2 0 14 A N N UA L R E P O R T
FIRST BANCORP | 2014 ANNUAL REPORT | 1
2014 Financial Highlights
In thousands (except for per share and ratio results)
2014
2013
F O R T H E Y E A R
Net interest income
Provision for loan and lease losses
Non-interest income (loss)
Non-interest expense
Income tax benefit (expense)
Net income (loss)
Net income (loss) attributable to common stockholders
F I N A N C I A L R AT I O S
Return on average assets (ROAