities, including the investment portfolio. Fair values are
volatile and are affected by factors such as market interest rates, prepayment speeds and discount
rates.
53
Valuation of financial instruments
The measurement of fair value is fundamental to the Corporations presentation of financial
condition and results of operations. The Corporation holds fixed income and equity securities,
derivatives, investments and other financial instruments at fair value. The Corporation holds its
investments and liabilities on the statement of financial condition mainly to manage liquidity
needs and interest rate risks. A substantial part of these assets and liabilities is reflected at
fair value on the Corporations financial statement of condition.
Effective January 1, 2007, the Corporation elected to early adopt SFAS 157, Fair Value
Measurements. This Statement 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 when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
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Level 1
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Inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities that the reporting entity has the
ability to access at the measurement date. |
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Level 2
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Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities. |
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Level 3
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Valuations are observed from unobservable inputs that are
supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. |
The following is a description of the valuation methodologies used for instruments measured at
fair value:
Callable Brokered CDs (Level 2 inputs)
The fair value of callable brokered CDs, which are included within deposits and elected to be
measured at fair value under SFAS 159, 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. The fair value does not
incorporate the risk of nonperformance, since the callable brokered
CDs are generally participated out by
brokers in shares of less than $100,000 and therefore, insured by the FDIC.
Medium-Term Notes (Level 2 inputs)
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 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 as required by SFAS 157. For the medium-term
notes, the credit risk is measured using the difference in yield curves between swap rates and a
yield curve that considers the industry and credit rating of the Corporation as issuer of the note
at a tenor comparable to the time to maturity of the note and option.
54
Investment Securities
The fair value of investment securities is the market value based on quoted market prices,
when available, or market prices for identical or comparable assets that are based on observable
market parameters including benchmark yields, reported trades, quotes from brokers or dealers,
issuer spreads, bids offers and reference data including market research operations. Observable
prices in the market already consider the risk of nonperformance. 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 inputs used for fair value determination
consist of specific characteristics such as information used in 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 mortgages on single-family
residential properties in the United States and the interest rate is variable, tied to 3-month
LIBOR and limited to the weighted-average coupon of the underlying collateral. The market
valuation is derived from a model and represents the estimated net cash flows over the projected
life of the pool of underlying assets applying a discount rate that reflects market observed
floating spreads over LIBOR, with a widening spread bias on a non-rated security. The model uses
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. The
Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow
analysis in combination with prepayment forecasts obtained from a commercially available prepayment
model (ADCO) and the variable cash flow of the security is modeled using the 3-month LIBOR forward
curve. The expected foreclosure frequency estimates used in the model are based on the 100% Public
Securities Association (PSA) Standard Default Assumption (SDA) with a loss severity assumption of
10% after taking into consideration that the issuer must cover losses up to 10% of the aggregate
outstanding balance according to recourse provisions.
Derivative Instruments
The fair value of most of the derivative instruments is based on observable market parameters
and takes into consideration the credit risk component, when appropriate. The Hull-White Interest
Rate Tree approach is used to value the option components of derivative instruments, and
discounting of the cash flows is performed using USD dollar LIBOR-based discount rates or yield
curves that account for the industry sector and the credit rating of the counterparty and/or the
Corporation. Derivatives are mainly composed of interest rate swaps used to economically hedge
brokered CDs and medium-term notes. For these interest rate swaps, a credit component is not
considered in the valuation since the Corporation fully collateralizes with investment securities
any mark-to-market loss with the counterparty and if there are market gains the counterparty must
deliver collateral to the Corporation.
Certain derivatives with limited market activity, as is the case with derivative instruments
named as reference caps, are valued using models that consider unobservable market parameters
(Level 3). Reference caps are used to mainly hedge interest rate risk inherent in 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 inputs used for fair value
determination consist of specific characteristics such as information used in 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 the 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 are obtained from Bloomberg L.P.
(Bloomberg) every day 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 caplet is then discounted from each payment date.
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Derivative Financial Instruments
As part of the Corporations overall interest rate risk management, the Corporation utilizes
derivative instruments, including interest rate swaps, interest rate caps and options to manage
interest rate risk. In accordance with SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, all derivative instruments are measured and recognized on the Consolidated
Statements of Financial Condition at their fair value. On the date the derivative instrument
contract is entered into, the Corporation may designate the derivative as (1) a hedge of the fair
value of a recognized asset or liability or of an unrecognized firm commitment (fair value
hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability (cash flow hedge) or (3) as a standalone
derivative instrument, including economic hedges that the Corporation has not formally documented
as a fair value or cash flow hedge. Changes in the fair value of a derivative instrument that is
highly effective and that is designated and qualifies as a fair-value hedge, along with changes in
the fair value of the hedged asset or liability that is attributable to the hedged risk (including
gains or losses on firm commitments), are recorded in current-period earnings as interest income or
interest expense depending upon whether an asset or liability is being hedged. Similarly, the
changes in the fair value of standalone derivative instruments or derivatives not qualifying or
designated for hedge accounting under SFAS 133 are reported in current-period earnings as interest
income or interest expense depending upon whether an asset or liability is being economically
hedged. Changes in the fair value of a derivative instrument that is highly effective and that is
designated and qualifies as a cash-flow hedge, if any, are recorded in other comprehensive income
in the stockholders equity section of the Consolidated Statements of Financial Condition until
earnings are affected by the variability of cash flows (e.g., when periodic settlements on a
variable-rate asset or liability are recorded in earnings). None of the Corporations derivative
instruments qualified or have been designated as a cash flow hedge.
Prior to entering into an accounting hedge transaction or designating a hedge, the Corporation
formally documents the relationship between the hedging instrument and the hedged item, as well as
the risk management objective and strategy for undertaking the hedge transaction. This process
includes linking all derivative instruments that are designated as fair value or cash flow hedges
to specific assets and liabilities on the statements of financial condition or to specific firm
commitments or forecasted transactions along with a formal assessment at both inception of the
hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting
changes in fair values or cash flows of the hedged item. The Corporation discontinues hedge
accounting prospectively when it determines that the derivative is not effective or will no longer
be effective in offsetting changes in the fair value or cash flows of the hedged item, the
derivative expires, is sold, or terminated, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate. When a fair value hedge is
discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the
existing basis adjustment is amortized or accreted over the remaining life of the asset or
liability as a yield adjustment.
The Corporation recognizes unrealized gains and losses arising from any changes in fair value of
derivative instruments and hedged items, as applicable, as interest income or interest expense
depending upon whether an asset or liability is being hedged.
The Corporation occasionally purchases or originates financial instruments that contain embedded
derivatives. At inception of the financial instrument, the Corporation assesses: (1) if the
economic characteristics of the embedded derivative are clearly and closely related to the economic
characteristics of the financial instrument (host contract), (2) if the financial instrument that
embodies both the embedded derivative and the host contract is measured at fair value with changes
in fair value reported in earnings, or (3) if a separate instrument with the same terms as the
embedded instrument would not meet the definition of a derivative. If the embedded derivative does
not meet any of these conditions, it is separated from the host contract and carried at fair value
with changes recorded in current period earnings as part of net interest income. Information
regarding derivative instruments is included in Note 30 to the Corporations audited financial
statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K.
Effective January 1, 2007, the Corporation elected to early adopt SFAS 159. This Statement
allows entities to choose to measure certain financial assets and liabilities at fair value with
any changes in fair value reflected in
56
earnings. The fair value option may be applied on an instrument-by-instrument basis. The
Corporation adopted SFAS 159 for callable fixed medium-term notes and callable brokered CDs
(SFAS 159 liabilities), that were hedged with interest rate swaps. From April 3, 2006 to the
adoption of SFAS 159, First BanCorp was following the long-haul method of accounting under
SFAS 133 for the portfolio of callable interest rate swaps, callable brokered CDs and callable
notes. One of the main considerations in the determination to early adopt SFAS 159 for these
instruments was to eliminate the operational procedures required by the long-haul method of
accounting in terms of documentation, effectiveness assessment, and manual procedures followed by
the Corporation to fulfill the requirements specified by SFAS 133.
With the Corporations elimination of the use of the long-haul method in connection with the
adoption of SFAS 159, the Corporation no longer amortizes or accretes the basis adjustment for the
SFAS 159 liabilities. The basis adjustment amortization or accretion is the reversal of the basis
differential between the market value and book value recognized at the inception of fair value
hedge accounting as well as the change in value of the hedged brokered CDs and medium-term notes
recognized since the implementation of the long-haul method. Since the time the Corporation
implemented the long-haul method, it had recognized changes in the value of the hedged brokered CDs
and medium-term notes based on the expected call date of the instruments. The adoption of SFAS 159
also requires the recognition, as part of the initial adoption adjustment to retained earnings, of
all of the unamortized placement fees that were paid to broker counterparties upon the issuance of
the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees
through earnings based on the expected call date of the instruments. SFAS 159 also establishes
that the accrued interest should be reported as part of the fair value of the financial instruments
elected to be measured at fair value. Refer to Note 27 to the Corporations audited financial
statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K.
Prior to the implementation of the long-haul method First BanCorp reflected changes in the
fair value of those swaps as well as swaps related to certain loans as non-hedging instruments
through operations as part of net interest income.
Income Recognition on Loans
Loans are stated at the principal outstanding balance, net of unearned interest, unamortized
deferred origination fees and costs and unamortized premiums and discounts. Fees collected and
costs incurred in the origination of new loans are deferred and amortized using the interest method
or a method which approximates the interest method over the term of the loan as an adjustment to
interest yield. Unearned interest on certain personal, auto loans and finance leases is recognized
as income under a method which approximates the interest method. When a loan is paid off or sold,
any unamortized net deferred fee (cost) is credited (charged) to income.
Loans on which the recognition of interest income has been discontinued are designated as
non-accruing. When loans are placed on non-accruing status, any accrued but uncollected interest
income is reversed and charged against interest income. Consumer, construction, commercial and
mortgage loans are classified as non-accruing when interest and principal have not been received
for a period of 90 days or more. This policy is also applied to all impaired loans based upon an
evaluation of the risk characteristics of said loans, loss experience, economic conditions and
other pertinent factors. Loan and lease losses are charged and recoveries are credited to the
allowance for loan and lease losses. Closed-end consumer loans and leases are charged-off when
payments are 120 days in arrears. Open-end (revolving credit) consumer loans are charged-off when
payments are 180 days in arrears.
The Corporation may also classify loans in non-accruing status and recognize revenue only when
cash payments are received because of the deterioration in the financial condition of the borrower
and payment in full of principal or interest is not expected. In addition, during the third
quarter of 2007, the Corporation started a loan loss mitigation program providing homeownership
preservation assistance. Loans modified through this program are reported as non-performing loans
and interest is recognized on a cash basis. When there is reasonable assurance of repayment and
the borrower has made payments over a sustained period, the loan is returned to accruing status.
57
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) and the Securities Exchange Commission
(SEC) have issued the following accounting pronouncements and guidance relevant to the
Corporations operations:
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 adoption of this statement did not have an impact on the Corporations financial
statements, when adopted 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 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 adoption of this statement did not have an impact on the Corporations financial
statements, when adopted on January 1, 2009.
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. The Corporation adopted the
disclosure framework dictated by this Statement during 2008. Required disclosures are included in
Note 30 of the Corporations audited financial statements for the year ended December 31, 2008
included in Item 8 of this Form 10-K
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 obviates the need for the guidance applicable to
auditors in SAS 69 by identifying the GAAP hierarchy for entities, since entities rather than
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 SEC approval of the Public Company
Accounting Oversight Boards amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles, which the SEC approved on September 16,
2008. The adoption of SFAS 162 did not impact the Corporations current accounting policies or the
Corporations financial results.
58
In May 2008, the FASB issued Staff Position No. (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 December 31, 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 No. 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 December 31, 2008, the outstanding unvested shares of
restricted stock do not contain rights to nonforfeitable dividends.
In September 2008, the FASB issued FSP No. 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 December
31, 2008, the Corporation is not involved in the credit derivatives market. This FSP also amends
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 did not have a significant impact on the Corporations financial statements.
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 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.
59
In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities. This FSP amends SFAS 140, to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46 (revised December 2003), Consolidation
of Variable Interest Entities, to require public enterprises, including sponsors that have a
variable interest in a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, this FSP requires certain disclosures to
be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity
(SPE) that holds a variable interest in the qualifying SPE but was not the transferor
(nontransferor) of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the transferor
(nontransferor) of financial assets to the qualifying SPE. The disclosures required by this FSP
are intended to provide greater transparency to financial statement users about a transferors
continuing involvement with transferred financial assets and an enterprises involvement with
variable interest entities and qualifying SPEs. This FSP became effective for the first reporting
period (interim or annual) ending after December 15, 2008, with earlier application encouraged.
This FSP shall apply for each annual and interim reporting period thereafter. The adoption of this
Statement did not have a significant impact on the Corporations financial statements as the
Corporation is not materially involve in the transfer of financial assets through securitization
and asset-backed financing arrangements, nor have involvement with variable interest entities.
In January 2009, the FASB issued FSP No. EITF 99-20-1 (FSP EITF 99-20-1), Amendments to the
Impairment Guidance of EITF Issue No. 99-20. This FSP amends the impairment guidance in EITF
Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,
to achieve more consistent determination of whether an other-than-temporary impairment has
occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment
assessment and the related disclosure requirements in SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, and other related guidance. The FSP became effective for interim
and annual reporting periods ending after December 15, 2008, and must be applied prospectively.
Retrospective application to a prior interim or annual reporting period is not permitted. The
adoption of this Statement did not have a significant impact on the Corporations financial
statements.
RESULTS OF OPERATIONS
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 year ended December 31, 2008 was
$527.9 million, compared to $451.0 million and $443.7 million for 2007 and 2006, respectively. On
an adjusted tax equivalent basis and excluding the changes in the fair value of derivative
instruments, the ineffective portion and the basis adjustment amortization or accretion resulting
from fair value hedge accounting in 2006, and unrealized gains and losses on SFAS 159 liabilities,
net interest income for the year ended December 31, 2008 was $579.1 million, compared to $475.4
million and $529.9 million for 2007 and 2006, respectively.
The following tables include a detailed analysis of net interest income. Part I 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.
For periods after the adoption of fair value hedge accounting and SFAS 159, 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, (2) the ineffective portion of designated hedges, (3) the basis adjustment
amortization or accretion and (4) unrealized gains or losses on SFAS
60
159 liabilities. For periods prior to the adoption of hedge accounting, the net interest income is
computed on an adjusted tax equivalent basis by excluding the impact of the change in the fair
value of derivatives (refer to explanation below regarding changes in the fair value of derivative
instruments).
Part I
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest income(1)/ expense |
|
|
Average rate(1) |
|
Year Ended December 31, |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market & other short-term investments |
|
$ |
286,502 |
|
|
$ |
440,598 |
|
|
$ |
1,444,533 |
|
|
$ |
6,355 |
|
|
$ |
22,155 |
|
|
$ |
72,755 |
|
|
|
2.22 |
% |
|
|
5.03 |
% |
|
|
5.04 |
% |
Government obligations (2) |
|
|
1,402,738 |
|
|
|
2,687,013 |
|
|
|
2,827,196 |
|
|
|
93,539 |
|
|
|
159,572 |
|
|
|
170,088 |
|
|
|
6.67 |
% |
|
|
5.94 |
% |
|
|
6.02 |
% |
Mortgage-backed securities |
|
|
3,923,423 |
|
|
|
2,296,855 |
|
|
|
2,540,394 |
|
|
|
244,150 |
|
|
|
117,383 |
|
|
|
128,096 |
|
|
|
6.22 |
% |
|
|
5.11 |
% |
|
|
5.04 |
% |
Corporate bonds |
|
|
7,711 |
|
|
|
7,711 |
|
|
|
8,347 |
|
|
|
570 |
|
|
|
510 |
|
|
|
574 |
|
|
|
7.39 |
% |
|
|
6.61 |
% |
|
|
6.88 |
% |
FHLB stock |
|
|
65,081 |
|
|
|
46,291 |
|
|
|
26,914 |
|
|
|
3,710 |
|
|
|
2,861 |
|
|
|
2,009 |
|
|
|
5.70 |
% |
|
|
6.18 |
% |
|
|
7.46 |
% |
Equity securities |
|
|
3,762 |
|
|
|
8,133 |
|
|
|
27,155 |
|
|
|
47 |
|
|
|
3 |
|
|
|
350 |
|
|
|
1.25 |
% |
|
|
0.04 |
% |
|
|
1.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (3) |
|
|
5,689,217 |
|
|
|
5,486,601 |
|
|
|
6,874,539 |
|
|
|
348,371 |
|
|
|
302,484 |
|
|
|
373,872 |
|
|
|
6.12 |
% |
|
|
5.51 |
% |
|
|
5.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
3,351,236 |
|
|
|
2,914,626 |
|
|
|
2,606,664 |
|
|
|
215,984 |
|
|
|
188,294 |
|
|
|
171,333 |
|
|
|
6.44 |
% |
|
|
6.46 |
% |
|
|
6.57 |
% |
Construction loans |
|
|
1,485,126 |
|
|
|
1,467,621 |
|
|
|
1,462,239 |
|
|
|
82,513 |
|
|
|
121,917 |
|
|
|
126,592 |
|
|
|
5.56 |
% |
|
|
8.31 |
% |
|
|
8.66 |
% |
Commercial loans |
|
|
5,473,716 |
|
|
|
4,797,440 |
|
|
|
5,593,018 |
|
|
|
314,931 |
|
|
|
362,714 |
|
|
|
401,027 |
|
|
|
5.75 |
% |
|
|
7.56 |
% |
|
|
7.17 |
% |
Finance leases |
|
|
373,999 |
|
|
|
379,510 |
|
|
|
322,431 |
|
|
|
31,962 |
|
|
|
33,153 |
|
|
|
28,934 |
|
|
|
8.55 |
% |
|
|
8.74 |
% |
|
|
8.97 |
% |
Consumer loans |
|
|
1,709,512 |
|
|
|
1,729,548 |
|
|
|
1,783,384 |
|
|
|
197,581 |
|
|
|
202,616 |
|
|
|
214,967 |
|
|
|
11.56 |
% |
|
|
11.71 |
% |
|
|
12.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4) (5) |
|
|
12,393,589 |
|
|
|
11,288,745 |
|
|
|
11,767,736 |
|
|
|
842,971 |
|
|
|
908,694 |
|
|
|
942,853 |
|
|
|
6.80 |
% |
|
|
8.05 |
% |
|
|
8.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
18,082,806 |
|
|
$ |
16,775,346 |
|
|
$ |
18,642,275 |
|
|
$ |
1,191,342 |
|
|
$ |
1,211,178 |
|
|
$ |
1,316,725 |
|
|
|
6.59 |
% |
|
|
7.22 |
% |
|
|
7.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts |
|
$ |
580,572 |
|
|
$ |
443,420 |
|
|
$ |
371,422 |
|
|
$ |
12,914 |
|
|
$ |
11,365 |
|
|
$ |
5,919 |
|
|
|
2.22 |
% |
|
|
2.56 |
% |
|
|
1.59 |
% |
Savings accounts |
|
|
1,217,730 |
|
|
|
1,020,399 |
|
|
|
1,022,686 |
|
|
|
18,916 |
|
|
|
15,037 |
|
|
|
12,970 |
|
|
|
1.55 |
% |
|
|
1.47 |
% |
|
|
1.27 |
% |
Certificates of deposit |
|
|
9,484,051 |
|
|
|
9,291,900 |
|
|
|
10,479,500 |
|
|
|
391,665 |
|
|
|
498,048 |
|
|
|
531,188 |
|
|
|
4.13 |
% |
|
|
5.36 |
% |
|
|
5.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
11,282,353 |
|
|
|
10,755,719 |
|
|
|
11,873,608 |
|
|
|
423,495 |
|
|
|
524,450 |
|
|
|
550,077 |
|
|
|
3.75 |
% |
|
|
4.88 |
% |
|
|
4.63 |
% |
Loans payable |
|
|
10,792 |
|
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
2.25 |
% |
|
|
|
|
|
|
|
|
Other borrowed funds |
|
|
3,864,189 |
|
|
|
3,449,492 |
|
|
|
4,543,262 |
|
|
|
148,753 |
|
|
|
172,890 |
|
|
|
223,069 |
|
|
|
3.85 |
% |
|
|
5.01 |
% |
|
|
4.91 |
% |
FHLB advances |
|
|
1,120,782 |
|
|
|
723,596 |
|
|
|
273,395 |
|
|
|
39,739 |
|
|
|
38,464 |
|
|
|
13,704 |
|
|
|
3.55 |
% |
|
|
5.32 |
% |
|
|
5.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities (6) |
|
$ |
16,278,116 |
|
|
$ |
14,928,807 |
|
|
$ |
16,690,265 |
|
|
$ |
612,230 |
|
|
$ |
735,804 |
|
|
$ |
786,850 |
|
|
|
3.76 |
% |
|
|
4.93 |
% |
|
|
4.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
579,112 |
|
|
$ |
475,374 |
|
|
$ |
529,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.83 |
% |
|
|
2.29 |
% |
|
|
2.35 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.20 |
% |
|
|
2.83 |
% |
|
|
2.84 |
% |
|
|
|
(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 the Puerto Rico statutory tax
rate (39% for 2008 and 2007, 43.5% for the Corporations Puerto Rico banking subsidiary in
2006 and 41.5% for all other subsidiaries in 2006)) and adding to it the cost of
interest-bearing liabilities. When adjusted to a tax equivalent basis, yields on taxable and
exempt assets are comparable. Changes in the fair value of derivative instruments (including
the ineffective portion after the adoption of hedge accounting in the second quarter of 2006),
unrealized gains or losses on SFAS 159 liabilities, and basis adjustment amortization or
accretion are excluded from interest income and interest expense 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 $10.2 million, $11.1 million, and $14.9 million for 2008,
2007 and 2006, respectively, of income from prepayment penalties and late fees related to the
Corporations loan portfolio. |
|
(6) |
|
Unrealized gains and losses on SFAS 159 liabilities are excluded from the average volumes. |
61
Part II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Compared to 2007 |
|
|
2007 Compared to 2006 |
|
|
|
Increase (decrease) |
|
|
Increase (decrease) |
|
|
|
Due to: |
|
|
Due to: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market & other short-term investments |
|
$ |
(6,082 |
) |
|
$ |
(9,718 |
) |
|
$ |
(15,800 |
) |
|
$ |
(50,485 |
) |
|
$ |
(115 |
) |
|
$ |
(50,600 |
) |
Government obligations |
|
|
(80,954 |
) |
|
|
14,921 |
|
|
|
(66,033 |
) |
|
|
(8,259 |
) |
|
|
(2,257 |
) |
|
|
(10,516 |
) |
Mortgage-backed securities |
|
|
97,011 |
|
|
|
29,756 |
|
|
|
126,767 |
|
|
|
(12,367 |
) |
|
|
1,654 |
|
|
|
(10,713 |
) |
Corporate bonds |
|
|
|
|
|
|
60 |
|
|
|
60 |
|
|
|
(41 |
) |
|
|
(23 |
) |
|
|
(64 |
) |
FHLB stock |
|
|
1,115 |
|
|
|
(266 |
) |
|
|
849 |
|
|
|
1,323 |
|
|
|
(471 |
) |
|
|
852 |
|
Equity securities |
|
|
(29 |
) |
|
|
73 |
|
|
|
44 |
|
|
|
(145 |
) |
|
|
(202 |
) |
|
|
(347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
11,061 |
|
|
|
34,826 |
|
|
|
45,887 |
|
|
|
(69,974 |
) |
|
|
(1,414 |
) |
|
|
(71,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
28,173 |
|
|
|
(483 |
) |
|
|
27,690 |
|
|
|
20,070 |
|
|
|
(3,109 |
) |
|
|
16,961 |
|
Construction loans |
|
|
1,214 |
|
|
|
(40,618 |
) |
|
|
(39,404 |
) |
|
|
457 |
|
|
|
(5,132 |
) |
|
|
(4,675 |
) |
Commercial loans |
|
|
45,020 |
|
|
|
(92,803 |
) |
|
|
(47,783 |
) |
|
|
(58,602 |
) |
|
|
20,289 |
|
|
|
(38,313 |
) |
Finance leases |
|
|
(477 |
) |
|
|
(714 |
) |
|
|
(1,191 |
) |
|
|
5,054 |
|
|
|
(835 |
) |
|
|
4,219 |
|
Consumer loans |
|
|
(2,332 |
) |
|
|
(2,703 |
) |
|
|
(5,035 |
) |
|
|
(6,396 |
) |
|
|
(5,955 |
) |
|
|
(12,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
71,598 |
|
|
|
(137,321 |
) |
|
|
(65,723 |
) |
|
|
(39,417 |
) |
|
|
5,258 |
|
|
|
(34,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
82,659 |
|
|
|
(102,495 |
) |
|
|
(19,836 |
) |
|
|
(109,391 |
) |
|
|
3,844 |
|
|
|
(105,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
23,142 |
|
|
|
(124,097 |
) |
|
|
(100,955 |
) |
|
|
(53,151 |
) |
|
|
27,524 |
|
|
|
(25,627 |
) |
Loans payable |
|
|
243 |
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds |
|
|
18,327 |
|
|
|
(42,464 |
) |
|
|
(24,137 |
) |
|
|
(54,261 |
) |
|
|
4,082 |
|
|
|
(50,179 |
) |
FHLB advances |
|
|
17,599 |
|
|
|
(16,324 |
) |
|
|
1,275 |
|
|
|
23,883 |
|
|
|
877 |
|
|
|
24,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
59,311 |
|
|
|
(182,885 |
) |
|
|
(123,574 |
) |
|
|
(83,529 |
) |
|
|
32,483 |
|
|
|
(51,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
23,348 |
|
|
$ |
80,390 |
|
|
$ |
103,738 |
|
|
$ |
(25,862 |
) |
|
$ |
(28,639 |
) |
|
$ |
(54,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the Corporations interest-earning assets, mostly investments in obligations of
some U.S. Government agencies and sponsored entities, generate interest which is exempt from income
tax, principally in Puerto Rico. Also interest and gains on sale of investments held by the
Corporations international banking entities are tax-exempt under the Puerto Rico tax law. To
facilitate the comparison of all interest data related to these assets, the interest income has
been converted to a taxable equivalent basis. The tax equivalent yield was estimated by dividing
the interest rate spread on exempt assets by (1 less the Puerto Rico statutory tax rate (39% for
2008 and 2007, 43.5% for the Corporations Puerto Rico banking subsidiary in 2006 and 41.5% for all
other subsidiaries in 2006)) and adding to it the average cost of interest-bearing liabilities. The
computation considers the interest expense disallowance required by Puerto Rico tax law. A
significant increase in revenues was observed in connection with the increase in tax-exempt MBS
held by the Corporations international banking entities. Refer to Income Taxes discussion below
for additional information of the Puerto Rico tax law.
The presentation of net interest income excluding the effects of the changes in the fair value
of the derivative instruments, including the ineffective portion for designated hedges after the
adoption of fair value accounting, the basis adjustment amortization or accretion, 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, the basis adjustment amortization or accretion, and unrealized gains or
losses on SFAS 159 liabilities have no effect on interest due or interest earned on
interest-bearing assets or interest-bearing liabilities, respectively, or on interest payments
exchanged with interest rate swap counterparties.
The following table reconciles the 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Interest income on interest-earning assets on an adjusted tax equivalent basis |
|
$ |
1,191,342 |
|
|
$ |
1,211,178 |
|
|
$ |
1,316,725 |
|
Less: tax equivalent adjustments |
|
|
(56,408 |
) |
|
|
(15,293 |
) |
|
|
(27,987 |
) |
Less: net unrealized (loss) gain on derivatives (economic undesignated hedges) |
|
|
(8,037 |
) |
|
|
(6,638 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
1,126,897 |
|
|
$ |
1,189,247 |
|
|
$ |
1,288,813 |
|
|
|
|
|
|
|
|
|
|
|
62
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivatives (economic undesignated hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
$ |
(4,341 |
) |
|
$ |
(3,985 |
) |
|
$ |
(472 |
) |
Interest rate swaps on corporate bonds |
|
|
|
|
|
|
|
|
|
|
27 |
|
Interest rate swaps on loans |
|
|
(3,696 |
) |
|
|
(2,653 |
) |
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on derivatives (economic undesignated hedges) |
|
$ |
(8,037 |
) |
|
$ |
(6,638 |
) |
|
$ |
75 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of interest expense for the years ended December
31, 2008, 2007 and 2006. As previously stated, the net interest margin analysis excludes the
changes in the fair value of derivatives, unrealized gains or losses on SFAS 159 liabilities, the
ineffective portion of derivative instruments designated as fair value hedges under SFAS 133, and
the basis adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(In thousands) |
|
(In thousands) |
|
Interest expense on interest-bearing liabilities |
|
$ |
632,134 |
|
|
$ |
713,918 |
|
|
$ |
757,969 |
|
Net interest (realized) incurred on interest rate swaps |
|
|
(35,569 |
) |
|
|
12,323 |
|
|
|
8,926 |
|
Amortization of placement fees on brokered CDs |
|
|
15,665 |
|
|
|
9,056 |
|
|
|
19,896 |
|
Amortization of placement fees on medium-term notes |
|
|
|
|
|
|
507 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense excluding net unrealized (gain) loss on
derivatives (designated and economic undesignated hedges), net
unrealized (gain) loss on SFAS 159 liabilities and accretion
of basis adjustment |
|
|
612,230 |
|
|
|
735,804 |
|
|
|
786,850 |
|
Net unrealized (gain) loss on derivatives (designated and economic
undesignated hedges) and SFAS 159 liabilities |
|
|
(13,214 |
) |
|
|
4,488 |
|
|
|
61,895 |
|
Accretion of basis adjustment |
|
|
|
|
|
|
(2,061 |
) |
|
|
(3,626 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
599,016 |
|
|
$ |
738,231 |
|
|
$ |
845,119 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the net unrealized gain and loss on
derivatives (designated and economic undesignated hedges) and net unrealized loss on SFAS 159
liabilities which are included in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(In thousands) |
|
(In thousands) |
|
Unrealized gain on derivatives (designated hedges
- ineffective portion): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,989 |
) |
Interest rate swaps on medium-term notes |
|
|
|
|
|
|
|
|
|
|
(720 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives (designated hedges
- ineffective portion) |
|
|
|
|
|
|
|
|
|
|
(4,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on derivatives (economic undesignated hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and other derivatives on brokered CDs |
|
|
(62,856 |
) |
|
|
(66,826 |
) |
|
|
62,521 |
|
Interest rate swaps and other derivatives on medium-term notes |
|
|
(392 |
) |
|
|
692 |
|
|
|
4,083 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (gain) loss on derivatives (economic undesignated hedges) |
|
|
(63,248 |
) |
|
|
(66,134 |
) |
|
|
66,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on SFAS 159 liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on brokered CDs |
|
|
54,199 |
|
|
|
71,116 |
|
|
|
|
|
Unrealized gain on medium-term notes |
|
|
(4,165 |
) |
|
|
(494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on SFAS 159 liabilities |
|
|
50,034 |
|
|
|
70,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (gain) loss on derivatives (designated and economic
undesignated hedges) and SFAS 159 liabilities |
|
$ |
(13,214 |
) |
|
$ |
4,488 |
|
|
$ |
61,895 |
|
|
|
|
|
|
|
|
|
|
|
63
The
following table summarizes the components of the accretion of basis adjustment, which are
included in interest expense in 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Accretion of basis adjustments on fair value hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,576 |
) |
Interest rate swaps on medium-term notes |
|
|
|
|
|
|
(2,061 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
Accretion of basis adjustment on fair value hedges |
|
$ |
|
|
|
$ |
(2,061 |
) |
|
$ |
(3,626 |
) |
|
|
|
|
|
|
|
|
|
|
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 pay-float swaps that hedge (economically or under fair value hedge accounting)
brokered CDs and medium-term notes.
The amortization of broker placement fees represents the amortization of fees paid to brokers
upon issuance of related financial instruments (i.e., brokered CDs not elected for the fair value
option under SFAS 159). For 2007, the amortization of broker placement fees includes the
derecognition of the unamortized balance of placement fees related to a $150 million note redeemed
prior to its contractual maturity during the second quarter as well as the amortization of
placement fees for brokered CDs not elected for fair value option under SFAS 159.
Unrealized gains or losses on derivatives represent: (1) for economic or undesignated hedges,
including derivative instruments economically hedging SFAS 159 liabilities changes in the fair
value of derivatives, primarily interest rate swaps, that economically hedge liabilities (i.e.,
brokered CDs and medium-term notes) or assets (i.e., loans and corporate bonds), and (2) for
designated hedges the ineffectiveness represented by the difference between the changes in the
fair value of the derivative instrument (i.e., interest rate swaps) and changes in fair value of
the hedged item (i.e., brokered CDs and medium-term notes).
Unrealized gains or losses on SFAS 159 liabilities represent the change in the fair value of
liabilities (medium-term notes and brokered CDs), other than the accrual of interests, for which
the Corporation elected the fair value option under SFAS 159.
For 2007, the basis adjustment represents the basis differential between the market value and
the book value of a $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, which was amortized or
accreted based on the expected maturity of the liability as a yield adjustment. The unamortized
balance of the basis adjustment was derecognized as part of the redemption of the $150 million
note resulting in an adjustment to earnings of $1.9 million recognized as an accretion of basis
adjustment, during the second quarter of 2007. For 2006, the basis adjustment represents the
amortization or accretion of the basis differential between the market value and the book value of
the hedged liabilities recognized at the inception of fair value hedge accounting, which was
amortized or accreted to interest expense based on the expected maturity of the hedged liabilities
as changes in value after the inception of the long-haul method.
As shown on the tables above, the results of operations for 2008, 2007, and 2006 were
impacted by changes in the valuation of derivative instruments that hedge
economically or under fair value designation the Corporations brokered CDs and medium-term notes
and by unrealized gains and losses on SFAS 159 liabilities. The adoption of fair value hedge
accounting during the second quarter of 2006 and SFAS 159, effective January 1, 2007, reduced the
earnings volatility caused by fluctuations in the value of derivative instruments.
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
64
convert the fixed interest
payment on its brokered CDs and medium-term notes to variable payments (receive fixed/pay
floating). Refer to Note 30 of the Corporations audited financial statements for the year ended
December 31, 2008 included in Item 8 of this Form 10-K 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 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.
2008 compared to 2007
Net interest income increased 17% to $527.9 million for 2008 from $451.0 million for 2007.
Approximately $14.2 million of the total net interest income increase is related to fluctuations in
the fair value of derivative instruments and financial liabilities elected to be measured at fair
value under SFAS 159. The Corporations net interest spread and margin, on an adjusted tax
equivalent basis, for 2008 were 2.83% and 3.20%, respectively, up 54 and 37 basis points from
2007. The increase was mainly associated with a decrease in the average cost of funds resulting
from lower short-term interest rates and to a lesser extent to a higher volume of interest earning
assets. During 2008, the target for the Federal Funds rate was lowered from 4.25% to a range of 0%
to 0.25% through seven separate actions in an attempt to stimulate the U.S. economy, officially in
recession since December 2007. The decrease in funding costs more than offset lower loan yields
resulting from the repricing of variable-rate construction and commercial loans tied to short-term
indexes and from a higher volume of non-accrual loans.
Average earning assets for 2008 increased by $1.3 billion, as compared to 2007, driven by
commercial and residential real estate loan originations, and to a lesser extent, purchases of
loans during 2008 that contributed to a wider spread. In addition, the Corporation purchased
approximately $3.2 billion in U.S. government agency fixed-rate MBS having an average yield of
5.44% during 2008, which is higher than the cost of the borrowing required to finance the purchase
of such assets, thus contributing to a higher net interest income as compared to 2007. The
increase in the loan and MBS portfolio was partially offset by the early redemption, through call
exercises, of approximately $1.2 billion of U.S. Agency debentures with an average yield of 5.87%
due to the drop in rates in the long end of the yield curve.
On the funding side, the average cost of the Corporations interest-bearing liabilities
decreased by 117 basis points mainly due to lower short-term rates and the mix of borrowings. The
benefit from the decline in short-term rates in 2008 was partially offset by the Corporations
strategy, in managing its asset/liability position in order to limit the effects of changes in
interest rates on net interest income, of reducing its exposure to high levels of market volatility
by, among other things, extending the duration of its borrowings and replacing swapped-to-floating
brokered CDs that matured or were called (due to lower short-term rates) with brokered CDs not
hedged with interest rate swaps. Also, the Corporation has reduced its interest rate risk through
other funding sources and by, among other things, entering into long-term and structured repurchase
agreements that replaced short-term borrowings. The volume of swapped-to-floating brokered CDs has
decreased by approximately $3.0 billion to $1.1 billion as of December 31, 2008 from $4.1 billion a
year ago. This strategy has better positioned the Corporation for possible adverse changes in
interest rates in the future.
On
the asset side, the average yield on the Corporations interest-earning assets decreased by
63 basis points driven by lower yields on the variable-rate commercial and construction loan
portfolio. The weighted-average yield on loans decreased by 125 basis points during 2008. In the
latter part of 2008, the Corporation took initial steps to obtain higher pricing on its
variable-rate commercial loan portfolio; however, this effort was severely impacted by significant
declines in short-term rates during the last quarter of 2008 (the Prime Rate dropped to 3.25% from
7.25% at December 31, 2007 and 3-month LIBOR closed at 1.43% on
December 31, 2008 from 4.70% on December 31, 2007) and,
to an extent, by the increase in the volume of non-performing loans. Lower loan yields were
partially offset by higher yields on tax-exempt securities such as U.S. agency MBS held by the
Corporations international banking entity subsidiary. Expected acceleration in MBS prepayments in
2009 may require the reinvestment of proceeds at lower prevailing rates, but the Corporation will
strive to protect the net interest rate spread through its re-investment strategy and through new
loan originations.
65
On an adjusted tax equivalent basis, net interest income increased by $103.7 million, or 22%,
for 2008 compared to 2007. The increase was principally due to the lower short-term rates
discussed above but also was positively impacted by a $41.1 million increase in the tax-equivalent
adjustment. The tax-equivalent adjustment 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 as previously stated. The increase in the tax-equivalent adjustment
was mainly related to increases in the interest rate spread on tax-exempt assets due to lower
short-term rates and a higher volume of tax-exempt MBS held by the Corporations international
banking entity subsidiary, FirstBank Overseas Corporation.
2007 compared to 2006
Net interest income increased to $451.0 million for 2007 from $443.7 million in 2006. The
increase in net interest income for 2007, as compared to 2006, was mainly driven by the effect in
2006 earnings of unrealized non-cash losses related to changes in the fair value of derivative
instruments prior to the implementation of fair value hedge accounting using the long-haul method
on April 3, 2006. During the first quarter of 2006, the Corporation recorded changes in the fair
value of derivative instruments as non-hedging instruments through operations recording unrealized
losses of $69.7 million for derivatives as part of interest expense. The adoption of fair value
hedge accounting in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the
accounting volatility that previously resulted from the accounting asymmetry created by accounting
for the financial liabilities at amortized cost and the derivatives at fair value. The change in
the valuation of derivative instruments, the net unrealized loss on SFAS 159 liabilities, the basis
adjustment and the ineffective portion on designated hedges recorded as part of net interest income
(the valuation changes) resulted in a net non-cash loss of $9.1 million for 2007, compared to a
net unrealized loss of $58.2 million for 2006.
For the year ended December 31, 2007, net interest income on an adjusted tax equivalent basis
decreased 10% as compared to the previous year from $529.9 million to $475.4 million. Net interest
income on an adjusted tax equivalent basis excludes the valuation changes. The decrease in net
interest income on an adjusted tax equivalent basis was mainly driven by the continued pressure of
the flattening of the yield curve during most of 2007 and the decrease in the average volume of
interest-earning assets primarily due to the repayment of approximately $2.4 billion received from
a local financial institution reducing the balance of its secured commercial loan with the
Corporation during the latter part of the second quarter of 2006. This partially extinguished
secured commercial loan yielded 150 basis points over 3-month LIBOR. The repayment caused a
reduction in net interest income of approximately $15.0 million when comparing results for the year
ended December 31, 2007 to previous year results. Furthermore, 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. The tax equivalent adjustment declined to $15.3 million for 2007 from $28.0 million for
2006 mainly due to the decrease in the interest rate spread on tax-exempt assets resulting from the
sustained flatness of the yield curve as well as changes in the proportion of tax-exempt assets to
total assets and changes in the statutory income tax rate in Puerto Rico.
Notwithstanding the decrease in adjusted tax equivalent net interest income in absolute terms,
the Corporation was able to maintain its net interest margin on an adjusted tax equivalent basis at
a relatively stable level. Net interest margin for the year ended December 31, 2007 was 2.83%,
compared to 2.84% for the previous year reflecting the effect of the Corporations decision to
deleverage its balance sheet as well as the effect of the steepened yield curve during the last
quarter of 2007. During the second half of 2007, the Corporation sold approximately $556 million
and $400 million of low-yielding mortgage-backed securities and U.S. Treasury investments,
respectively, and used the proceeds in part to pay down high cost borrowings as they matured. The
Corporation re-invested approximately $566 million in higher-yielding U.S. Agency mortgage-backed
securities. The Corporation was able to mitigate the pressure of the sustained flatness of the
yield curve during most of 2007 by the redemption of its $150 million medium-term notes which
carried a cost higher than the overall cost of funding and by the increase in the amount of
structured repos entered into by the Corporation which price below LIBOR or are structured to
lock-in interest rates that are lower than yields on the securities serving as collateral for an
extended period.
Total interest income on an adjusted tax equivalent basis decreased by $105.5 million, mainly
due to a decrease in average interest-earning assets. The Corporations average interest-earning
assets decreased by $1.9 billion or
66
10% for 2007 compared to 2006. For the investment portfolio,
the decrease in average volume was mainly driven by the use of short-term investments to repay
short-term brokered CDs as these matured and the sale of low-yield mortgage-backed securities and
U.S. government obligations representing a decrease of approximately $70.0 million in interest
income on investments. After receiving the repayment of $2.4 billion from a local financial
institution, the Corporation invested the proceeds in money market investments. During the second
half of 2006, the Corporation used part of the proceeds to repay short-term brokered certificates
of deposit, mainly issued in 2006, as these matured. For the loan portfolio, the decrease in
average volume, was mainly driven by the aforementioned payment of $2.4 billion received in 2006
from a local financial institution reducing the balance of a secured commercial loan, partially
offset by loan originations that resulted in increases in the average balance of the residential,
construction and consumer loan portfolios. Declining loan yields on the Corporations
residential, construction and consumer loan portfolios attributable to the increase in the balance
of non-performing loans also adversely affected interest income during 2007.
The Corporations total interest expense, excluding changes in the fair value of derivatives
and the ineffective portion and basis adjustment amortization or accretion, decreased by $51.0
million or 6% in 2007 compared to 2006. The decrease in interest expense was due to the deleverage
of the Corporations balance sheet by selling low-yielding investment securities and using part of
the proceeds to pay down high cost borrowings as they matured. This was partially offset by a
higher average cost of borrowings due to higher short-term interest rates experienced during most
of 2007 as compared to 2006. During 2007, as compared to 2006, the average volume of deposits
decreased by $1.1 billion and the related average rate increased by 25 basis points, the average
volume of other borrowed funds decreased by $1.1 billion and the related average rate increased by
10 basis points and the average volume of FHLB advances increased by $450.2 million and the related
average rate increased by 31 basis points. The decrease in the average volume of interest-bearing
liabilities resulted in a decrease in total interest expense due to volume of $83.5 million that
was partially offset by the increase in the average cost of funds which resulted in an increase in
interest expense due to rate of $32.5 million.
Provision for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings to maintain the allowance for
loan and lease losses at a level that the Corporation considers adequate to absorb probable losses
inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based
upon a number of additional factors including historical loan and lease loss experience, current
economic conditions, the fair value of the underlying collateral and the financial condition of the
borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation.
Although the Corporation believes that the allowance for loan and lease losses is adequate,
factors beyond the Corporations control, including factors affecting the economies of Puerto Rico,
the United States (principally the state of Florida), the U.S. Virgin Islands and the British
Virgin Islands may contribute to delinquencies and defaults, thus necessitating additional
reserves.
During 2008, the Corporation provided $190.9 million for loan and lease losses, as compared to
$120.6 million in 2007 and $75.0 million in 2006.
Refer to the discussions under Risk Management Credit Risk Management Allowance for Loan
and Lease Losses and Non-performing Assets below for analysis of the allowance for loan and lease
losses and non-performing assets and related ratios.
2008 compared to 2007
The increase, as compared to 2007, is mainly attributable to the significant increase in
delinquency levels and increases in specific reserves for impaired commercial and construction
loans adversely impacted by deteriorating economic conditions in the United States and Puerto Rico.
Also, increases to reserve factors for potential losses inherent in the loan portfolio, higher
reserves for the residential mortgage loan portfolio in the U.S. mainland and Puerto Rico and the
overall growth of the Corporations loan portfolio contributed to higher charges in 2008.
During 2008, the Corporation experienced continued stress in the credit quality of and
worsening trends on its construction loan portfolio, in particular, condo-conversion loans 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
67
exposure of the Corporation to condo-conversion loans in the United States is approximately $197.4 million or less than 2% of the
total loan portfolio. A total of approximately $154.4 million of
this condo-conversion portfolio is
considered impaired under SFAS 114 with a specific reserve of $36.0 million allocated to these
impaired loans during 2008. Current absorption rates in condo-conversion loans in the United States
are low and properties collateralizing some loans originally disbursed as condo-conversion 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 December 31, 2008, approximately
$47.8 million of loans originally disbursed as condo-conversion construction loans have been
reverted to income-producing commercial loans. Higher reserves were also necessary for the
residential mortgage loan portfolio in the U.S. mainland in light of increased delinquency levels
and the decrease in housing prices. The Corporations loan portfolio in the United States mainland,
mainly in the state of Florida, totals $1.5 billion, or 11% of the total loan portfolio.
In Puerto Rico, the Corporations impaired commercial and construction loan portfolio amounted
to approximately $164 million and $106 million, respectively, with specific reserves of $21 million
and $19 million, respectively, allocated to these loans during 2008. The Corporation also
increased its reserves for the residential mortgage and construction loan portfolio from the 2007
levels to account for the increased credit risk tied to recessionary conditions in Puerto Ricos
economy, which are expected to continue at least through the remainder of 2009. The Puerto Rico
housing market has not seen the dramatic decline in housing prices that is affecting the U.S.
mainland; however, there has been a lower demand for houses due to diminished consumer purchasing
power and confidence.
Refer to the discussions under Financial Condition and Operating Analysis Lending
Activities 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.
2007 compared to 2006
First BanCorps provision for loan and lease losses for the year ended December 31, 2007
increased by $45.6 million, or 61%, compared to 2006. The increase in the provision was primarily
due to deterioration in the credit quality of the Corporations loan portfolio associated with the
weakening economic conditions in Puerto Rico and the slowdown in the United States housing sector.
In particular, the increase was mainly related to specific and general provisions related to the
construction loan portfolio of the Corporations Corporate Banking operations in Miami, Florida and
increases in the general reserves allocated to the consumer loan portfolio.
During the third quarter of 2007, the Corporation recorded an impairment of $8.1 million on
four condo-conversion loans, with an aggregate principal balance of $60.5 million at the time of
the impairment evaluation, extended to a single borrower through its Corporate banking operations
in Miami, Florida based on an updated impairment analysis that incorporated new appraisals. The
increase in non-accrual loans and charge-offs during 2007, other than the aforementioned troubled
loan relationship, as compared to 2006, was attributable to weak economic conditions in Puerto
Rico. Puerto Rico is in the midst of a recession caused by, among other things, higher utilities
prices, higher taxes, government budgetary imbalances, and higher levels of oil prices.
The
above-mentioned troubled relationship comprised four condo-conversion loans that the
Corporation had placed in non-accrual status during the second and third quarters of 2007. For the
third quarter of 2007, the Corporation updated the impairment analysis on the relationship and
requested new appraisals that reflected collateral deficiency as compared to the Corporations
recorded investment in the loans. The aggregate unpaid principal balance of the relationship
classified as non-accrual decreased to $46.4 million as of December 31, 2007, net of a charge-off
of $3.3 million recorded to this relationship in the fourth quarter of 2007. The charge-off was
recorded at the time of sale of one of the loans in the relationship. This sale was made at a
price that exceeded the recorded investment in the loan (loan receivable less specific reserve) by
approximately $1 million.
In 2008, the Corporation sold another of the impaired loans with a carrying value of $21.8
million for $22.5 million. The other two loans were foreclosed during 2008 and one of the projects
with a carrying value of $3.8 million was sold in the fourth quarter of 2008 and a $0.4 million
loss was recorded on the sale. The Corporation expects to complete the sale of the last remaining
foreclosed condo-conversion project of the aforementioned troubled relationship in the U.S.
mainland in the first half of 2009.
68
Non-interest Income
The following table presents the composition of non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges on loans |
|
$ |
6,309 |
|
|
$ |
6,893 |
|
|
$ |
5,945 |
|
Service charges on deposit accounts |
|
|
12,895 |
|
|
|
12,769 |
|
|
|
12,591 |
|
Mortgage banking activities |
|
|
3,273 |
|
|
|
2,819 |
|
|
|
2,259 |
|
Rental income |
|
|
2,246 |
|
|
|
2,538 |
|
|
|
3,264 |
|
Insurance income |
|
|
10,157 |
|
|
|
10,877 |
|
|
|
11,284 |
|
Other operating income |
|
|
18,570 |
|
|
|
13,595 |
|
|
|
14,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income before net gain (loss) on investments, insurance
reimbursement and other agreements related to a contingency
settlement, net gain on partial extinguishment and recharacterization
of secured commercial loans to local financial institutions and gain
on sale of credit card portfolio |
|
|
53,450 |
|
|
|
49,491 |
|
|
|
49,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on VISA shares and other proceeds |
|
|
9,474 |
|
|
|
|
|
|
|
|
|
Net gain on sale of investments |
|
|
17,706 |
|
|
|
3,184 |
|
|
|
7,057 |
|
Impairment on investments |
|
|
(5,987 |
) |
|
|
(5,910 |
) |
|
|
(15,251 |
) |
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments |
|
|
21,193 |
|
|
|
(2,726 |
) |
|
|
(8,194 |
) |
Insurance reimbursement and other agreements related to a
contingency settlement |
|
|
|
|
|
|
15,075 |
|
|
|
|
|
Gain on partial extinguishment and recharacterization of secured
commercial loans to local financial institutions |
|
|
|
|
|
|
2,497 |
|
|
|
(10,640 |
) |
Gain on sale of credit card portfolio |
|
|
|
|
|
|
2,819 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,643 |
|
|
$ |
67,156 |
|
|
$ |
31,336 |
|
|
|
|
|
|
|
|
|
|
|
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
administering residential mortgage loans originated by the Corporation and subsequently sold
with servicing retained. In addition, lower-of-cost-or-market valuation adjustments to the
Corporations residential mortgage loans held for sale portfolio and servicing rights portfolio, if
any, are recorded as part of mortgage banking activities.
Rental income represents income generated by the Corporations subsidiary, First Leasing and
Rental Corporation, on the rental of various types of motor vehicles.
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.
69
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.
2008 compared to 2007
Non-interest
income increased 11% to $74.6 million for 2008 from $67.2 million for 2007. The
increase is related to a realized gain of $17.7 million on the sale of approximately $526 million
of U.S. sponsored agency fixed-rate MBS and to the gain of $9.3 million on the sale of part of the
Corporations investment in VISA in connection with VISAs IPO. The announcement of the FED that
it will invest up to $600 billion in obligations from U.S. government-sponsored agencies, including
$500 billion in MBS backed by FNMA, FHLMC and GNMA, caused a surge in prices and sent mortgage
rates down to the lowest levels since February and offered a market opportunity to realize a gain.
Higher point of sale (POS) and ATM interchange fee income and an increase in fee income from cash
management services provided to corporate customers accounted for approximately $3.9 million of the
increase in non-interest income. Other-than-temporary impairment charges amounted to $6.0 million
in 2008, compared to $5.9 million in 2007. Different from 2007 when impairment charges related
exclusively to equity securities, most of the impairment charges in
2008 (approximately $4.2 million) were related to auto
industry corporate bonds held by FirstBank Florida. The Corporations
remaining exposure to auto industry corporate bonds as of December 31, 2008 amounted to $1.5
million, while its exposure to equity securities was approximately $2.2 million.
The increase in non-interest income attributable to activities mentioned above was partially
offset, when comparing 2008 to 2007, by isolated events such as the $15.1 million income
recognition in 2007 for reimbursement of expenses related to the class action lawsuit settled in
2007, and a gain of $2.8 million on the sale of a credit card portfolio and $2.5 million on the
partial extinguishment and recharacterization of a secured commercial loan to a local financial
institution that were recognized in 2007 as described below.
2007 compared to 2006
First BanCorps non-interest income for 2007 amounted to $67.2 million, compared to $31.3
million for 2006. The increase in non-interest income was mainly attributable to income
recognition of approximately $15.1 million for agreements reached with insurance carriers and
former executives for reimbursement of expenses related to the settlement of the class action
lawsuit brought against the Corporation coupled with lower other-than-temporary impairment charges
on certain of the Corporations equity securities portfolio, as compared to 2006. For 2007,
other-than-temporary impairment charges on equity securities decreased by $9.3 million, as compared
to impairment charges recognized for 2006. Also, a net change of $13.1 million in net gains and
losses related to partial repayments of certain secured commercial loans extended to local
financial institutions (2007-net gain of $2.5 million; 2006net loss of $10.6 million), a higher
gain on the sale of its credit card portfolio and higher income from service charges on loans
contributed to the increase in non-interest income during 2007 as compared to 2006.
During 2006, the Corporation recorded a net loss of $10.6 million on the partial
extinguishment of a secured commercial loan extended to a local financial institution as a result
of a series of credit agreements reached with Doral to formally document as secured borrowings the
loan transfers between the parties that previously had been accounted for erroneously as sales.
The terms of the credit agreements specified: (1) a floating interest payment based on a spread
over 90-day LIBOR subject to a cap; (2) an amortization schedule tied to the scheduled amortization
of the underlying mortgage loans subject to a maximum maturity of 10 years; (3) mandatory
prepayments as a result of actual prepayments from the underlying mortgages; and (4) an option to
Doral to prepay the loan without penalty at any time.
On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the
balance of approximately $2.9 billion in secured commercial loans to approximately $450 million as
of that date. In connection with the repayment, the Corporation and Doral entered into a sharing
agreement on May 25, 2006 with respect to certain profits or losses that Doral would incur as part
of the sales of the mortgages that previously collateralized the commercial loans. First BanCorp
agreed to reimburse Doral for 40% of the net losses incurred by Doral as a result of sales or
securitization of the mortgages, subject to certain conditions and subject to a maximum
reimbursement of $9.5 million, which would be reduced proportionately to the extent that Doral did
not sell the mortgages. As a result of the loss sharing agreement and the extinguishment of the
secured commercial loans by Doral, the Corporation
70
recorded a net loss of $10.6 million, composed
of losses realized as part of the loss sharing agreement and the difference between the carrying
value of the loans and the net payment received from Doral.
In connection with the repayment, Doral and First BanCorp also agreed to share the profits, if
any, received from any subsequent sales or securitization of the mortgage loans, in the same
proportion that the Corporation shared in the losses, subject to a maximum of $9.5 million.
During the first quarter of 2007, the Corporation entered into various agreements with R&G
Financial Corporation (R&G Financial) relating to prior transactions accounted for as commercial
loans secured by mortgage loans and pass-through trust certificates from R&G Financial
subsidiaries. First, through a mortgage payment agreement, R&G Financial paid the Corporation
approximately $50 million to reduce the commercial loan that R&G Premier Bank, R&G Financials
banking subsidiary, had outstanding with the Corporation. In addition, the remaining balance of
the loans secured by mortgage loans of approximately $271 million was re-documented as a secured
loan from the Corporation to R&G Financial. The terms of the credit agreement specified: (1) a
floating interest payment based on a spread over 90-day LIBOR; (2) repayment of the loan in arrears
in sixty equal consecutive monthly installments of principal (scheduled amortization plus any
unscheduled principal recoveries) and interest maturing on February 22, 2012; (3) delivery by R&G
Financial to the Corporation and maintenance at all times of a first priority security interest
with a collateral value as a percentage of loans of 103% for FHA/VA mortgage loans, 105% for
conventional conforming mortgage loans and 111% of conventional non-conforming mortgage loans; and
(4) R&G Financial may, at its option, prepay the loan without premium or penalty. Second, R&G
Financial and the Corporation amended various agreements involving, as of the date of the
transaction, approximately $183.8 million of securities collateralized by loans that were
originally sold through five grantor trusts. The modifications to the original agreements allow
the Corporation to treat these transactions as true sales for accounting and legal purposes and
recharacterize the loans as securities collateralized by loans. As a result of the agreements and
the partial extinguishment of the secured commercial loan, the Corporation recorded a net gain of
$2.5 million related to the difference between the carrying value of the loans, the net payment
received and the fair value of the securities received from R&G Financial.
For 2007, the Corporation recorded a gain of $2.8 million on the sale of the credit card
portfolio pursuant to a strategic alliance reached with a U.S. financial institution, compared to a
gain of $0.5 million recorded in 2006.
Higher income from service charges on loans, which increased by $0.9 million or 16% as
compared to 2006, was due to the increase in the loan portfolio volume driven by new originations.
Loan originations for 2007 amounted to $4.1 billion.
71
Non-Interest Expense
The following table presents the components of non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Employees compensation and benefits |
|
$ |
141,853 |
|
|
$ |
140,363 |
|
|
$ |
127,523 |
|
Occupancy and equipment |
|
|
61,818 |
|
|
|
58,894 |
|
|
|
54,440 |
|
Deposit insurance premium |
|
|
10,111 |
|
|
|
6,687 |
|
|
|
1,614 |
|
Other taxes, insurance and supervisory fees |
|
|
22,868 |
|
|
|
21,293 |
|
|
|
17,881 |
|
Professional fees recurring |
|
|
12,572 |
|
|
|
13,480 |
|
|
|
11,455 |
|
Professional fees non-recurring |
|
|
3,237 |
|
|
|
7,271 |
|
|
|
20,640 |
|
Servicing and processing fees |
|
|
9,918 |
|
|
|
6,574 |
|
|
|
7,297 |
|
Business promotion |
|
|
17,565 |
|
|
|
18,029 |
|
|
|
17,672 |
|
Communications |
|
|
8,856 |
|
|
|
8,562 |
|
|
|
9,165 |
|
Net loss on REO operations |
|
|
21,373 |
|
|
|
2,400 |
|
|
|
18 |
|
Other |
|
|
23,200 |
|
|
|
24,290 |
|
|
|
20,258 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
333,371 |
|
|
$ |
307,843 |
|
|
$ |
287,963 |
|
|
|
|
|
|
|
|
|
|
|
2008 compared to 2007
Non-interest expenses increased 8% to $333.4 million for 2008 from $307.8 million for 2007.
The increase is principally attributable to a higher net loss on REO operations and increases in
the deposit insurance premium expense and occupancy and equipment expenses, partially offset by
lower professional fees.
The net loss on REO operations increased by approximately $19.0 million for 2008, as compared
to the previous year, mainly due to a higher inventory of repossessed properties and declining
real estate prices, mainly in the U.S. mainland, that have caused write-downs on the value of
repossessed properties. A significant portion of the losses is related to foreclosed properties
from the Corporate Banking operations in Miami, including a $5.3 million write-down to the value of
the last remaining foreclosed project in the United States as of December 31, 2008 which is
expected to be sold in the first half of 2009. Higher
losses were also observed in Puerto Rico due to a higher inventory and recent trends in sales.
The deposit insurance premium expense increased by $3.4 million as the Corporation used
available one-time credits to offset the premium increase in 2007 resulting from a new assessment
system adopted by the FDIC and also attributable to the increase in the deposit base.
On February 27, 2009, the FDIC approved an emergency special assessment of
20 cents per $100 insured deposits that would be collected in the third
quarter of 2009 and agreed to increase fees it will begin charging
banks in April to a range of 12 cents to 16 cents per $100 deposit.
The Corporation expects an estimated charge of approximately $25
million resulting from the emergency special assessment in
2009 and an increase of approximately $13 million in the
deposit insurance premium expense for 2009, as compared
to 2008, as a result of the increase in the regular assessment rate.
Occupancy and equipment expenses increased by $2.9 million primarily to support the growth of
the Corporations operations as well as increases in utility costs.
Employeescompensation
and benefits expenses increased by $1.5 million for 2008, as compared to
the previous year, primarily due to higher average compensation and related fringe benefits,
partially offset by a decrease of $2.8 million in stock-based compensation expenses and the impact
in 2007 of the accrual of approximately $3.3 million for a voluntary separation program
established by the Corporation as part of its cost saving strategies. The Corporation has been
able to continue the growth of its operations without incurring in substantial additional operating
expenses. The Corporations total headcount has decreased as compared to December 31, 2007 as a
result of the voluntary separation program completed earlier in 2008 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.
72
Professional fees decreased by $4.9 million for the 2008 year, as compared to 2007, primarily
attributable to lower legal, accounting and consulting fees due to, among other things, the
settlement of legal and regulatory matters.
2007 compared to 2006
The Corporations non-interest expenses for 2007 increased by $19.9 million, or 7%, compared
to 2006. The increase in non-interest expenses was mainly due to increases in employees
compensation and benefits as well as deposit insurance premium expenses, occupancy and equipment
expenses, other taxes and insurance fees, partially offset by a decrease in professional fees.
Employees compensation and benefits expenses for 2007 increased by $12.8 million, or 10%,
compared to 2006. The increase in employees compensation and benefits expenses was primarily due
to increases in the average compensation and related fringe benefits paid to employees coupled with
the accrual of approximately $3.3 million for a voluntary separation program established by the
Corporation as part of its cost saving strategies.
For the year ended December 31, 2007, the deposit insurance premium expense increased by $5.1
million, as compared to 2006. The increase in the deposit insurance premium expense was due to
changes in the premium calculation adopted by the FDIC during 2007.
Occupancy and equipment expenses for 2007 increased by $4.5 million, or 8%, compared to 2006.
The increase in occupancy and equipment expenses in 2007 is mainly attributable to increases in
costs associated with the expansion of the Corporations branch network and loan origination
offices.
Other taxes, insurance and supervisory fees increased by $3.4 million, or 19%, compared to
2006 due to a higher expense related to prepaid municipal and property taxes recorded during 2007.
For 2007, other expenses increased by $6.4 million, or 32%, compared to 2006. The increase in
other expenses for 2007 was mainly due to a $3.3 million increase related to costs associated with
capital raising efforts in 2007 not qualifying for capitalization coupled with increased costs
associated with foreclosure actions on the aforementioned troubled loan relationship in Miami,
Florida.
Professional fees decreased during 2007 by $11.3 million, or 35%, compared to 2006. The
decrease was primarily attributable to lower legal, accounting and consulting fees due to the
conclusion during the third quarter of 2006 of the internal review conducted by the Corporations
Audit Committee and the restatement process.
Income Tax Provision
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, with certain
conditions and limitations, against the Corporations Puerto Rico tax liability. The Corporation
is also subject to U.S. Virgin Islands taxes on its income from sources within this jurisdiction.
Any such tax paid is creditable against the Corporations Puerto Rico tax liability, subject to
certain conditions and limitations.
Under the Puerto Rico Internal Revenue Code of 1994, as amended (PR Code), First BanCorp is
subject to a maximum statutory tax rate of 39%, except that in 2005 and 2006 an additional
transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005,
the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum
statutory tax rate from 39.0% to 41.5% for a two-year period. On May 13, 2006, with an effective
date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of
2.0% applicable only to companies covered by the Puerto Rico Banking Act, as amended, such as
FirstBank, which raised the maximum statutory tax rate to 43.5% for the 2006 taxable year. The PR
Code also includes an alternative minimum tax
73
of 22% that applies if the Corporations regular
income tax liability is less than the alternative minimum tax requirements.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate
mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and
Puerto Rico income taxes and by doing business through 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 additional information relating to income taxes, see Note 25 to the Corporations audited
financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K,
including the reconciliation of the statutory to the effective income tax rate for 2008, 2007 and
2006.
2008 compared to 2007
For 2008, the Corporation recognized an income tax benefit of $31.7 million compared to an
income tax expense of $21.6 million for 2007. The fluctuation is mainly related to lower taxable
income. A significant portion of revenues was derived from tax-exempt assets and operations
conducted through the IBE, FirstBank Overseas Corporation. Also, the positive fluctuation in
financial results was impacted by two transactions: (i) a reversal of $10.6 million of UTBs during
the second quarter of 2008 for positions taken on income tax returns recorded under the provisions
of FIN 48, 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 established a multi-year allocation schedule for deductibility of the
$74.25 million payment made by the Corporation during 2007 to settle a securities class action
suit. Also, higher deferred tax benefits were recorded in connection with a higher provision for
loan and lease losses.
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 amounts 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 of
$22.4 million (including $6.8 million of accrued interest), the Corporation cannot make any
reasonable reliable estimate of the timing of future cash flows or changes, if any, associated with
such obligations.
As of December 31, 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 $7.3
million, compared to a valuation allowance amounting to $4.9 million as of December 31, 2007. As
of December 31, 2008, the deferred tax asset, net of the valuation allowance of $7.3 million,
amounted to approximately $128.0 million compared to $90.1 million as of December 31, 2007.
For additional information relating to income taxes, refer to Note 25 of the Corporations
audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form
10-K.
2007 compared to 2006
For the year ended December 31, 2007, the Corporation recognized an income tax expense of
$21.6 million, compared to $27.4 million in 2006. The decrease in income tax expense was mainly
due to lower taxable income coupled with the effect of a lower statutory tax rate in Puerto Rico
for 2007 (39% in 2007 compared to 43.5% in 2006). As of December 31, 2007, the Corporation
evaluated its ability to realize the deferred tax asset and concluded, based on the evidence
available, that it is more likely than not that some of the deferred tax asset will not be realized
and thus, established a valuation allowance of $4.9 million, compared to a valuation allowance
amounting to $6.1 million as of December 31, 2006. As of December 31, 2007, the deferred tax
asset, net of the valuation allowance of $4.9 million, amounted to approximately $90.1 million
compared to $162.1 million as of December 31, 2006. The significant
74
decrease in the deferred tax asset is due to the reversal during the third quarter of 2007 of the deferred tax asset related to
the class action lawsuit contingency of $74.25 million recorded as of December 31, 2005 and due to
the tax impact of the adoption of SFAS 159, on January 1, 2007, of approximately $58.7 million.
The Corporation reached an agreement with the lead class action plaintiff during 2007 and payments
totaling the previously reserved amount of $74.25 million were made.
OPERATING SEGMENTS
Based upon the Corporations organizational structure and the information provided to the
Chief Operating Decision Maker and to a lesser extent to the Board of Directors, the operating
segments are driven primarily by the Corporations legal entities. As of December 31, 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 a combined 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. For information regarding First
BanCorps reportable segments, please refer to Note 31 Segment Information to the Corporations
audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form
10-K.
The accounting policies of the segments are the same as those described in Note 1 Nature of
Business and Summary of Significant Accounting Policies to the Corporations audited financial
statements for the year ended December 31, 2008 included in Item 8 of this 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 Treasury and Investment segment loans funds to the Consumer (Retail) Banking, Mortgage
Banking and Commercial and Corporate Banking segments to finance their lending activities and
borrows funds from those segments. The Consumer (Retail) Banking segment also loans funds to other
segments. The interest rates charged or credited by Treasury and Investment 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 the operations of FirstBank Florida as well as finance leases and
insurance and other miscellaneous products that were adversely affected by deteriorating economic
conditions. This category, in particular FirstBank Florida was negatively impacted by the increase
in the provision for loan and lease losses due to the deterioration in the credit quality of this
portfolio and declining prices in the real estate market in the United States. In addition, an
other-than-temporary impairment charges of $4.2 million were recorded in connection with auto
industry corporate bonds held by FirstBank Florida.
Consumer(Retail)Banking
The Consumer (Retail) Banking segment consists of the Corporations consumer lending and
deposit-taking activities conducted mainly through its branch network and loan centers. Loans to
consumers include auto, boat, lines of credit, and personal loans. Deposit products include
interest bearing and non-interest bearing checking and savings accounts, Individual Retirement
Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch of
FirstBanks retail network serve as one of the funding sources for the lending and investment
activities.
Consumer lending has been mainly driven by auto loan originations. The Corporation follows a
strategy of providing outstanding service to selected auto dealers that provide the channel for the
bulk of the Corporations auto loan originations. This strategy is directly linked to our
commercial lending activities as the Corporation maintains strong and stable auto floor plan
relationships, which are the foundation of a successful auto loan generation operation. The
Corporation commercial relations with floor plan dealers is strong and directly benefits the
Corporations consumer lending operation and are managed as part of the consumer banking
activities.
75
Personal loans and, to a lesser extent, marine financing and a small revolving credit
portfolio also contribute to interest income generated on consumer lending. Credit card accounts,
which are issued under the Banks name through an alliance with FIA Card Services (Bank of
America), who bears the credit risk, grew more than 100% from December 31, 2007. Management plans
to continue to be active in the consumer loans market, applying the Corporations strict
underwriting standards.
The highlights of the Consumer (Retail) Banking segment financial results for the year ended
December 31, 2008 include the following:
|
|
|
Segment income before taxes for the year ended December 31, 2008 was $46.7
million compared to $82.9 million and $139.6 million for the years ended December 31,
2007 and 2006, respectively. |
|
|
|
|
Net interest income for the year ended December 31, 2008 was $173.0 million
compared to $205.3 million and $238.5 million for the years ended December 31, 2007 and
2006, respectively. The decrease in net interest income reflects a diminished consumer
loan portfolio due to principal repayments and charge-offs relating to the auto and
personal loans portfolio coupled with the sale of approximately $15.6 million during
2007 of the Corporations credit card portfolio. This portfolio
is mainly composed of fixed-rate loans financed with shorter-term
borrowings; thus positively affected in a declining interest rate
scenario, however, this was more than offset by a decrease in the amount
credited to this segment for its deposit-taking activities due to the
decline in interest rates, resulting
in a decrease in net interest income in 2008, as compared to 2007. |
|
|
|
|
The provision for loan and lease losses for 2008 decreased by $4.3 million
compared to the same period in 2007 and increased by $20.2 million when comparing 2007
with the same period in 2006. The decrease in 2008, as compared to 2007, is mainly
related to the lower amount of the consumer loan portfolio, a relative stability in
delinquency and non-performing levels, and a decrease in net charge-offs attributable
in part to the changes in underwriting standards implemented since late 2005 and the
originations using these new underwriting standards of new consumer loans to replace
maturing consumer loans. This portfolio had an average life of approximately four years. The
increase in the provision for loan and lease losses for 2007, compared to 2006, was
mainly due to a higher general reserve for the Puerto Rico consumer loan portfolio,
particularly auto loans, as a result of weak economic conditions in Puerto Rico.
Increasing trends in non-performing loans and charge-offs experienced during 2007 and
2006 were affected by the fiscal and economic situation of Puerto Rico. Puerto Rico has
been in the midst of a recession since the third quarter of 2005. |
|
|
|
|
Non-interest income for the year ended December 31, 2008 was $28.8 million
compared to $27.3 million and $23.5 million for the years ended December 31, 2007 and
2006, respectively. The increase for 2008, as compared to 2007, is mainly related to
higher point of sale (POS) and ATM interchange fee income caused by 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 calculation since the second
half of 2007. The increase in non-interest income for 2007, as compared to 2006, was
driven by a gain on sale of a credit card portfolio of $2.8 million. |
|
|
|
|
Direct non-interest expenses for the year ended December 31, 2008 were $103.8
million compared to $94.1 million and $86.9 million for the years ended December 31,
2007 and 2006, respectively. The increase in direct operating expense for 2008 was
mainly due to increases in compensation, marketing collection efforts and in the FDIC
insurance premium. The increase for 2007, as compared to 2006, was mainly due to
increases in employees compensation and benefits and occupancy and equipment. The
increase in employees compensation and benefits was mainly from increases in the
headcount in the Corporations retail bank branch network coupled with increases in
average salary and employee benefits to support the growth of the segment. |
Commercial and Corporate Banking
The Commercial and Corporate Banking segment consists of the Corporations lending and other
services for the public sector and specialized industries such as healthcare, tourism, financial
institutions, food and beverage, shopping centers and middle-market clients. The Commercial and
Corporate Banking segment offers commercial
76
loans, including commercial real estate and
construction loans, and other products such as cash management and business management services. A
substantial portion of this portfolio is secured either by the underlying value of the real estate
collateral, and collateral and the personal guarantees of the borrowers are taken in abundance of
caution. Although commercial loans involve greater credit risk than a typical residential mortgage
loan because they are larger in size and more risk is concentrated in a single borrower, the
Corporation has and maintains an effective credit risk management infrastructure designed to
mitigate potential losses associated with commercial lending, including strong underwriting and
loan review functions, sales of loan participations and continuous monitoring of concentrations
within portfolios.
For this segment, the Corporation follows a strategy aimed to cater to customer needs in the
commercial loans middle market segment by building strong relationships and offering financial
solutions that meet customers unique needs. Starting in 2005, the Corporation expanded its
distribution network and participation in the commercial loans middle market segment by focusing on
customers with financing needs of up to $5 million. The Corporation established 5 regional offices
that provide coverage throughout Puerto Rico. The offices are staffed with sales, marketing and
credit officers able to provide a high level of personalized service and prompt decision-making.
The highlights of the Commercial and Corporate Banking segment financial results for the year
ended December 31, 2008 include the following:
|
|
|
Segment income before taxes for the year ended
December 31, 2008 was $21.2
million compared to $77.8 million and $123.8 million for the years ended December 31,
2007 and 2006, respectively. |
|
|
|
|
Net interest income for the year ended December 31, 2008 was $136.9 million
compared to $135.9 million and $154.7 million for the years ended December 31, 2007 and
2006, respectively. The increase in net interest income for 2008, as compared to 2007,
is related to both an increase in the average volume of earning assets driven by new
commercial loan originations and lower interest rates charged by other segments due to
the decline in short-term interest rates in 2008 that more than offset lower loan
yields due to the repricing of this portfolio and the increase in non-accrual loans.
Also, the Corporation has took initial steps to obtain a higher pricing on its
variable-rate commercial loan portfolio given the current market environment. The
decrease in net interest income for 2007, compared to 2006, was mainly driven by a
decrease in the average volume of interest-earning assets. The decrease in the
segments average volume of interest-earning assets was mainly due to the substantial
partial repayment of $2.4 billion received from Doral in May 2006 that reduced the
segments outstanding secured commercial loan from local financial institutions. The
repayment also reduced the Corporations loans-to-one borrower exposure. |
|
|
|
|
The provision for loan and lease losses for 2008 was $78.8 million compared to
$41.2 million and $7.9 million for 2007 and 2006, respectively. The increase in the
provision for loan and lease losses for 2008 was mainly driven by higher specific
reserves relating to the condo-conversion loan portfolio of the Corporations Corporate
Banking operation in Miami, Florida. The increase was also related to the increase in
the amount of commercial and construction impaired loans in Puerto Rico due to
deteriorating economic conditions. Refer to the Provision for Loan and Lease Losses
discussion above and to the Risk Management Allowance for Loan and Lease Losses and
Non-performing Assets discussion below for additional information with respect to the
credit quality of the Corporations commercial and construction loan portfolio. The
increase in 2007, compared to 2006, was driven by higher general reserves on the
Corporate Banking operations construction loan portfolio in Miami, Florida due to the
slowdown of the U.S. housing market, an $8.1 million charge due to the collateral
impairment on the previously discussed troubled loan relationship, and to the increase
in the loan portfolio. |
|
|
|
|
Total non-interest income for the year ended December 31, 2008 amounted to $4.6
million compared to a non-interest income of $6.3 million and non-interest loss of $6.1
million for the years ended December 31, 2007 and 2006 respectively. The fluctuation in
non-interest income for 2008 and 2007 was mainly attributable to the
impact on earnings
of agreements entered into with other local financial institutions for the partial
extinguishment of secured commercial loans extended to such institutions (a gain of
$2.5 million recorded in 2007 compared to a loss of $10.6 million recorded in 2006).
Aside
|
77
from
these transactions, non-interest income for the Commercial and Corporate
Banking Segment increased by $0.9 million in connection with higher fees on cash
management services provided to corporate customers.
|
|
|
Direct non-interest expenses for 2008 were $41.6 million compared to $23.2
million and $16.9 million for 2007 and 2006, respectively. The increase for 2008, as
compared to 2007, was mainly due to a higher loss in REO operations, primarily expenses
and write-downs related to foreclosed condo-conversion projects in Miami, Florida.
Refer to Non-interest expenses discussion above for additional information. The
increase in direct operating expenses for 2007, as compared to 2006, was mainly due to
increases in employees compensation due to increases in average salary and employee
benefits and increases in REO operations losses associated with the aforementioned
troubled loan relationship in Miami coupled with the expense allocated to this segment
related to the FDIC insurance premium expense. |
Mortgage Banking
The Mortgage Banking segment conducts its operations mainly through FirstBank and its mortgage
origination subsidiary, FirstMortgage. These operations consist of the origination, sale and
servicing of a variety of residential mortgage loan products. Originations are sourced through
different channels such as branches, mortgage brokers and real estate brokers, and in association
with new project developers. FirstMortgage focuses on originating residential real estate loans,
some of which conform to Federal Housing Administration (FHA), Veterans Administration (VA) and
Rural Development (RD) standards. Loans originated that meet FHA standards qualify for the
federal agencys insurance program whereas loans that meet VA and RD standards are guaranteed by
their respective federal agencies. Mortgage loans that do not qualify under these programs are
commonly referred to as conventional loans. Conventional real estate loans could be conforming and
non-conforming. Conforming loans are residential real estate loans that meet the standards for sale
under the FNMA and FHLMC programs whereas loans that do not meet the standards are referred to as
non-conforming residential real estate loans. The Corporations strategy is to penetrate markets by
providing customers with a variety of high quality mortgage products to serve their financial needs
faster and simpler and at competitive prices.
The Mortgage Banking segment also acquires and sells mortgages in the secondary markets.
Residential real estate conforming loans are sold to investors like FNMA and FHLMC. In December
2008, the Corporation obtained from GNMA, Commitment Authority to issue GNMA mortgage-backed
securities. Under this program the Corporation will begin securitizing and selling FHA/VA mortgage
loan production into the secondary markets.
The highlights of the Mortgage Banking segment financial results for the year ended December
31, 2008 include the following:
|
|
|
Segment income before taxes for the year ended December 31, 2008 was $16.9
million compared to $18.6 million and $24.4 million for the years ended December 31,
2007 and 2006, respectively. |
|
|
|
|
Net interest income for the year ended December 31, 2008 was $47.2 million
compared to $39.0 million and $43.4 million for the years ended December 31, 2007 and
2006, respectively. The increase in net interest income for 2008, as compared to 2007,
is mainly related to the decline in short-term rates during 2008. This portfolio is
principally composed of fixed-rate residential mortgage loans tied to long-term
interest rates that are financed with shorter-term borrowings; thus positively affected
in a declining interest rate scenario as the one prevailing in 2008. The increase in
2008 was also related to a higher portfolio, driven by mortgage loan originations. The
decrease in net interest income for 2007, as compared to 2006, was principally due to
declining loan yields on the residential mortgage loan portfolio resulting from the
increase in non-performing loans. |
|
|
|
|
The provision for loan and lease losses for the year 2008 was $9.8 million
compared to $1.6 million and $4.0 million for the years ended December 31, 2007 and
2006, respectively. The increase in 2008, as compared to 2007, was mainly related to
the increase in the volume of non-performing loans due to deteriorating economic
conditions in Puerto Rico and an increase in reserve factors to account for the
continued recessionary economic conditions and the increase in charge-offs. The
decrease in 2007, as
|
78
compared to 2006, was due to the fact that after a
detailed review of the residential mortgage loan portfolio in 2006, the Corporation determined
that it needed to increase its allowance for loan and lease losses based on the
deterioration of the economic conditions in Puerto Rico and the increase in the home
price index in Puerto Rico. The Corporation continues to update the analysis on a
yearly basis, and in 2007 the Corporation obtained similar results than in 2006. As a
consequence, the Corporation determined that the allowance for loan losses for the
residential mortgage loan portfolio was at an adequate level.
|
|
|
Non-interest income for the year ended December 31, 2008 was $3.4 million
compared to $3.0 million and $2.5 million for the years ended December 31, 2007 and
2006, respectively. The increase for 2008, as compared to 2007 was driven by a higher
volume of loan sales in the secondary market. The increase for 2007, as compared to
2006, was driven by higher service charges on loans associated with the growth in the
residential mortgage loan portfolio coupled with a negative lower-of-cost-or-market
adjustment of $1.0 million recorded in 2006 to the loans-held-for-sale portfolio. |
|
|
|
|
Direct non-interest expenses for 2008 were $23.9 million compared to $21.8
million and $17.5 million for 2007 and 2006, respectively. The increase for 2008, as
compared to 2007, is related to technology related expenses incurred to improve the
servicing of the mortgage loans as well as increases in compensation and, to a lesser
extent, higher losses on REO operations in connection with a higher volume of
repossessed properties and recent trends in sales. The increase in direct operating
expenses for 2007, as compared to 2006, was mainly due to increases in employees
average salary compensation and higher employer benefits. The Corporation has committed
substantial resources to this segment during the past 4 years. |
Treasury and Investments
The Treasury and Investments segment is responsible for the Corporations investment portfolio
and treasury functions designed to manage and enhance liquidity. This segment sells funds to the
Commercial and Corporate Banking, Mortgage Banking, and Consumer (Retail) Banking segments to
finance their lending activities and also purchases funds gathered by those segments. The interest
rates charged or credited by Treasury and Investments are based on market rates.
The highlights of the Treasury and Investments segment financial results for the year ended
December 31, 2008 include the following:
|
|
|
Segment income before taxes for the year ended December 31, 2008 amounted to
$106.3 million compared to losses of $14.5 million and $79.2 million for the years
ended December 31, 2007 and 2006, respectively. |
|
|
|
|
Net interest income for the year ended December 31, 2008 was $87.2 million
compared to a loss of $4.5 million and a loss of $63.2 million for the years ended
December 31, 2007 and 2006, respectively. The variance observed in 2008, as compared
to 2007, is mainly related to lower short-term rates and, to a lesser extent, to an
increase in the volume of average interest-earning assets. The Corporations
securities portfolio is mainly composed of fixed-rate U.S. agency MBS and debt
securities tied to long-term rates. During 2008, the Corporation purchased
approximately $3.2 billion in fixed-rate MBS at an average yield of 5.44%, which is
significantly higher than the cost of borrowings used to finance the purchase of such
assets. Despite the early redemption by counterparties of approximately $1.2 billion
of U.S. agency debentures through call exercises, 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 $945 million of U.S.
agency debentures still held by the Corporation as of December 31, 2008. The
Corporation has benefited from higher than current market yields on these instruments.
Also, non-cash gains from changes in the fair value of derivative instruments and SFAS
159 liabilities accounted for approximately $14.2 million of the increase in net
interest income for 2008 as compared to 2007. The lower net interest loss for 2007 was
caused by the effect in 2006 earnings of non-cash losses from changes in the fair value
of derivative instruments prior to the implementation of the long-haul method of
accounting on April 3,
|
79
2006. During the first quarter of 2006, the Corporation
recorded unrealized losses of $69.7 million for derivatives as part of interest
expense. The adoption of fair value hedge accounting in the second quarter of 2006 and
the adoption of SFAS 159 in 2007 reduced the accounting volatility that previously
resulted from the accounting asymmetry created by accounting for the financial
liabilities at amortized cost and the derivatives at fair value.
|
|
|
Non-interest income for the year ended December 31, 2008 amounted to $25.8
million compared to a losses of $2.2 million and of $8.3 million for the years ended
December 31, 2007 and 2006, respectively. The positive fluctuation in earnings was
related to the aforementioned realized gain of $17.7 million mainly on the sale of
approximately $526 million of U.S. sponsored agency fixed-rate MBS and to the gain of
$9.3 million on the sale of part of the Corporations investment in VISA in connection
with VISAs IPO. Refer to Non-interest incomediscussion above for additional
information. The decrease in non-interest loss for 2007 was driven by lower
other-than-temporary impairment charges in the Corporations equity securities
portfolio, which decreased by $9.3 million as compared to 2006. |
|
|
|
|
Direct non-interest expenses for 2008 were $6.7 million compared to $7.8
million and $7.7 million for 2007 and 2006, respectively. The decrease for 2008, as
compared to 2007 was mainly associated to lower professional service fees. The
increase in direct operating expenses for 2007, compared to 2006 was mainly due to
increases in employees compensation and benefits. |
80
FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Financial Condition
The following table presents an average balance sheet of the Corporation for the following
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market & other short-term investments |
|
$ |
286,502 |
|
|
$ |
440,598 |
|
|
$ |
1,444,533 |
|
Government obligations |
|
|
1,402,738 |
|
|
|
2,687,013 |
|
|
|
2,827,196 |
|
Mortgage-backed securities |
|
|
3,924,990 |
|
|
|
2,296,855 |
|
|
|
2,540,394 |
|
Corporate bonds |
|
|
6,144 |
|
|
|
7,711 |
|
|
|
8,347 |
|
FHLB stock |
|
|
65,081 |
|
|
|
46,291 |
|
|
|
26,914 |
|
Equity securities |
|
|
3,762 |
|
|
|
8,133 |
|
|
|
27,155 |
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
5,689,217 |
|
|
|
5,486,601 |
|
|
|
6,874,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
3,351,236 |
|
|
|
2,914,626 |
|
|
|
2,606,664 |
|
Construction loans |
|
|
1,485,126 |
|
|
|
1,467,621 |
|
|
|
1,462,239 |
|
Commercial loans |
|
|
5,473,716 |
|
|
|
4,797,440 |
|
|
|
5,593,018 |
|
Finance leases |
|
|
373,999 |
|
|
|
379,510 |
|
|
|
322,431 |
|
Consumer loans |
|
|
1,709,512 |
|
|
|
1,729,548 |
|
|
|
1,783,384 |
|
|
|
|
|
|
|
|
|
|
|
Total loans(1) |
|
|
12,393,589 |
|
|
|
11,288,745 |
|
|
|
11,767,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
18,082,806 |
|
|
|
16,775,346 |
|
|
|
18,642,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest-earning assets(2) |
|
|
425,150 |
|
|
|
438,861 |
|
|
|
540,636 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
18,507,956 |
|
|
$ |
17,214,207 |
|
|
$ |
19,182,911 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts |
|
$ |
580,572 |
|
|
$ |
443,420 |
|
|
$ |
371,422 |
|
Savings accounts |
|
|
1,217,730 |
|
|
|
1,020,399 |
|
|
|
1,022,686 |
|
Certificate of deposit |
|
|
9,484,051 |
|
|
|
9,291,900 |
|
|
|
10,479,500 |
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
11,282,353 |
|
|
|
10,755,719 |
|
|
|
11,873,608 |
|
Loans
payable(3) |
|
|
10,792 |
|
|
|
|
|
|
|
|
|
Other borrowed funds |
|
|
3,864,189 |
|
|
|
3,449,492 |
|
|
|
4,543,262 |
|
FHLB advances |
|
|
1,120,782 |
|
|
|
723,596 |
|
|
|
273,395 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
16,278,116 |
|
|
|
14,928,807 |
|
|
|
16,690,265 |
|
Total
non-interest-bearing liabilities(4) |
|
|
796,476 |
|
|
|
959,361 |
|
|
|
1,294,563 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
17,074,592 |
|
|
|
15,888,168 |
|
|
|
17,984,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
550,100 |
|
|
|
550,100 |
|
|
|
550,100 |
|
Common stockholders equity |
|
|
883,264 |
|
|
|
775,939 |
|
|
|
647,983 |
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,433,364 |
|
|
|
1,326,039 |
|
|
|
1,198,083 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
18,507,956 |
|
|
$ |
17,214,207 |
|
|
$ |
19,182,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the average balance of non-accruing loans. |
|
(2) |
|
Includes the allowance for loan and lease losses and the valuation on investment
securities available-for-sale. |
|
(3) |
|
Consists of short-term borrowings under the FED Discount Window Program. |
|
(4) |
|
Includes changes in fair value on liabilities elected to be measured at fair value under
SFAS 159. |
81
The Corporations total average assets were $18.5 billion and $17.2 billion as of December 31,
2008 and 2007, respectively; an increase for 2008 of $1.3 billion or 8% as compared to 2007. The
increase in average assets was due to : (i) an increase of $1.1 billion in average loans driven by
new originations, in particular commercial and residential mortgage loans, and (ii) an increase of
$202.6 million in investment securities mainly due to the purchase of approximately $3.2 billion in
MBS during 2008, partially offset by $1.2 billion U.S. agency debentures called during the year.
The decrease in average assets for 2007, as compared to 2006, was due to deleveraging of the
balance sheet. In particular, the Corporation made use of short-term money market investments to
pay down brokered certificates deposits and repurchase agreements as they matured and sold lower
yielding U.S. Treasury and mortgage-backed securities. The average balance of the commercial loan
portfolio decreased by $795.6 million due to the repayment of $2.4 billion received from a local
financial institution in May 2006 and the partial extinguishment of $50 million and the
recharacterization of approximately $183.8 million of secured commercial loans extended to R&G
Financial in February 2007.
The Corporations total average liabilities were $17.1 billion and $15.9 billion as of
December 31, 2008 and 2007, respectively, an increase of $1.2 billion or 7% as compared to 2007.
The Corporation has diversified its sources of borrowings including:
(i) an increase of $526.6
million in average deposits, reflecting increases in brokered CDs used to finance lending
activities and to increase liquidity levels as a precautionary measure given the current economic
climate, and increases in deposits from individual, commercial and government sectors, (ii) an
increase of $414.7 million in alternative sources such as repurchase agreements that financed the
increase in investment securities, and (iii) a combined increase of approximately $408.0 million in
advances from FHLB and short-term borrowings from the FED through the Discount Window Program as
the Corporation has taken direct actions to enhance its liquidity position due to the financial
market disruptions and increased its borrowing capacity with the FHLB and the FED, which funds are
also used to finance the Corporations lending activities. The decrease in average liabilities for
2007, as compared to 2006, was driven by a lower average balance of brokered CDs and repurchase
agreements due to the deleveraging of the Corporations balance sheet. In addition, the redemption
of the Corporations $150 million medium-term notes during the second quarter of 2007, which
carried a cost higher than the overall cost of funding, contributed to the decrease in average
liabilities in 2007. These reductions were partially offset by a higher average volume of advances
from FHLB.
Assets
Total assets as of December 31, 2008 amounted to $19.5 billion, an increase of $2.3 billion
compared to total assets as of December 31, 2007. The Corporations loan portfolio increased by
$1.3 billion (before the allowance for loan and lease losses), driven by new originations, mainly
commercial and residential mortgage loans 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 fixed-rate U.S. government agency MBS during the first
half of 2008 as market conditions presented an opportunity to obtain attractive yields, improve its
net interest margin and replace $1.2 billion of U.S. Agency debentures called by
counterparties. The Corporation increased its cash and money market investments by $26.8 million in
part as a precautionary measure during the present economic climate.
82
Loans Receivable
The following table presents the composition of the loan portfolio including loans held for
sale as of year-end for each of the last five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Residential real estate
loans, including loans
held for sale |
|
$ |
3,491,728 |
|
|
$ |
3,164,421 |
|
|
$ |
2,772,630 |
|
|
$ |
2,346,945 |
|
|
$ |
1,322,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real
estate loans |
|
|
1,535,758 |
|
|
|
1,279,251 |
|
|
|
1,215,040 |
|
|
|
1,090,193 |
|
|
|
690,900 |
|
Construction loans |
|
|
1,526,995 |
|
|
|
1,454,644 |
|
|
|
1,511,608 |
|
|
|
1,137,118 |
|
|
|
398,453 |
|
Commercial loans |
|
|
3,857,728 |
|
|
|
3,231,126 |
|
|
|
2,698,141 |
|
|
|
2,421,219 |
|
|
|
1,871,851 |
|
Loans to local
financial
institutions
collateralized
by real estate
mortgages
and pass-through
trust
certificates |
|
|
567,720 |
|
|
|
624,597 |
|
|
|
932,013 |
|
|
|
3,676,314 |
|
|
|
3,841,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
7,488,201 |
|
|
|
6,589,618 |
|
|
|
6,356,802 |
|
|
|
8,324,844 |
|
|
|
6,803,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
363,883 |
|
|
|
378,556 |
|
|
|
361,631 |
|
|
|
280,571 |
|
|
|
212,234 |
|
|
|
Consumer loans |
|
|
1,744,480 |
|
|
|
1,667,151 |
|
|
|
1,772,917 |
|
|
|
1,733,569 |
|
|
|
1,359,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross |
|
|
13,088,292 |
|
|
|
11,799,746 |
|
|
|
11,263,980 |
|
|
|
12,685,929 |
|
|
|
9,697,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and
lease losses |
|
|
(281,526 |
) |
|
|
(190,168 |
) |
|
|
(158,296 |
) |
|
|
(147,999 |
) |
|
|
(141,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
12,806,766 |
|
|
$ |
11,609,578 |
|
|
$ |
11,105,684 |
|
|
$ |
12,537,930 |
|
|
$ |
9,556,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending Activities
Gross total loans increased by $1.3 billion in 2008, or 11%, when compared to 2007 primarily
due to an increase in the Corporations commercial and residential mortgage loan portfolios driven
by new originations. As shown in the table above, the 2008 loan portfolio was comprised of
commercial (57%), residential real estate (27%), and consumer and finance leases (16%). Of the
total gross loans of $13.1 billion for 2008, approximately 81% have credit risk concentration in
Puerto Rico, 11% in the United States and 8% in the Virgin Islands, as shown in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto |
|
|
Virgin |
|
|
United |
|
|
|
|
As of December 31, 2008 |
|
Rico |
|
|
Islands |
|
|
States |
|
|
Total |
|
|
|
(In thousands) |
|
Residential real estate loans, including
loans held for sale |
|
$ |
2,637,210 |
|
|
$ |
447,216 |
|
|
$ |
407,302 |
|
|
$ |
3,491,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans |
|
|
977,700 |
|
|
|
78,511 |
|
|
|
479,547 |
|
|
|
1,535,758 |
|
Construction loans (1) |
|
|
834,817 |
|
|
|
175,405 |
|
|
|
516,773 |
|
|
|
1,526,995 |
|
Commercial loans |
|
|
3,648,823 |
|
|
|
172,356 |
|
|
|
36,549 |
|
|
|
3,857,728 |
|
Loans to local financial institutions
collateralized by real estate
mortgages |
|
|
567,720 |
|
|
|
|
|
|
|
|
|
|
|
567,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
6,029,060 |
|
|
|
426,272 |
|
|
|
1,032,869 |
|
|
|
7,488,201 |
|
Finance leases |
|
|
363,883 |
|
|
|
|
|
|
|
|
|
|
|
363,883 |
|
Consumer loans |
|
|
1,571,335 |
|
|
|
129,305 |
|
|
|
43,840 |
|
|
|
1,744,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross |
|
$ |
10,601,488 |
|
|
$ |
1,002,793 |
|
|
$ |
1,484,011 |
|
|
$ |
13,088,292 |
|
Allowance for loan and lease losses |
|
|
(203,233 |
) |
|
|
(9,712 |
) |
|
|
(68,581 |
) |
|
|
(281,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,398,255 |
|
|
$ |
993,081 |
|
|
$ |
1,415,430 |
|
|
$ |
12,806,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Construction loan portfolio in the United States includes approximately $197.4
million of loans originally disbursed as condo-conversion loans, of which $154.4
million is considered impaired as of December 31, 2008 with a specific reserve of $36.0
million. |
83
First BanCorp relies primarily on its retail network of branches to originate residential and
consumer loans. The Corporation supplements its residential mortgage originations with wholesale
servicing released purchases from small mortgage bankers. For purposes of the following presentation,
the Corporation presented separately commercial loans to local financial institutions because it
believes this approach provides a better representation of the Corporations commercial production
capacity.
The following table sets forth certain additional data (including loan production) related to
the Corporations loan portfolio net of the allowance for loan and lease losses for the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
11,609,578 |
|
|
$ |
11,105,684 |
|
|
$ |
12,537,930 |
|
|
$ |
9,556,958 |
|
|
$ |
6,914,677 |
|
Residential real estate
loans originated and
purchased |
|
|
690,365 |
|
|
|
715,203 |
|
|
|
908,846 |
|
|
|
1,372,490 |
|
|
|
765,486 |
|
Construction loans
originated and purchased |
|
|
475,834 |
|
|
|
678,004 |
|
|
|
961,746 |
|
|
|
1,061,773 |
|
|
|
309,053 |
|
Commercial loans
originated and purchased |
|
|
2,175,395 |
|
|
|
1,898,157 |
|
|
|
2,031,629 |
|
|
|
2,258,558 |
|
|
|
1,014,946 |
|
Secured commercial loans
disbursed to local
financial institutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681,407 |
|
|
|
2,228,056 |
|
Finance leases originated |
|
|
110,596 |
|
|
|
139,599 |
|
|
|
177,390 |
|
|
|
145,808 |
|
|
|
116,200 |
|
Consumer loans
originated and purchased |
|
|
788,215 |
|
|
|
653,180 |
|
|
|
807,979 |
|
|
|
992,942 |
|
|
|
746,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans originated
and purchased |
|
|
4,240,405 |
|
|
|
4,084,143 |
|
|
|
4,887,590 |
|
|
|
6,512,978 |
|
|
|
5,179,854 |
|
Sales and
securitizations of loans |
|
|
(164,583 |
) |
|
|
(147,044 |
) |
|
|
(167,381 |
) |
|
|
(118,527 |
) |
|
|
(180,818 |
) |
Repayments and
prepayments |
|
|
(2,589,120 |
) |
|
|
(3,084,530 |
) |
|
|
(6,022,633 |
) |
|
|
(3,803,804 |
) |
|
|
(2,263,043 |
) |
Other (decreases)
increases(1)
(2) |
|
|
(289,514 |
) |
|
|
(348,675 |
) |
|
|
(129,822 |
) |
|
|
390,325 |
|
|
|
(93,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) |
|
|
1,197,188 |
|
|
|
503,894 |
|
|
|
(1,432,246 |
) |
|
|
2,980,972 |
|
|
|
2,642,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
12,806,766 |
|
|
$ |
11,609,578 |
|
|
$ |
11,105,684 |
|
|
$ |
12,537,930 |
|
|
$ |
9,556,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase
(decrease) |
|
|
10.31 |
% |
|
|
4.54 |
% |
|
|
(11.42 |
)% |
|
|
31.19 |
% |
|
|
38.21 |
% |
|
|
|
(1) |
|
Includes the change in the allowance for loan and lease losses and cancellation of loans due
to the repossession of the collateral. |
|
(2) |
|
For 2008, is net of $19.6 million of loans from the acquisition of VICB in 2008. For 2007,
includes the recharacterization of securities collateralized by loans of approximately $183.8
million previously accounted for as a secured commercial loan with R&G Financial. For 2005,
includes $470 million of loans acquired as part of the Ponce General acquisition. |
Residential Real Estate Loans
Residential real estate loan production and purchases for the year ended December 31, 2008
decreased by $24.8 million, compared to the same period in 2007 and decreased by $193.6 million for
2007, compared to the same period in 2006. The slight decrease reflects a lower volume of loans
purchased during 2008. Residential mortgage loan purchases during 2008 amounted to $211.8 million,
a decrease of approximately $58.7 million from 2007. This is due to the impact in 2007 of a
purchase of $72.2 million (mainly FHA loans) from a local financial institution not as part of the
ongoing Corporations Partners in Business Program discussed below. Meanwhile, internal
residential mortgage loan originations increased by $33.9 million for 2008, as compared to 2007,
favorably affected by 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 credits were 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
84
consecutive years. Noncompliance with this requirement will affect only the homebuyers credit and
not the tax credit granted to the financial institution.
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 $90.0
million for 2008.
Residential real estate loans represent 16% of total loans originated and purchased for 2008,
with the residential mortgage loans balance increasing by $327.3 million, from $3.2 billion in 2007
to $3.5 billion in 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.
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. FirstMortgages multi-channel strategy has proven to be effective in
capturing business.
The decrease in mortgage loan production for 2007, as compared to 2006, was attributable to
deteriorating economic conditions in Puerto Rico, the slowdown in the United States housing market
and stricter underwriting standards. The Corporation decided to make certain adjustments to its
underwriting standards designed to enhance the credit quality of its mortgage loan portfolio, in
light of worsening macroeconomic conditions in Puerto Rico.
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 global financial crisis. 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
In recent years, the Corporation has emphasized commercial lending activities and continues to
penetrate this market. A substantial portion of this portfolio is collateralized by real estate.
Total commercial loans originated amounted to $2.7 billion for 2008, an increase of $75.1 million
when compared to originations during 2007, for total commercial loan portfolio of $7.5 billion at
December 31, 2008. As a result of new originations net of prepayments and maturities, the
commercial loans balance, excluding secured commercial loans to local financial institutions,
increased by $0.9 billion, from $6.0 billion as of December 31, 2007 to $6.9 billion as of December
31, 2008.
The increase in commercial and construction loan production for 2008, compared to 2007, was
mainly experienced in Puerto Rico. Commercial loan originations in Puerto Rico increased by
approximately $269.8 million for 2008. Commercial originations include floor plan lending
activities which depends on inventory levels (autos) financed and their turnover. Floor plan
originations amounted to approximately $729.5 million for the 2008 year, compared to $729.3 million
for 2007. The increase in commercial loan originations in Puerto Rico was partially offset by
lower construction loan originations in the United States, which decreased by $144.7 million for
2008, as compared to 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 in its Miami Corporate Banking
operations. Also, there was a decrease in construction loan originations in Puerto Rico due to
current weakening economic conditions.
Although commercial loans involve greater credit risk because they are larger in size and more
risk is concentrated in a single borrower, the Corporation has and continues to develop an
effective credit risk management infrastructure that mitigates potential losses associated with
commercial lending, including strong underwriting and loan review functions, sales of loan
participations, and continuous monitoring of concentrations within portfolios.
85
The Corporations commercial loans are primarily variable and adjustable rate loans.
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 of up to $5 million. The Corporation has 5 regional offices that provide
coverage throughout Puerto Rico. The offices are staffed with sales, marketing and credit officers
able to provide a high level of personalized service and prompt decision-making.
The Corporations largest concentration as of December 31, 2008 in the amount of $348.8
million is with one mortgage originator in Puerto Rico, Doral. Together with the Corporations
next largest loan concentration of $218.9 million with another mortgage originator in Puerto Rico,
R&G Financial, the Corporations total loans granted to these mortgage originators amounted to
$567.7 million as of December 31, 2008. These commercial loans are secured by individual mortgage
loans on residential and commercial real estate. In December 2005, the Corporation obtained a
waiver from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto
Rico with respect to the statutory limit for individual borrowers
(loan-to-one borrower limit).
However, as of December 31, 2008, the outstanding balance of the R&G Financial relationship was
under the loan-to-one borrower limit for secured loans of approximately $331 million.
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
December 31, 2008, approximately $47.8 million of loans originally disbursed as condo-conversion
construction loans have been reverted to income-producing commercial 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.
86
The composition of the Corporations construction loan portfolio as of December 31, 2008 by
category and geographic location follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto |
|
|
Virgin |
|
|
United |
|
|
|
|
As of December 31, 2008 |
|
Rico |
|
|
Islands |
|
|
States |
|
|
Total |
|
|
|
(In thousands) |
|
Loans for residential housing projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-rise(1) |
|
$ |
183,910 |
|
|
$ |
|
|
|
$ |
559 |
|
|
$ |
184,469 |
|
Mid-rise(2) |
|
|
108,143 |
|
|
|
5,977 |
|
|
|
56,235 |
|
|
|
170,355 |
|
Single-family detach |
|
|
108,294 |
|
|
|
2,675 |
|
|
|
40,844 |
|
|
|
151,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for residential housing projects |
|
|
400,347 |
|
|
|
8,652 |
|
|
|
97,638 |
|
|
|
506,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans to individuals secured by
residential properties |
|
|
15,442 |
|
|
|
37,729 |
|
|
|
|
|
|
|
53,171 |
|
Condo-conversion loans(3) |
|
|
|
|
|
|
|
|
|
|
197,384 |
|
|
|
197,384 |
|
Loans for commercial projects |
|
|
215,456 |
|
|
|
92,032 |
|
|
|
18,806 |
|
|
|
326,294 |
|
Bridge and Land loans |
|
|
176,088 |
|
|
|
37,846 |
|
|
|
203,162 |
|
|
|
417,096 |
|
Working capital |
|
|
31,213 |
|
|
|
|
|
|
|
|
|
|
|
31,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before net deferred fees and
allowance for loan losses |
|
|
838,546 |
|
|
|
176,259 |
|
|
|
516,990 |
|
|
|
1,531,795 |
|
Net deferred fees |
|
|
(3,729 |
) |
|
|
(854 |
) |
|
|
(217 |
) |
|
|
(4,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction loan portfolio, gross |
|
|
834,817 |
|
|
|
175,405 |
|
|
|
516,773 |
|
|
|
1,526,995 |
|
Allowance for loan losses |
|
|
(28,310 |
) |
|
|
(1,494 |
) |
|
|
(53,678 |
) |
|
|
(83,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction loan portfolio, net |
|
$ |
806,507 |
|
|
$ |
173,911 |
|
|
$ |
463,095 |
|
|
$ |
1,443,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 74% 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 2008, approximately $47.8 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 year ended December 31, 2008:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Total undisbursed funds under existing commitments |
|
$ |
514,018 |
|
|
|
|
|
|
|
Construction loans in non-accrual status |
|
$ |
116,290 |
|
|
|
|
|
|
|
Net charge offs Construction loans (1) |
|
$ |
7,735 |
|
|
|
|
|
|
|
Allowance for loan losses Construction loans |
|
$ |
83,482 |
|
|
|
|
|
|
|
Non-performing construction loans to total construction loans |
|
|
7.62 |
% |
|
|
|
|
|
|
Allowance for loan losses construction loans to total construction loans |
|
|
5.47 |
% |
|
|
|
|
|
|
Net charge-offs to total average construction loans (1) |
|
|
0.52 |
% |
|
|
|
|
|
|
|
(1) |
|
Includes charge-offs of $6.2 million related to the repossession and sale of impaired loans in
the Miami Corporate Banking operations. |
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 |
|
$ |
88,404 |
|
$300K-$600K |
|
|
171,118 |
|
Over $600K |
|
|
140,825 |
|
|
|
|
|
|
|
$ |
400,347 |
|
|
|
|
|
Consumer Loans
Consumer loan originations are principally driven through the Corporations retail network.
For the year ended December 31, 2008, consumer loan originations amounted to $788.2 million, an
increase of $135.0 million or 21% compared to 2007. The increase in consumer loan originations 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 by approximately $83 million, or 13%, for 2008 as compared to
87
2007 mainly due to adverse economic conditions in Puerto Rico. Unemployment in Puerto Rico reached
13.1% in December 2008, up 2.6% from prior year. Consumer loan originations are driven by auto
loan originations through a strategy of providing outstanding service to selected auto dealers who
provide the channel for the bulk of the Corporations auto loan originations. This strategy is
directly linked to our commercial lending activities as the Corporation maintains strong and stable
auto floor plan relationships, which are the foundation of a successful auto loan generation
operation. The Corporation commercial relations with floor plan dealers is strong and directly
benefits the Corporations consumer lending operation.
Finance Leases
Originations of finance leases, which are mostly composed of loans to individuals to finance
the acquisition of a motor vehicle, decreased by $29.0 million or 21% to $110.6 million during 2008
compared to 2007, also affected by adverse economic conditions in Puerto Rico. These leases
typically have five-year terms and are collateralized by a security interest in the underlying
assets.
Investment Activities
The Corporations investment portfolio as of December 31, 2008 amounted to $5.7 billion, an
increase of $897.7 million when compared with the investment portfolio of $4.8 billion as of
December 31, 2007. The increase in investment securities resulted mainly from 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 $526
million of MBS in 2008 given a surge in prices, in particular after the announcement of the FED
that it will invest up to $600 billion in obligations from U.S. government-sponsored agencies,
including $500 billion in MBS backed by FNMA, FHLMC and GNMA.
Total purchases of investment securities, excluding those invested on a short-term basis
(money market investments) during 2008 amounted to approximately $3.4 billion and were composed
mainly of mortgage-backed securities in the amount of $3.2 billion with a weighted-average coupon
of 5.44%, U.S. Treasury bills with original maturities over 3 months in the amount of $161.1
million with a weighted-average coupon of 1.09% ($152.7 million already expired as of December 31,
2008) and obligations from the Puerto Rico government of approximately $114.3 million with a
weighted-average coupon of 5.47%.
Over 90% of the Corporations securities portfolio is invested in U.S. Government and Agency
debentures and fixed-rate U.S. government sponsored-agency MBS (mainly FNMA and FHLMC fixed-rate
securities). As of December 31, 2008, the Corporation had $4.0 billion and $925 million in FNMA and
FHLMC mortgage-backed securities and debt securities, respectively, representing 87% of the total
investment portfolio. The Corporations investment in equity securities is minimal, and it does not
own any equity or debt securities of U.S. financial institutions that recently failed.
88
The following table presents the carrying value of investments as of December 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
(In thousands) |
|
(In thousands) |
|
Money market investments |
|
$ |
76,003 |
|
|
$ |
183,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity: |
|
|
|
|
|
|
|
|
U.S. Government and agencies obligations |
|
|
953,516 |
|
|
|
2,365,147 |
|
Puerto Rico Government obligations |
|
|
23,069 |
|
|
|
31,222 |
|
Mortgage-backed securities |
|
|
728,079 |
|
|
|
878,714 |
|
Corporate bonds |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
1,706,664 |
|
|
|
3,277,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
U.S. Government and agencies obligations |
|
|
|
|
|
|
16,032 |
|
Puerto Rico Government obligations |
|
|
137,133 |
|
|
|
24,521 |
|
Mortgage-backed securities |
|
|
3,722,992 |
|
|
|
1,239,169 |
|
Corporate bonds |
|
|
1,548 |
|
|
|
4,448 |
|
Equity securities |
|
|
669 |
|
|
|
2,116 |
|
|
|
|
|
|
|
|
|
|
|
3,862,342 |
|
|
|
1,286,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity
securities, including $62.6 million and $63.4 million of FHLB stock
as of December 31, 2008 and 2007, respectively |
|
|
64,145 |
|
|
|
64,908 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
5,709,154 |
|
|
$ |
4,811,413 |
|
|
|
|
|
|
|
|
Mortgage-backed securities as of December 31, 2008 and 2007, consist of:
|
|
|
|
|
|
|
|
|
(In
thousands) |
|
2008 |
|
|
2007 |
|
Held-to-maturity |
|
|
|
|
|
|
|
|
FHLMC certificates |
|
$ |
8,338 |
|
|
$ |
11,274 |
|
FNMA certificates |
|
|
719,741 |
|
|
|
867,440 |
|
|
|
|
|
|
|
|
|
|
|
728,079 |
|
|
|
878,714 |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
FHLMC certificates |
|
|
1,892,358 |
|
|
|
158,953 |
|
GNMA certificates |
|
|
342,674 |
|
|
|
44,340 |
|
FNMA certificates |
|
|
1,373,977 |
|
|
|
902,198 |
|
Mortgage pass-through certificates |
|
|
113,983 |
|
|
|
133,678 |
|
|
|
|
|
|
|
|
|
|
|
3,722,992 |
|
|
|
1,239,169 |
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
4,451,071 |
|
|
$ |
2,117,883 |
|
|
|
|
|
|
|
|
89
The carrying values of investment securities classified as available-for-sale and
held-to-maturity as of December 31, 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 |
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
8,455 |
|
|
|
1.07 |
|
Due after ten years |
|
|
945,061 |
|
|
|
5.77 |
|
|
|
|
|
|
|
|
|
|
|
953,516 |
|
|
|
5.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government obligations |
|
|
|
|
|
|
|
|
Due within one year |
|
|
4,639 |
|
|
|
6.18 |
|
Due after one year through five years |
|
|
110,404 |
|
|
|
5.41 |
|
Due after five years through ten years |
|
|
24,444 |
|
|
|
5.84 |
|
Due after ten years |
|
|
20,715 |
|
|
|
5.35 |
|
|
|
|
|
|
|
|
|
|
|
160,202 |
|
|
|
5.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
|
241 |
|
|
|
7.70 |
|
Due after ten years |
|
|
3,307 |
|
|
|
6.66 |
|
|
|
|
|
|
|
|
|
|
|
3,548 |
|
|
|
6.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,117,266 |
|
|
|
5.70 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
4,451,071 |
|
|
|
5.30 |
|
Equity securities |
|
|
669 |
|
|
|
2.38 |
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
and held-to-maturity |
|
$ |
5,569,006 |
|
|
|
5.38 |
|
|
|
|
|
|
|
|
Total proceeds from the sale of securities during the year ended December 31, 2008 amounted to
approximately $680.0 million (2007 $960.8 million). The Corporation realized gross gains of
approximately $17.9 million (2007 $5.1 million), and realized gross losses of approximately $0.2
million (2007 $1.9 million).
During the year ended December 31, 2008, the Corporation recorded other-than-temporary
impairments of approximately $6.0 million (2007 $5.9 million) on certain corporate bonds and
equity securities held in its available-for-sale portfolio. Of the $6.0 million
other-than-temporary impairments recorded in 2008 approximately $4.2 million is related to auto
industry corporate bonds held by FirstBank Florida. 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. The Corporations remaining exposure to auto industry corporate bonds as of
December 31, 2008 amounted to $1.5 million. The impairment losses in 2007 were related to equity
securities.
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 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 2008, which is significantly higher than the cost of borrowings used to finance the purchase of such assets. As of
December 31, 2008, the Corporation has 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 section 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
Corporations audited financial statements for the year ended December 31, 2008 included in Item 8
of this Form 10-K for additional information regarding the Corporations investment portfolio.
90
Investment Securities and Loans Receivable Maturities
The following table presents the maturities or repricing of the loan and investment portfolio
as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2-5 Years |
|
|
Over 5 Years |
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
One Year |
|
|
Interest |
|
|
Interest |
|
|
Interest |
|
|
Interest |
|
|
|
|
|
|
or Less |
|
|
Rates |
|
|
Rates |
|
|
Rates |
|
|
Rates |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Investments:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
76,003 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
76,003 |
|
Motgage-backed securities |
|
|
336,564 |
|
|
|
635,863 |
|
|
|
|
|
|
|
3,478,644 |
|
|
|
|
|
|
|
4,451,071 |
|
Other securities(2) |
|
|
77,623 |
|
|
|
110,623 |
|
|
|
|
|
|
|
993,834 |
|
|
|
|
|
|
|
1,182,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
490,190 |
|
|
|
746,486 |
|
|
|
|
|
|
|
4,472,478 |
|
|
|
|
|
|
|
5,709,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:(1)(2)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
635,283 |
|
|
|
374,381 |
|
|
|
|
|
|
|
2,482,064 |
|
|
|
|
|
|
|
3,491,728 |
|
Commercial and commercial real estate |
|
|
4,898,543 |
|
|
|
521,715 |
|
|
|
364,443 |
|
|
|
176,505 |
|
|
|
|
|
|
|
5,961,206 |
|
Construction |
|
|
1,481,557 |
|
|
|
23,218 |
|
|
|
|
|
|
|
22,220 |
|
|
|
|
|
|
|
1,526,995 |
|
Finance leases |
|
|
100,706 |
|
|
|
263,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363,883 |
|
Consumer |
|
|
612,766 |
|
|
|
1,113,256 |
|
|
|
|
|
|
|
18,458 |
|
|
|
|
|
|
|
1,744,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
7,728,855 |
|
|
|
2,295,747 |
|
|
|
364,443 |
|
|
|
2,699,247 |
|
|
|
|
|
|
|
13,088,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
$ |
8,219,045 |
|
|
$ |
3,042,233 |
|
|
$ |
364,443 |
|
|
$ |
7,171,725 |
|
|
$ |
|
|
|
$ |
18,797,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Scheduled repayments reported in the maturity category in which the payment is due and variable
rates according to repricing frequency. |
|
(2) |
|
Equity securities available-for-sale, other equity securities and loans having no stated
scheduled of repayment and
no stated maturity were included under the one year or less category. |
|
(3) |
|
Non-accruing loans were included under the one year or less category. |
RISK MANAGEMENT
General
Risks are inherent in virtually all aspects of the Corporations business activities and
operations. Consequently, effective risk management is fundamental to the success of the
Corporation. The primary goals of risk management are to ensure that the Corporations risk taking
activities are consistent with the Corporations objectives and risk tolerance and that there is an
appropriate balance between risk and reward in order to maximize stockholder value.
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.
Risk Definition
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from the possibility that the Corporation
will not have sufficient cash to meet the short-term liquidity demands such as from deposit
redemptions or loan commitments. Refer to Liquidity and Capital Adequacy section below for
further details.
Interest Rate Risk
91
Interest rate risk is the risk to earnings or capital arising from adverse movements in
interest rates, refer to Interest Rate Risk Management section below for further details.
Market Risk
Market risk is the risk to earnings or capital arising from adverse movements in market rates
or prices, such as interest rates or equity prices. The Corporation evaluates market risk together
with interest rate risk, refer to Interest Rate Risk Management section below for further
details.
Credit Risk
Credit risk is the risk to earnings or capital arising from a borrowers or a counterpartys
failure to meet the terms of a contract with the Corporation or otherwise to perform as agreed.
Refer to Credit Risk Management section below for further details.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events. This risk is inherent across all functions, products
and services of the Corporation. Refer to Operational Risk section below for further details.
Legal and Regulatory Risk
Legal and regulatory risk is the risk to earnings and capital arising from the Corporations
failure to comply with laws or regulations that can adversely affect the Corporations reputation
and/or increase its exposure to litigation.
Reputation Risk
Reputation risk is the risk to earnings and capital arising from any adverse impact on the
Corporations market value, capital or earnings of negative public opinion, whether true or not.
This risk affects the Corporations ability to establish new relationships or services, or to
continue servicing existing relationships.
Contingency Risk
Contingency risk is the risk to earnings and capital associated with the Corporations
preparedness for the occurrence of an unforeseen event.
Risk Governance
The following discussion highlights the roles and responsibilities of the key participants in
the Corporations risk management framework:
Board of Directors
The Board of Directors oversees the Corporations overall risk governance program with the
assistance of the Asset and Liability Committee, Credit Committee and the Audit Committee in
executing this responsibility.
Asset and Liability Committee
The Asset and Liability Committee of the Corporation is appointed by the Board of Directors to
assist the Board of Directors in its oversight of the Corporations policies and procedures related
to asset and liability management relating to funds management, investment management, liquidity,
interest rate risk management, capital adequacy and use of derivatives. In doing so, the
Committees primary general functions involve:
92
|
|
|
The establishment of a process to enable the recognition, assessment, and management of
risks that could affect the Corporations assets and liabilities management; |
|
|
|
|
The identification of the Corporations risk tolerance levels for yield maximization
relating to its assets and liabilities; |
|
|
|
|
The evaluation of the adequacy and effectiveness of the Corporations risk management
process relating to the Corporations assets and liabilities, including managements role
in that process; and |
|
|
|
|
The evaluation of the Corporations compliance with its risk management process
relating to the Corporations assets and liabilities. |
Credit Committee
The Credit Committee of the Board of Directors is appointed by the Board of Directors to
assist them in its oversight of the Corporations policies and procedures related to all matters of
the Corporations lending function. In doing so, the Committees primary general functions
involve:
|
|
|
The establishment of a process to enable the identification, assessment, and management
of risks that could affect the Corporations credit management; |
|
|
|
|
The identification of the Corporations risk tolerance levels related to its credit
management; |
|
|
|
|
The evaluation of the adequacy and effectiveness of the Corporations risk management
process related to the Corporations credit management, including managements role in
that process; |
|
|
|
|
The evaluation of the Corporations compliance with its risk management process related
to the Corporations credit management; and |
|
|
|
|
The approval of loans as required by the lending authorities approved by the Board of
Directors. |
Audit Committee
The Audit Committee of First BanCorp is appointed by the Board of Directors to assist the
Board of Directors in fulfilling its responsibility to oversee management regarding:
|
|
|
The conduct and integrity of the Corporations financial reporting to any governmental
or regulatory body, shareholders, other users of the Corporations financial reports and
the public; |
|
|
|
|
the Corporations systems of internal control over financial reporting and disclosure
controls and procedures; |
|
|
|
|
The qualifications, engagement, compensation, independence and performance of the
Corporations independent auditors, their conduct of the annual audit of the Corporations
financial statements, and their engagement to provide any other services; |
|
|
|
|
The Corporations legal and regulatory compliance; |
|
|
|
|
The application for the Corporations related person transaction policy as established
by the Board of Directors; |
|
|
|
|
The application of the Corporations code of business conduct and ethics as established
by management and the Board of Directors; and |
|
|
|
|
The preparation of the Audit Committee report required to be included in the
Corporations annual proxy statement by the rules of the Securities and Exchange
Commission. |
In performing this function, the Audit Committee is assisted by the Chief Risk Officer
(CRO) and the Risk Management Council (RMC), and other members of senior management.
93
Risk Management Council
The Risk Management Council is appointed by the Chief Executive Officer to assist the
Corporation in overseeing, and receiving information regarding the Corporations policies,
procedures and practices related to the Corporations risks. In doing so, the Councils primary
general functions involve:
|
|
|
The appointment of owners of the significant Corporations risks; |
|
|
|
|
The development of the risk management infrastructure needed to enable it to monitor
risk policies and limits established by the Board of Directors; |
|
|
|
|
The evaluation of the risk management process to identify any gap and the implementation
of any necessary control to close such gap; |
|
|
|
|
The establishment of a process to enable the recognition, assessment, and management of
risks that could affect the Corporation; and |
|
|
|
|
Ensure that the Board of Directors receives appropriate information about the
Corporations risks. |
Refer to Interest Rate Risk, Credit Risk, Liquidity, Operational, Legal and Regulatory Risk
Management -Operational Risk discussion below for further details of matters discussed in the Risk
Management Council.
Other Management Committees
As part of its governance framework, the Corporation has various risk management
related-committees. These committees are jointly responsible for ensuring adequate risk measurement
and management in their respective areas of authority. At the management level, these committees
include:
|
(1) |
|
Managements Investment and Asset Liability Committee (MIALCO) oversees interest
rate and market risk, liquidity management and other related matters. Refer to Liquidity
Risk and Capital Adequacy and Interest Rate Risk Management discussions below for further
details. |
|
|
(2) |
|
Information Technology Steering Committee is responsible for the oversight of and
counsel on matters related to information technology including the development of
information management policies and procedures throughout the Corporation. |
|
|
(3) |
|
Bank Secrecy Act Committee is responsible for oversight, monitoring and reporting of
the Corporations compliance with the Bank Secrecy Act. |
|
|
(4) |
|
Credit Committees (Delinquency and Credit Management Committee) oversee and
establish standards for credit risk management processes within the Corporation. The Credit
Management Committee is responsible for the approval of loans above an established size
threshold. The Delinquency Committee is responsible for the periodic review of (1) past due
loans, (2) overdrafts, (3) non-accrual loans, (4) other real estate owned (OREO) assets,
and (5) the banks watch list and non-performing loans. |
94
Officers
As part of its governance framework, the following officers play a key role in the
Corporations risk management process:
|
(1) |
|
Chief Executive Officer and Chief Operating Officer are responsible for the overall
risk governance structure of the Corporation. |
|
|
(2) |
|
Chief Risk Officer is responsible for the oversight of the risk management organization
as well as risk governance processes. In addition, the CRO with the collaboration of the
Risk Assessment Manager manages the operational risk program. |
|
|
(3) |
|
Chief Credit Risk Officer and the Chief Lending Officer are responsible of managing the
Corporations credit risk program. |
|
|
(4) |
|
Chief Financial Officer in combination with the Corporations Treasurer, manages the
Corporations interest rate and market and liquidity risks programs and in combination with
the Corporations Chief Accounting Officer is responsible for the implementation of
accounting policies and practices in accordance with GAAP and applicable regulatory
requirements. The Chief Financial Officer is assisted by the Risk Assessment Manager for
the review of the Corporations internal control over financial reporting. |
|
|
(5) |
|
Chief Accounting Officer is responsible for the development and implementation of the
Corporations accounting policies and practices and the review and monitoring of critical
accounts and transactions to ensure that they are managed in accordance with GAAP and
applicable regulatory requirements. |
Other Officers
In addition to a centralized Enterprise Risk Management function, certain lines of business
and corporate functions have their own Risk Managers and support staff. The Risk Managers, while
reporting directly within their respective line of business or function, facilitate communications
with the Corporations risk functions and work in partnership
with the CRO or CFO to ensure alignment with
sound risk management practices and expedite the implementation of the enterprise risk management
framework and policies.
Liquidity and Capital Adequacy, Interest Rate Risk, Credit Risk, Operational, Legal and Regulatory
Risk Management
The following discussion highlights First BanCorps adopted policies and procedures for
liquidity risk, interest rate risk, credit risk, operational risk, legal and regulatory risk.
Liquidity Risk 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 the Corporations 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 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
95
Banking
Executive, the Risk Manager of the Treasury and Investments Division,
the Asset/Liability
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 the 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 December 31, 2008, the basic surplus ratio of approximately 11.2% included
un-pledged assets, FHLB lines of credit, collateral pledged at the FED Discount Window Program, and
cash. Un-pledged assets as of December 31, 2008 are mainly composed of Puerto Rico Government and
U.S. Agency fixed-rate debentures and MBS totaling $925.5 million, 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 its 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 and has decided to continue its participation in the FDICs voluntary Temporary
Liquidity Guarantee Program. This program insures 100% of deposits that are held in non-interest
bearing deposit transaction accounts and guarantees newly issued senior unsecured debt of banks,
under certain conditions.
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
96
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 Term Auction Facility (TAF) to provide
short-term loans to banks and expanding the qualifying collateral it will lend against, to include
commercial paper. The FDIC also raised the cap on deposit insurance coverage from $100,000 to
$250,000 until December 31, 2009. These actions made the federal government a viable source of
funding in the current environment.
The Corporations principal sources of funding are:
Deposits
The following table presents the composition of total deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Rate as of |
|
|
As of December 31, |
|
|
|
December 31, 2008 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Savings accounts |
|
|
1.98 |
% |
|
$ |
1,288,179 |
|
|
$ |
1,036,662 |
|
|
$ |
984,332 |
|
Interest-bearing checking accounts |
|
|
2.09 |
% |
|
|
726,731 |
|
|
|
518,570 |
|
|
|
433,278 |
|
Certificates of deposits |
|
|
3.94 |
% |
|
|
10,416,592 |
|
|
|
8,857,405 |
|
|
|
8,795,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
3.63 |
% |
|
|
12,431,502 |
|
|
|
10,412,637 |
|
|
|
10,213,302 |
|
Non-interest-bearing deposits |
|
|
|
|
|
|
625,928 |
|
|
|
621,884 |
|
|
|
790,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
13,057,430 |
|
|
$ |
11,034,521 |
|
|
$ |
11,004,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding |
|
|
|
|
|
$ |
11,282,353 |
|
|
$ |
10,755,719 |
|
|
$ |
11,873,608 |
|
|
|
Non-interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding |
|
|
|
|
|
$ |
682,496 |
|
|
$ |
563,990 |
|
|
$ |
771,343 |
|
|
|
Weighted average rate during the
period on interest-bearing
deposits(1) |
|
|
|
|
|
|
3.75 |
% |
|
|
4.88 |
% |
|
|
4.63 |
% |
|
|
|
(1) |
|
Excludes changes in fair value of callable brokered CDs elected to be measured at fair value
under SFAS 159 and changes in
the fair value of derivatives that hedge (economically or under fair value hedge accounting)
brokered CDs
and the basis adjustment. |
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 as of December 31, 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 outstanding as of
December 31, 2008 is approximately 2.5 years. Approximately 24% 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
97
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 to $250,000. For the year ended December 31, 2008, the
Corporation issued $9.8 billion in brokered CDs (including rollover of short-term broker CDs
and replacement of brokered CDs called) compared to $4.3 billion for 2007.
The following table presents a maturity summary of CDs with denominations of $100,000 or
higher as of December 31, 2008.
|
|
|
|
|
|
|
(In thousands) |
|
Three months or less |
|
$ |
1,763,086 |
|
Over three months to six months |
|
|
1,065,688 |
|
Over six months to one year |
|
|
2,304,775 |
|
Over one year |
|
|
4,485,993 |
|
|
|
|
|
Total |
|
$ |
9,619,542 |
|
|
|
|
|
Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $8.4
billion issued to deposit brokers in the form of large ($100,000 or more) certificates of
deposit that are generally participated out by brokers in shares of less than $100,000,
therefore, insured by the FDIC.
Retail deposits The Corporations deposit products also include regular savings accounts,
demand deposit accounts, money market accounts and retail CDs. The Corporation experienced
increases in all sectors including individuals, business and government (mainly certificates
issued to agencies of the Government of Puerto Rico and to Government agencies in the Virgin
Islands) reflecting successful direct campaigns and cross-selling strategies. Refer to Note
12 in the Corporations audited financial statements for the year ended December 31, 2008
included in Item 8 of this Form 10-K for further details.
Borrowings
As of December 31, 2008, total borrowings amounted to $4.7 billion as compared to $4.5 billion
and $4.7 billion as of December 31, 2007 and 2006, respectively.
The following table presents the composition of total borrowings as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Rate as of |
|
|
As of December 31, |
|
|
|
December 31, 2008 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Federal funds
purchased and
securities sold
under agreements
to repurchase |
|
|
3.85 |
% |
|
$ |
3,421,042 |
|
|
$ |
3,094,646 |
|
|
$ |
3,687,724 |
|
Advances from FHLB |
|
|
3.09 |
% |
|
|
1,060,440 |
|
|
|
1,103,000 |
|
|
|
560,000 |
|
Notes payable |
|
|
5.08 |
% |
|
|
23,274 |
|
|
|
30,543 |
|
|
|
182,828 |
|
Other borrowings |
|
|
4.28 |
% |
|
|
231,914 |
|
|
|
231,817 |
|
|
|
231,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
|
|
|
|
$ |
4,736,670 |
|
|
$ |
4,460,006 |
|
|
$ |
4,662,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
rate during the
period |
|
|
|
|
|
|
3.78 |
% |
|
|
5.06 |
% |
|
|
4.99 |
% |
|
|
|
(1) |
|
Includes $1.6 billion as of December 31, 2008 which are tied to variable rates or matured
within a year. |
98
Securities sold under agreements to repurchase The growth of the Corporations investment
portfolio is substantially funded with repurchase agreements. Securities sold under repurchase
agreements were $3.4 billion at December 31, 2008, compared with $2.9 billion at December 31, 2007.
One of the Corporations strategies is the use of structured repurchase agreements and long-term
repurchase agreements to reduce exposure to interest rate risk by lengthening the final maturities
of its liabilities while keeping funding cost at reasonable levels. Of the total of $3.4 billion
repurchase agreements outstanding as of December 31, 2008, approximately $2.4 billion consist of
structured repos and $600 million of long-term repos. The access to this type of funding has been
affected by the current liquidity problems in the financial markets as certain counterparties are
not willing to enter into additional repurchase agreements and the capacity to extend the term of
maturing repurchase agreements has been reduced. Refer to Note 13 in the Corporations audited
financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K for
further details about repurchase agreements outstanding by counterparty and maturities.
Under the Corporations repurchase agreements, as is the case with derivative contracts, the
Corporation is required to deposit cash or qualifying securities to meet margin
requirements. To the extent that the value of securities previously pledged as collateral
declines because of changes in interest rates, a liquidity crisis or any other factor, the
Corporation will be required to deposit additional cash or securities to meet its margin
requirements, thereby adversely affecting its liquidity. Given the quality of the collateral
pledged, the Corporation did not experience significant margin calls from counterparties
recently arising from writedowns in valuations.
Advances from the FHLB The Corporations Bank subsidiary is a member of the FHLB system
and obtains advances to fund its operations under a collateral agreement with the FHLB that
requires the Bank to maintain minimum qualifying mortgages as collateral for advances taken.
As of December 31, 2008 and 2007, the outstanding balance of FHLB advances was $1.1
billion. Approximately $678.4 million of outstanding advances from the FHLB matured over
one year. As part of its precautionary initiatives to safeguard access to credit, the
Corporation increased its capacity under FHLB credit facilities by posting additional
collateral and, as of December 31, 2008, it had $729 million available for additional
borrowings.
FED Discount window FED initiatives to ease the credit crisis have included cuts to the
discount rate, which was lowered from 4.75% to 0.50% through eight separate actions since
December 2007, and adjustments to previous practices to facilitate financing for longer
periods. This makes the FED Discount Window a viable source of funding given current market
conditions. The Corporation has pledged U.S. government agency fixed-rate MBS on this
short-term borrowing channel and recently has increased its capacity by posting additional
collateral with the FED. The Corporation had $479 million available for use through the FED
Discount Window Program and no amount outstanding as of
December 31, 2008. Furthermore, FirstBank requested approval
and began procedures for compliance with requirements for
participation in the Borrower-in-Custody Program (BIC).
Through the BIC program a broad range of loans (including commercial,
consumer and mortgages) may be pledged and borrowed against it
through the Discount Window. In January 2009, the Bank received
approval for participation in the program and began utilizing it as
an additional source of funding. Over $2.0 billion of loans are
in the process of selection and eligibility qualification for
pledging under the program.
Credit Lines The Corporation maintains unsecured and un-committed lines of credit with
other banks. As of December 31, 2008, the Corporations total unused lines of credit with
other banks amounted to $220 million. The Corporation has not used these lines of credit.
Though currently not in use, other sources of short-term funding for the Corporation include
commercial paper and federal funds purchased. Furthermore, the Corporation has entered in previous
years into several financing transactions to diversify its funding sources, including the issuance
of notes payable and Junior subordinated debentures as part of its longer-term liquidity and
capital management activities. Among its funding sources are notes payable with a carrying value
of $23.3 million as of December 31, 2008.
In 2004, FBP Statutory Trust I, a statutory trust that is wholly owned by the Corporation and
not consolidated in the Corporations financial statements, sold to institutional investors $100
million of its variable rate trust preferred securities. The proceeds of the issuance, together
with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I
variable rate common securities, were used by FBP Statutory Trust I to purchase $103.1 million
aggregate principal amount of the Corporations Junior Subordinated Deferrable Debentures.
Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the
Corporation and not consolidated in the Corporations financial statements, sold to institutional
investors $125 million of its variable rate trust preferred securities. The proceeds of the
issuance, together with the proceeds of the purchase by the
99
Corporation of $3.9 million of FBP
Statutory Trust II variable rate common securities, were used by FBP Statutory
Trust II to purchase $128.9 million aggregate principal amount of the Corporations Junior
Subordinated Deferrable Debentures.
The trust preferred debentures are presented in the Corporations Consolidated Statement of
Financial Condition as Other Borrowings, net of related issuance costs. The variable rate trust
preferred securities are fully and unconditionally guaranteed by the Corporation. The $100 million
Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and the $125
million issued in September 2004 mature on September 17, 2034 and September 20, 2034, respectively;
however, under certain circumstances, the maturity of Junior Subordinated Debentures may be
shortened (which shortening would result in a mandatory redemption of the variable rate trust
preferred securities). The trust preferred securities, subject to certain limitations, qualify as
Tier I regulatory capital under current Federal Reserve rules and regulations.
The Corporation continues to evaluate its financing options, including available options
resulting from recent federal government initiatives to deal with the crisis in the financial
markets.
The Corporations principal uses of funds are the origination of loans and the repayment of
maturing brokered CDs and borrowings. Over the last four years, the Corporation has committed
substantial resources to its mortgage banking subsidiary, FirstMortgage Inc. As a result,
residential real estate loans as a percentage of total loans receivable have increased over time
from 14% at December 31, 2004 to 27% at December 31, 2008. Commensurate with the increase in its
mortgage banking activities, the Corporation has also invested in technology and personnel to
enhance the Corporations secondary mortgage market capabilities. The enhanced capabilities improve
the Corporations liquidity profile as it allows the Corporation to derive liquidity, if needed,
from the sale of mortgage loans in the secondary market. Recent disruptions in the credit markets
and a reduced investors demand for mortgage debt have adversely affected the liquidity of the
secondary mortgage markets. The U.S. (including Puerto Rico) secondary mortgage market is still
highly liquid in large part because of the sale or guarantee programs of the FHA, VA, HUD, FNMA and
FHLMC. 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. In December 2008, the Corporation obtained from GNMA, Commitment Authority to
issue GNMA mortgage-backed securities for approximately $50.5 million. Under this program the
Corporation will begin securitizing and selling FHA/VA mortgage loan production into the secondary
markets.
Credit Ratings
FirstBanks long-term senior debt rating is currently rated Ba1 by Moodys Investor Service
(Moodys) and BB+ by Standard & Poors (S&P), one notch under their definition of investment
grade. Fitch Ratings Ltd. (Fitch) has rated the Corporations long-term senior debt a rating of
BB, which is two notches under investment grade. However, the credit ratings outlook for Moodys
and S&P are stable while Fitchs is negative. The Corporation does not have any outstanding debt or
derivative agreements that would be affected by a credit downgrade. The Corporations liquidity is
contingent upon its ability to obtain external sources of funding to finance its operations. Any
future downgrades in credit ratings can hinder the Corporations access to external funding and/or
cause external funding to be more expensive, which could in turn adversely affect the results of
operations. Also, any change in credit ratings may affect the fair value of certain liabilities and
unsecured derivatives which consider the Corporations own credit risk as part of the valuation.
100
Cash Flows
Cash and cash equivalents was $405.7 million and $378.9 million as of December 31, 2008 and
2007, respectively. These balances increased by $66.2 million and decreased by $189.9 million from
December 31, 2007 and 2006, respectively. The following discussion highlights the major activities
and transactions that affected the Corporations cash flows during 2008 and 2007.
Cash Flows from Operating Activities
First BanCorps operating assets and liabilities vary significantly in the normal course of
business due to the amount and timing of cash flows. Management believes cash flows from
operations, available cash balances and the Corporations ability to generate cash through short-
and long-term borrowings will be sufficient to fund the Corporations operating liquidity needs.
For
the year ended December 31, 2008, net cash provided by operating activities was $175.9
million. Net cash generated from operating activities was higher than net income largely as a
result of adjustments for operating items such as the provision for loan and lease losses and
depreciation and amortization.
For the year ended December 31, 2007, net cash provided by operating activities was $60.3
million, which was lower than net income as a result of: (i) the monetary payment of $74.25 million
during the third quarter of 2007 for the settlement of the class action brought against the
Corporation relating to the accounting for mortgage-related transactions that led to the
restatement of financial statements for years 2000 through 2004, and (ii) non-cash adjustments,
including the accretion and discount amortizations associated to the Corporations investment
portfolio.
Cash Flows from Investing Activities
The Corporations investing activities primarily include originating loans to be held to
maturity and its available-for-sale and held-to-maturity investment portfolios. For the year ended
December 31, 2008, net cash of $2.3 billion was used in investing activities, primarily for
purchases of available-for-sale investment securities as market conditions presented an opportunity
for the Corporation to obtain attractive yields, improve its net interest margin and mitigate the
impact of investments securities, mainly U.S. Agency debentures, called by counterparties prior to
maturity, for loan originations disbursements and for the purchase of a $218 million auto loan
portfolio. Partially offsetting these uses of cash were proceeds from sales and maturities of
available-for-sale securities as well as proceeds from held-to-maturity securities called during
2008; proceeds from sales of loans and the gain on the mandatory redemption of part of the
Corporations investment in VISA, Inc., which completed its initial public offering (IPO) in March
2008.
For the year ended December 31, 2007, net cash used by investing activities was $136.6
million, also due to loan origination disbursements and purchases of mortgage loans as well as
purchases of investment securities.
Cash Flows from Financing Activities
The Corporations financing activities primarily include the receipt of deposits and issuance
of brokered CDs, the issuance and payments of long-term debt, the issuance of equity instruments
and activities related to its short-term funding. In addition, the Corporation pays monthly
dividends on its preferred stock and quarterly dividends on its common stock. In 2008, net cash
provided by financing activities was $2.1 billion due to increases in its deposit base, including
brokered CDs to finance lending activities and increase liquidity levels and increases in
securities sold under repurchase agreements to finance the Corporations securities inventory.
Partially offsetting these cash proceeds was the payment of cash dividends.
101
In 2007, net cash used in financing activities was $113.5 million due to a net decrease in
securities sold under repurchase agreements aligned with the Corporations decrease in investment
securities that resulted from maturities and prepayments received and the Corporations decision
back in 2007 to de-leverage its investment portfolio in order to protect earnings from margin
erosions under a flat-to-inverted yield curve scenario; the early redemption of a $150 million
medium-term note during the second quarter of 2007 and the payment of cash dividends. Partially
offsetting these uses of cash were proceeds from the issuance of brokered CDs and additional
advances from the FHLB used in part to pay down repurchase agreements and notes payable and
proceeds from the issuance of 9.250 million common shares in a private placement.
Capital
The Corporations stockholders equity amounted to $1.5 billion as of December 31, 2008, an
increase of $126.5 million compared to the balance as of December 31, 2007, driven by net income of
$109.9 million recorded for 2008 and a net unrealized gain of $82.7 million on the fair value of
available-for-sale securities recorded as part of comprehensive income. The increase in the fair
value of MBS was mainly in response to the announcement by the U.S. government that it will invest
up to $600 billion in obligations from housing-related government-sponsored agencies, including
$500 billion in MBS backed by FNMA, FHLMC and GNMA. Partially offsetting these increases were
dividends declared during 2008 amounting to $66.2 million.
For each of the years ended on December 31, 2008, 2007 and 2006, the Corporation declared in
aggregate cash dividends of $0.28 per common share. Total cash dividends paid on common shares
amounted to $25.9 million for 2008 (or a 37% dividend payout ratio), $24.6 million for 2007 (or a
88% dividend payout ratio) and $23.3 million for 2006 (or a 53% dividend payout ratio). Dividends
declared on preferred stock amounted to $40.3 million in 2008, 2007 and 2006.
As of December 31, 2008, First BanCorp, FirstBank Puerto Rico and FirstBank Florida were in
compliance with regulatory capital requirements that were applicable to them as a financial holding
company, a state non-member bank and a thrift, respectively (i.e., total capital and Tier 1 capital
to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets
of at least 4%). Set forth below are First BanCorps, FirstBank Puerto Ricos and FirstBank
Floridas regulatory capital ratios as of December 31, 2008 and December 31, 2007, based on
existing Federal Reserve, FDIC and OTS guidelines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Subsidiaries |
|
|
First |
|
|
|
|
|
FirstBank |
|
To be well |
|
|
BanCorp |
|
FirstBank |
|
Florida |
|
capitalized |
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (Total capital to risk-weighted assets) |
|
|
12.80 |
% |
|
|
12.23 |
% |
|
|
13.53 |
% |
|
|
10.00 |
% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) |
|
|
11.55 |
% |
|
|
10.98 |
% |
|
|
12.43 |
% |
|
|
6.00 |
% |
Leverage ratio (1) |
|
|
8.30 |
% |
|
|
7.90 |
% |
|
|
8.78 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (Total capital to risk-weighted assets) |
|
|
13.86 |
% |
|
|
13.23 |
% |
|
|
10.92 |
% |
|
|
10.00 |
% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) |
|
|
12.61 |
% |
|
|
11.98 |
% |
|
|
10.42 |
% |
|
|
6.00 |
% |
Leverage ratio (1) |
|
|
9.29 |
% |
|
|
8.85 |
% |
|
|
7.79 |
% |
|
|
5.00 |
% |
|
|
|
(1) |
|
Tier 1 capital to average assets for First BanCorp and FirstBank and Tier 1 Capital
to adjusted total assets
for FirstBank Florida. |
The decrease in regulatory capital ratios is mainly related to the increase in the volume of
risk-weighted assets driven by the aforementioned purchases of MBS and a higher commercial and
consumer loan portfolio. The Corporation is well capitalized and positioned to manage economic
downturns. The total regulatory capital ratio of 12.8% and the Tier 1 capital ratio of 11.6% as of
December 31, 2008 translates into approximately $386 million and $764 million of total capital and
Tier 1 capital, respectively, in excess of the well capitalized requirements of 10% and 6%,
respectively.
102
The Corporation recently announced, similar to a number of the largest and well-capitalized
banks in the United States, that it is participating in the U.S. Treasury Departments Capital
Purchase Program (CPP). Early in 2009, the Corporation completed the sale of 400,000 shares of
newly issued preferred stock valued at $400 million and a warrant to purchase up to 5,842,259
shares of the Corporations common stock at an exercise price of $10.27 per share, subject to the
standard terms and conditions for all participants in the CPP. Including this capital raise, the
Corporations total regulatory capital ratio would have been close to 15.7% as of December 31,
2008, or approximately $785 million in excess of the well-capitalized requirement, and the Tier 1
capital ratio would have been close to 14.5% or approximately $1.1 billion in excess of the
well-capitalized requirement. The Corporation will use this excess capital to further strengthen
its ability to support growth strategies that are centered on the needs of its customers and,
together with private and public sector initiatives, support the local economy and the communities
it serves during the current economic environment. Refer to Item 5 of this Form 10-K for
additional information regarding this issuance.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Corporation engages in financial transactions that are
not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are
different than the full contract or notional amount of the transaction. These transactions are
designed to (1) meet the financial needs of customers, (2) manage the Corporations credit, market
or liquidity risks, (3) diversify the Corporations funding sources and (4) optimize capital.
As a provider of financial services, the Corporation routinely enters into commitments with
off-balance sheet risk to meet the financial needs of its customers. These financial instruments
may include loan commitments and standby letters of credit. These commitments are subject to the
same credit policies and approval process used for on-balance sheet instruments. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position. As of December 31, 2008, commitments to extend
credit and commercial and financial standby letters of credit amounted to approximately $1.5
billion and $102.2 million, respectively. Commitments to extend credit are agreements to lend to
customers as long as the conditions established in the contract are met. Generally, the
Corporations mortgage banking activities do not enter into interest rate lock agreements with its
prospective borrowers.
103
Contractual Obligations and Commitments
The following table presents a detail of the maturities of the Corporations contractual
obligations and commitments, which consist of CDs, long-term contractual debt obligations,
operating leases, other contractual obligations, commitments to sell mortgage loans and commitments
to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commitments |
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
After 5 years |
|
|
|
(In thousands) |
|
Contractual obligations (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (2) |
|
$ |
10,416,592 |
|
|
$ |
5,765,792 |
|
|
$ |
2,937,391 |
|
|
$ |
624,837 |
|
|
$ |
1,088,572 |
|
Securities sold under
agreements
to repurchase |
|
|
3,421,042 |
|
|
|
533,542 |
|
|
|
1,287,500 |
|
|
|
900,000 |
|
|
|
700,000 |
|
Advances from FHLB |
|
|
1,060,440 |
|
|
|
382,000 |
|
|
|
411,000 |
|
|
|
267,440 |
|
|
|
|
|
Notes payable |
|
|
23,274 |
|
|
|
|
|
|
|
6,888 |
|
|
|
6,245 |
|
|
|
10,141 |
|
Other borrowings |
|
|
231,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,914 |
|
Operating leases |
|
|
51,415 |
|
|
|
7,669 |
|
|
|
10,946 |
|
|
|
7,473 |
|
|
|
25,327 |
|
Other contractual obligations |
|
|
42,461 |
|
|
|
22,557 |
|
|
|
16,879 |
|
|
|
3,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
15,247,138 |
|
|
$ |
6,711,560 |
|
|
$ |
4,670,604 |
|
|
$ |
1,809,020 |
|
|
$ |
2,055,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to sell mortgage loans |
|
$ |
50,500 |
|
|
$ |
50,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
102,178 |
|
|
$ |
102,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
914,374 |
|
|
$ |
914,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
33,632 |
|
|
|
33,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate
loans |
|
|
518,281 |
|
|
|
518,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
1,466,287 |
|
|
$ |
1,466,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
$22.4 million of tax liability, including accrued interest of $6.8 million, associated
with unrecognized tax benefits under FIN 48 has been excluded due to
the high degree of uncertainty regarding the timing of future cash outflows associated with such
obligations. |
|
(2) |
|
Includes $8.4 billion of brokered CDs generally sold by third-party intermediaries in denominations of
$100,000 or less, within FDIC insurance limits. |
The Corporation has obligations and commitments to make future payments under contracts, such
as debt and lease agreements, and under other commitments to sell mortgage loans at fair value and
commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Other contractual
obligations result mainly from contracts for rental and maintenance of equipment. Since certain
commitments are expected to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. For most of the commercial lines of credit, the
Corporation has the option to reevaluate the agreement prior to additional disbursements. There
have been no significant or unexpected draws on existing commitments. The funding needs patterns
of the customers have not significantly changed as a result of the latest market disruptions. 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.
Interest Rate Risk Management
First BanCorp manages its asset/liability position in order to limit the effects of changes in
interest rates on net interest income and to maintain stability in the profitability under varying
interest rate environments. The MIALCO oversees interest rate risk and meetings focus on, among
other things, current and expected conditions in world financial markets, competition and
prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities,
recent or proposed changes to the investment portfolio, alternative funding sources and their
costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or
regulatory issues which may be pertinent to these areas. The MIALCO approves funding decisions in
light of the Corporations overall growth strategies and objectives.
104
The Corporation performs on a quarterly basis a net interest income simulation analysis on a
consolidated basis to estimate the potential change in future earnings from projected changes in
interest rates. These simulations are carried out over a one-year and a five-year time horizon,
assuming gradual upward and downward interest rate movements of 200 basis points, achieved during a
twelve-month period. Simulations are carried out in two ways:
|
(1) |
|
using a static balance sheet as the Corporation had on the simulation date, and |
|
|
(2) |
|
using a growing balance sheet based on recent growth patterns and strategies. |
The balance sheet is divided into groups of assets and liabilities detailed by maturity or
re-pricing and their corresponding interest yields and costs. As interest rates rise or fall,
these simulations incorporate expected future lending rates, current and expected future funding
sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay
and other factors which may be important in projecting the future growth of net interest income.
The Corporation uses a simulation model to project future movements in the Corporations
balance sheet and income statement. The starting point of the projections generally corresponds to
the actual values of the balance sheet on the date of the simulations. For the December 31, 2007
simulation and based on the significant downward shift in rates experienced at the beginning of
2008, the Corporations MIALCO decided to update the rates as of the end of January 2008 and use
these as the starting point for the projections.
These simulations are highly complex, and use many simplifying assumptions that are intended
to reflect the general behavior of the Corporation over the period in question. There can be no
assurance that actual events will match these assumptions in all cases. For this reason, the
results of these simulations are only approximations of the true sensitivity of net interest income
to changes in market interest rates.
The following table presents the results of the simulations as of December 31, 2008 and 2007.
Consistent with prior years, these exclude non-cash changes in the fair value of derivatives and
SFAS 159 liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
December 31, 2007 |
|
|
Net Interest Income Risk (Projected for the next 12 months) |
|
Net Interest Income Risk (Projected for the next 12 months) |
|
|
Static Simulation |
|
Growing Balance Sheet |
|
Static Simulation |
|
Growing Balance Sheet |
(Dollars in millions) |
|
$ Change |
|
% Change |
|
$ Change |
|
% Change |
|
$ Change |
|
% Change |
|
$ Change |
|
% Change |
+200 bps ramp |
|
$ |
6.5 |
|
|
|
1.39 |
% |
|
$ |
6.4 |
|
|
|
1.29 |
% |
|
$ |
(8.1 |
) |
|
|
(1.64 |
)% |
|
$ |
(8.4 |
) |
|
|
(1.66 |
)% |
-200 bps ramp |
|
$ |
(12.8 |
) |
|
|
(2.77 |
)% |
|
$ |
(15.5 |
) |
|
|
(3.15 |
)% |
|
$ |
(13.2 |
) |
|
|
(2.68 |
)% |
|
$ |
(13.2 |
) |
|
|
(2.60 |
)% |
The Corporation has pursued during 2008 the strategy of reducing the interest rate risk
exposure in the re-pricing structure gaps between the assets and liabilities and to maintain
interest rate risk within the established policy target levels. Interest rate risk, as measured by
the sensitivity of net interest income to shifts in rates, changed when compared to December 31,
2007. In order to reduce the exposure to high levels of market volatility, during 2008, the
Corporation has been extending the maturity of its funding sources by, among other things, entering
into long-term repurchase agreements and issuing brokered CDs with longer terms. Also, the
Corporation increased the loan portfolio by approximately $1.3 billion since December 31, 2007, the
increase was mainly driven by commercial loans tied to short-term LIBOR repricing and 30 years
fixed-rate mortgage loans.
During the first 12 months of the income simulation, under a parallel falling rates scenario,
net interest income is expected to compress. The Corporations loan and investment portfolio is
subject to prepayment risk, which results from the ability of a third party to repay their debt
obligations prior to maturity. In a declining rate scenario, the prepayment risk in the
Corporations U.S. government agency fixed-rate MBS portfolio is expected to increase
substantially, combined with the callable feature of the U.S. agency debentures that would shorten
the duration of the assets with the potential of triggering the call options; which could lead to
reinvestment of proceeds from called securities in lower yielding assets. Due to current market
conditions and the drop in the long end of the yield curve during 2008, the probability of exercise
of the embedded calls on approximately $945 million of U.S. Agency debentures has increased and is
expected to be effective in both, the base and falling rates scenarios; this, despite the fact that
the lack of liquidity in the financial markets has caused several call dates go by during 2008
without the embedded calls being exercised.
105
Taking into consideration the aforementioned facts for the purpose of modeling, the net
interest income for the next twelve months in a growing balance sheet scenario, is estimated to
decrease by $15.5 million in a parallel downward move of 200 basis points, and the change for the
same period, is an increase of $6.4 million in a parallel upward move of 200 basis points. As
noted, the impact of the callability feature in the Agency Securities combined with the prepayment
risk of the loan and investment portfolio, and the re-investment of those securities into lower
yielding assets could result in a shift in the Corporations interest rate risk exposure from being
in a liability sensitive position to an asset sensitive position for the first twelve months of the
simulation horizon. Assuming parallel shifts in interest rates, the Corporations net interest
income would continue to increase in rising rate scenarios and reduce in falling rate scenarios
over a five-year modeling horizon.
The Corporation used the gap analysis tool to evaluate the potential effect of rate shocks on
income over the selected time periods. The gap report as of December 31, 2008 showed a positive
cumulative gap for 3 month of $2.1 billion and a positive cumulative gap of $1.4 billion for 1
year, compared to negative cumulative gaps of $2.3 billion and $1.6 billion for 3 months and 1
year, respectively, as of December 31, 2007.
Derivatives. First BanCorp uses derivative instruments and other strategies to manage its exposure
to interest rate risk caused by changes in interest rates beyond managements control.
The following summarizes major strategies, including 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. 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.
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.
Structured repurchase agreements The Corporation uses structured repurchase
agreements, with embedded call options, to reduce the Corporations exposure to interest rate
risk by lengthening the contractual maturities of its liabilities, while keeping funding
costs low. Another type of structured repurchase agreement includes repurchased agreements
with embedded cap corridors; these instruments also provide protection for a rising rate
scenario.
For detailed information regarding the volume of derivative activities (e.g. notional
amounts), location and fair values of derivative instruments in the Statement of Financial
Condition and the amount of gains and losses reported in the Statement of Income, refer to
Note 30 in the Corporations audited financial statements for the year ended December 31,
2008 included in Item 8 of this Form 10-K.
106
The
following tables summarize the fair value changes on the Corporations derivatives as well
as the source of the fair values:
Fair Value Change
|
|
|
|
|
(In thousands) |
|
December 31, 2008 |
|
|
|
|
|
Fair value of contracts outstanding at the beginning of year |
|
$ |
(52,451 |
) |
Fair value of new contracts at inception |
|
|
(3,255 |
) |
Contracts terminated or called during the year |
|
|
37,235 |
|
Changes in fair value during the year |
|
|
17,976 |
|
|
|
|
|
Fair value of contracts outstanding as of December 31, 2008 |
|
$ |
(495 |
) |
|
|
|
|
Source of Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
|
|
Less Than |
|
|
Maturity |
|
|
Maturity |
|
|
In Excess |
|
|
Total |
|
(In thousands) |
|
One Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
of 5 Years |
|
|
Fair Value |
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pricing from observable market inputs |
|
$ |
|
|
|
$ |
(1,008 |
) |
|
$ |
(577 |
) |
|
$ |
330 |
|
|
$ |
(1,255 |
) |
Pricing that consider unobservable market inputs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
760 |
|
|
|
760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(1,008 |
) |
|
$ |
(577 |
) |
|
$ |
1,090 |
|
|
$ |
(495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Effective January 1, 2007, the Corporation decided to early adopt SFAS 159 for its callable
brokered CDs and certain fixed medium-term notes that were hedged with interest rate swaps. One of
the main considerations to early adopt SFAS 159 for these instruments was to eliminate the
operational procedures required by the long-haul method of accounting in terms of documentation,
effectiveness assessment, and manual procedures followed by the Corporation to fulfill the
requirements specified by SFAS 133. As of December 31, 2008, all of the derivative instruments
held by the Corporation were considered economic undesignated hedges.
During 2008, approximately $3.0 billion of interest rate swaps were called by the
counterparties, mainly due to the decrease of 3-month LIBOR. Following the cancellation of the
interest rate swaps, the Corporation exercised its call option on approximately $2.9 billion
swapped-to-floating brokered CDs. The Corporation recorded a net unrealized gain of $4.1 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.
Refer to Note 27 of the Corporations audited financial statements for the year ended December
31, 2008 included in Item 8 of this Form 10-K for additional information regarding the fair value
determination of derivative instruments.
107
The use of derivatives involves market and credit risk. The market risk of derivatives stems
principally from the potential for changes in the value of derivative contracts based on changes in
interest rates. The credit risk of derivatives arises from the potential of default from the
counterparty. To manage this credit risk, the Corporation deals with counterparties of good credit
standing, enters into master netting agreements whenever possible and, when appropriate, obtains
collateral. Master netting agreements incorporate rights of set-off that provide for the net
settlement of contracts with the same counterparty in the event of default. Currently the
Corporation is mostly engaged in derivative instruments with counterparties with a credit rating of
single A or better. All of the Corporations interest rate swaps are supported by securities
collateral agreements, which allow the delivery of securities to and from the counterparties
depending on the fair value of the instruments, to minimize credit risk.
Set forth below is a detailed analysis of the Corporations credit exposure by counterparty
with respect to derivative instruments outstanding as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
Exposure at |
|
|
Negative |
|
|
Total |
|
|
interest receivable |
|
Counterparty |
|
Rating(1) |
|
|
Notional |
|
|
Fair Value(2) |
|
|
Fair Values |
|
|
Fair Value |
|
|
(payable) |
|
Interest rate swaps with rated counterparties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia |
|
AA |
|
$ |
16,570 |
|
|
$ |
41 |
|
|
$ |
|
|
|
$ |
41 |
|
|
$ |
108 |
|
Merrill Lynch |
|
|
A+ |
|
|
|
230,190 |
|
|
|
1,366 |
|
|
|
|
|
|
|
1,366 |
|
|
|
(106 |
) |
UBS Financial Services, Inc. |
|
|
A+ |
|
|
|
14,384 |
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
|
179 |
|
JP Morgan |
|
|
A+ |
|
|
|
531,886 |
|
|
|
2,319 |
|
|
|
(5,726 |
) |
|
|
(3,407 |
) |
|
|
1,094 |
|
Credit Suisse First Boston |
|
|
A+ |
|
|
|
151,884 |
|
|
|
178 |
|
|
|
(1,461 |
) |
|
|
(1,283 |
) |
|
|
512 |
|
Citigroup |
|
|
A |
|
|
|
295,130 |
|
|
|
1,516 |
|
|
|
(1 |
) |
|
|
1,515 |
|
|
|
2,299 |
|
Goldman Sachs |
|
|
A |
|
|
|
16,165 |
|
|
|
597 |
|
|
|
|
|
|
|
597 |
|
|
|
158 |
|
Morgan Stanley |
|
|
A |
|
|
|
107,450 |
|
|
|
735 |
|
|
|
|
|
|
|
735 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,363,659 |
|
|
|
6,840 |
|
|
|
(7,188 |
) |
|
|
(348 |
) |
|
|
4,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other derivatives (3) |
|
|
|
|
|
|
332,634 |
|
|
|
1,170 |
|
|
|
(1,317 |
) |
|
|
(147 |
) |
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
1,696,293 |
|
|
$ |
8,010 |
|
|
$ |
(8,505 |
) |
|
$ |
(495 |
) |
|
$ |
4,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
Exposure at |
|
|
Negative |
|
|
Total |
|
|
interest receivable |
|
Counterparty |
|
Rating(1) |
|
|
Notional |
|
|
Fair Value(2) |
|
|
Fair Values |
|
|
Fair Value |
|
|
(payable) |
|
Interest rate swaps with rated counterparties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JP Morgan |
|
AA- |
|
$ |
1,353,290 |
|
|
$ |
18 |
|
|
$ |
(19,766 |
) |
|
$ |
(19,748 |
) |
|
$ |
3,334 |
|
Wachovia |
|
AA- |
|
|
23,655 |
|
|
|
|
|
|
|
(365 |
) |
|
|
(365 |
) |
|
|
144 |
|
Morgan Stanley |
|
AA- |
|
|
193,170 |
|
|
|
4,737 |
|
|
|
(2,591 |
) |
|
|
2,146 |
|
|
|
264 |
|
Goldman Sachs |
|
AA- |
|
|
45,490 |
|
|
|
2,297 |
|
|
|
(398 |
) |
|
|
1,899 |
|
|
|
257 |
|
Citigroup |
|
AA- |
|
|
795,971 |
|
|
|
5 |
|
|
|
(9,042 |
) |
|
|
(9,037 |
) |
|
|
2,693 |
|
UBS Financial Services, Inc. |
|
AA |
|
|
90,016 |
|
|
|
|
|
|
|
(928 |
) |
|
|
(928 |
) |
|
|
245 |
|
Lehman Brothers |
|
|
A+ |
|
|
|
1,077,045 |
|
|
|
5 |
|
|
|
(14,768 |
) |
|
|
(14,763 |
) |
|
|
2,748 |
|
Credit Suisse First Boston |
|
|
A+ |
|
|
|
183,393 |
|
|
|
36 |
|
|
|
(1,785 |
) |
|
|
(1,749 |
) |
|
|
12 |
|
Merrill Lynch |
|
|
A+ |
|
|
|
577,088 |
|
|
|
10 |
|
|
|
(7,503 |
) |
|
|
(7,493 |
) |
|
|
(1,488 |
) |
Bank of Montreal |
|
|
A+ |
|
|
|
9,825 |
|
|
|
|
|
|
|
(36 |
) |
|
|
(36 |
) |
|
|
45 |
|
Bear Stearns |
|
|
A |
|
|
|
74,400 |
|
|
|
2,305 |
|
|
|
(875 |
) |
|
|
1,430 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,423,343 |
|
|
|
9,413 |
|
|
|
(58,057 |
) |
|
|
(48,644 |
) |
|
|
8,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other derivatives(3) |
|
|
|
|
|
|
351,217 |
|
|
|
5,288 |
|
|
|
(9,095 |
) |
|
|
(3,807 |
) |
|
|
431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
4,774,560 |
|
|
$ |
14,701 |
|
|
$ |
(67,152 |
) |
|
$ |
(52,451 |
) |
|
$ |
8,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the S&P and Fitch Long Term Issuer Credit Ratings. |
|
(2) |
|
For each counterparty, this amount includes derivatives with positive fair value
excluding the related accrued interest receivable/payable. |
|
(3) |
|
Credit exposure with several local companies for which a credit rating is not
readily available. |
|
|
|
Approximately $0.8 million and $5.1 million of the credit exposure with local
companies relates to caps referenced to mortgages bought from R&G Premier Bank as of
December 31, 2008 and 2007, respectively. |
Lehman Brothers Special Financing, Inc. (Lehman) was the 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
108
conditions. In connection with the unpaid net cash settlement due as of December 31, 2008, under
the swap agreements, 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 as of December 31, 2008. The Corporation had pledged
collateral with Lehman to guarantee its performance under the swap
agreements in the event payment thereunder was required. The market value of pledged securities with Lehman as of December
31, 2008 amounted to approximately $62 million.
The position of the Corporation with respect to the recovery of
the collateral, after discussion with its outside legal counsel, is
that at all times title to the collateral has been vested in the
Corporation and that, therefore, this collateral should not, for any
purpose, be considered property of the bankruptcy estate available
for distribution among Lehmans creditors.
On January 30, 2009, the Corporation filed a customer claim with the trustee
and at this time the Corporation is unable to determine the timing of the claim resolution or
whether it will succeed in recovering all or a substantial portion of the collateral or its
equivalent value. As additional relevant facts become available in
future periods, a need to recognize a partial or full reserve of
this claim may arise.
Credit Risk Management
First BanCorp is subject to credit risk mainly with respect to its portfolio of loans
receivable and off-balance sheet instruments, mainly derivatives and loan commitments. Loans
receivable represents loans that First BanCorp holds for investment and, therefore, First BanCorp
is at risk for the term of the loan. Loan commitments represent commitments to extend credit,
subject to specific conditions, for specific amounts and maturities. These commitments may expose
the Corporation to credit risk and are subject to the same review and approval process as for
loans. Refer to Contractual Obligations and Commitments above for further details. The credit
risk of derivatives arises from the potential of the counterpartys default on its contractual
obligations. To manage this credit risk, the Corporation deals with counterparties of good credit
standing, enters into master netting agreements whenever possible and, when appropriate, obtains
collateral. For further details and information on the Corporations derivative credit risk
exposure, refer to Interest Rate Risk Management section above. The Corporation manages its
credit risk through credit policy, underwriting, and quality control procedures and an established
delinquency committee. The Corporation also employs proactive collection and loss mitigation
efforts. Also, there are Loan Workout functions responsible for avoiding defaults and minimizing
losses upon default of commercial and construction loans. The group utilizes relationship officers,
collection specialists and attorneys. In the case of residential construction projects, the workout
function monitors project specifics, such as project management and marketing, as deemed necessary.
The Corporation may also have risk of default in the securities portfolio. The securities held
by the Corporation are principally fixed-rate mortgage-backed securities and U.S. Treasury and
agency securities. Thus, a substantial portion of these instruments is backed by mortgages, a
guarantee of a U.S. government-sponsored entity or backed by the full faith and credit of the U.S.
government and is deemed to be of the highest credit quality.
Managements Credit Committee, comprised of the Corporations Chief Credit Risk Officer and
other senior executives, has primary responsibility for setting strategies to achieve the
Corporations credit risk goals and objectives. These goals and objectives are documented in the
Corporations Credit Policy.
Allowance for Loan and Lease Losses and Non-performing Assets
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. Management allocates specific portions of the allowance for loan and
lease losses to problem loans that are identified through an asset classification analysis. The
adequacy of the allowance for loan and lease losses is based upon a number of factors including
historical loan and lease loss experience that may not fully represent current conditions inherent
in the portfolio. For example, factors affecting the Puerto Rico, Florida (USA), US Virgin
Islands or British Virgin Islands economies may contribute to delinquencies and defaults above
the Corporations historical loan and lease losses. The Corporation addresses this risk by
actively monitoring the delinquency and default experience and by considering current economic and
market conditions and their probable impact on the borrowers. Based on the assessment of current
conditions, the Corporation makes appropriate adjustments to the historically developed assumptions
when necessary to adjust historical factors to account for present conditions. The Corporation
also takes into consideration information about trends on non-accrual loans, delinquencies, changes
in underwriting policies, and other risk characteristics relevant to the particular loan category and
delinquencies. Although management believes that the allowance for loan and lease losses is
adequate, factors beyond the Corporations
109
control, including factors affecting the economies of Puerto Rico, the United States (principally
the state of Florida), the U.S.VI or British VI may contribute to delinquencies and defaults, thus
necessitating additional reserves.
For small, homogeneous loans, including residential mortgage loans, auto loans, consumer
loans, finance lease loans, and commercial and construction loans in amounts under $1.0 million,
the Corporation evaluates a specific allowance based on average historical loss experience for each
corresponding type of loans and market conditions. The methodology of accounting for all probable
losses is made in accordance with the guidance provided by SFAS 5, Accounting for Contingencies.
The Corporation measures impairment individually for those commercial and real estate loans
with a principal balance of $1 million or more in accordance with the provisions of SFAS 114. A
loan is impaired when, based on current information and events, it is probable that the Corporation
will be unable to collect all amounts due according to the contractual terms of the loan agreement.
A specific reserve is determined for those commercial and real estate loans classified as
impaired, primarily based on each such loans collateral value (if collateral dependent) or the
present value of expected future cash flows discounted at the loans effective interest rate. If
foreclosure is probable, the creditor is required to measure the impairment based on the fair value
of the collateral. The fair value of the collateral is generally obtained from appraisals. Updated
appraisals are obtained when the Corporation determines that loans are impaired and for certain
loans on a spot basis selected by specific characteristics such as delinquency levels, age of the
appraisal, and loan-to-value ratios. Should there be a deficiency, the Corporation records a
specific allowance for loan losses related to these loans.
As a general procedure, the Corporation internally reviews appraisals on a spot basis as part
of the underwriting and approval process. For construction loans related to the Miami Corporate
Banking operations, appraisals are reviewed by an outsourced contracted appraiser. Once a loan
backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full
assessment of the value of the collateral is performed. If the Corporation commences litigation to
collect an outstanding loan or commences foreclosure proceedings against a borrower (which includes
the collateral), a new appraisal report is requested and the book value is adjusted accordingly,
either by a corresponding reserve or a charge-off.
The Credit Risk area requests new collateral appraisals for impaired collateral dependent
loans. In order to determine present market conditions in Puerto Rico and the Virgin Islands, and
to gauge property appreciation rates, opinions of value are requested for a sample of delinquent
residential real estate loans. The valuation information gathered through these appraisals is
considered in the Corporations allowance model assumptions.
Substantially all of the Corporations loan portfolio is located within the boundaries of the
U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. Virgin Islands or the U.S.
mainland, the performance of the Corporations loan portfolio and the value of the collateral
backing the transactions are dependent upon the performance of and conditions within each specific
area real estate market. Recent economic reports related to the real estate market in Puerto Rico
indicate that certain pockets of the real estate market are subject to readjustments in value
driven by the deteriorated purchasing power of the consumers and general economic conditions. The
Corporation is protected by healthy loan-to-value ratios set upon original approval and driven by
the Corporations regulatory and credit policy standards. The real estate market for the U.S.
Virgin islands remains fairly stable.
110
The following table sets forth an analysis of the activity in the allowance for loan and lease
losses during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Allowance for loan and lease losses, beginning of year |
|
$ |
190,168 |
|
|
$ |
158,296 |
|
|
$ |
147,999 |
|
|
$ |
141,036 |
|
|
$ |
126,378 |
|
Provision for loan and lease losses |
|
|
190,948 |
|
|
|
120,610 |
|
|
|
74,991 |
|
|
|
50,644 |
|
|
|
52,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
(6,256 |
) |
|
|
(985 |
) |
|
|
(997 |
) |
|
|
(945 |
) |
|
|
(254 |
) |
Commercial |
|
|
(29,575 |
) |
|
|
(11,260 |
) |
|
|
(6,036 |
) |
|
|
(8,558 |
) |
|
|
(5,848 |
) |
Construction |
|
|
(7,933 |
) |
|
|
(3,910 |
) |
|
|
|
|
|
|
|
|
|
|
(342 |
) |
Finance leases |
|
|
(10,583 |
) |
|
|
(10,393 |
) |
|
|
(5,721 |
) |
|
|
(2,748 |
) |
|
|
(2,894 |
) |
Consumer |
|
|
(62,725 |
) |
|
|
(68,282 |
) |
|
|
(64,455 |
) |
|
|
(39,669 |
) |
|
|
(34,704 |
) |
Recoveries |
|
|
8,751 |
|
|
|
6,092 |
|
|
|
12,515 |
|
|
|
6,876 |
|
|
|
5,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(108,321 |
) |
|
|
(88,738 |
) |
|
|
(64,694 |
) |
|
|
(45,044 |
) |
|
|
(38,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments(1) |
|
|
8,731 |
|
|
|
|
|
|
|
|
|
|
|
1,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, end of year |
|
$ |
281,526 |
|
|
$ |
190,168 |
|
|
$ |
158,296 |
|
|
$ |
147,999 |
|
|
$ |
141,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to year end total
loans receivable |
|
|
2.15 |
% |
|
|
1.61 |
% |
|
|
1.41 |
% |
|
|
1.17 |
% |
|
|
1.46 |
% |
Net charge-offs to average loans
outstanding during the period |
|
|
0.87 |
% |
|
|
0.79 |
% |
|
|
0.55 |
% |
|
|
0.39 |
% |
|
|
0.48 |
% |
Provision for loan and lease losses to net charge-offs
during the period |
|
|
1.76 |
x |
|
|
1.36 |
x |
|
|
1.16 |
x |
|
|
1.12 |
x |
|
|
1.38 |
x |
|
|
|
(1) |
|
For 2008, carryover of the allowance for loan losses related to the $218 million auto
loan portfolio acquired from Chrysler. |
|
|
|
For 2007, allowance for loan losses from the acquisition of FirstBank Florida. |
The following table sets forth information concerning the allocation of the Corporations
allowance for loan and lease losses by loan category and the percentage of loan balances in each
category to total loans as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
(In thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
(Dollars in thousands) |
|
Residential real estate |
|
$ |
15,016 |
|
|
|
27 |
% |
|
$ |
8,240 |
|
|
|
27 |
% |
|
$ |
6,488 |
|
|
|
25 |
% |
|
$ |
3,409 |
|
|
|
18 |
% |
|
$ |
1,595 |
|
|
|
14 |
% |
Commercial real estate loans |
|
|
17,775 |
|
|
|
12 |
% |
|
|
13,699 |
|
|
|
11 |
% |
|
|
13,706 |
|
|
|
11 |
% |
|
|
9,827 |
|
|
|
9 |
% |
|
|
8,958 |
|
|
|
7 |
% |
Construction loans |
|
|
83,482 |
|
|
|
12 |
% |
|
|
38,108 |
|
|
|
12 |
% |
|
|
18,438 |
|
|
|
13 |
% |
|
|
12,623 |
|
|
|
9 |
% |
|
|
5,077 |
|
|
|
4 |
% |
Commercial loans (including loans to
local financial institutions) |
|
|
74,358 |
|
|
|
33 |
% |
|
|
63,030 |
|
|
|
33 |
% |
|
|
53,929 |
|
|
|
32 |
% |
|
|
58,117 |
|
|
|
48 |
% |
|
|
70,906 |
|
|
|
59 |
% |
Consumer loans (1) |
|
|
90,895 |
|
|
|
16 |
% |
|
|
67,091 |
|
|
|
17 |
% |
|
|
65,735 |
|
|
|
19 |
% |
|
|
64,023 |
|
|
|
16 |
% |
|
|
54,500 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
281,526 |
|
|
|
100 |
% |
|
$ |
190,168 |
|
|
|
100 |
% |
|
$ |
158,296 |
|
|
|
100 |
% |
|
$ |
147,999 |
|
|
|
100 |
% |
|
$ |
141,036 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes lease financing |
First BanCorps allowance for loan and lease losses was $281.5 million as of December 31, 2008,
compared to $190.2 million as of December 31, 2007 and $158.3 million as of December 31, 2006. The
provision for loan and lease losses for the year ended December 31, 2008 amounted to $190.9
million, compared to $120.6 million and $75.0 million for 2007 and 2006, respectively. The
increase is mainly attributable to the significant increase in delinquency levels and increases in
specific reserves for impaired commercial and construction loans adversely impacted by
deteriorating economic conditions in the United States and Puerto Rico. Also, increases to reserve
factors for potential losses inherent in the loan portfolio, higher reserves for the residential
mortgage loan portfolio in the U.S. mainland and Puerto Rico and the overall growth of the
Corporations loan portfolio contributed to higher charges in 2008. The Corporation experienced
continued stress in the credit quality of and worsening trends on 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 reserve factors 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, which are expected to continue at least through the remainder of 2009. The Puerto
Rico housing market has not seen the dramatic decline in housing prices that is affecting the U.S.
mainland; however, there has been a lower demand for houses due to diminished consumer purchasing
power and confidence. The Corporation also does business in the Eastern Caribbean Region. Growth in
this region has been fueled by an expansion in the construction, residential mortgage and small
loan business sectors. Refer to Provision and Allowance for Loan and Lease Losses and Lending
Activities Commercial and
111
Construction Loans above and Non-Accruing and Non-performing Assets below for specific details
about troubled loan relationships and the exposure to the geographic segments where the Corporation
operates and detailed information about the Corporations construction loan portfolio.
During 2008, the Corporation identified several commercial and construction loans amounting to
$414.9 million that it determined should be classified as impaired, of which $382.0 million have a
specific reserve of $82.9 million. Approximately $154.4 million of the $351.5 million commercial
and construction loans that were determined to be impaired during 2008 are related to the Miami
Corporate Banking operations condo-conversion loans, which has a related specific reserve of $36.0
million.
Meanwhile, the Corporations impaired loans decreased by approximately $64.1 million during
2008, principally as a result of: (i) the foreclosure of two condo-conversion loans related to a
troubled relationship in the Corporations Miami Corporate Banking Operations, with an aggregate
principal balance of approximately $22.4 million and a related impairment reserve of $4.2 million,
and (ii) the sale for $22.5 million, in the first half of 2008, of a condo-conversion loan that
carried a principal balance of approximately $24.1 million and a related impairment reserve of $2.4
million related to the same trou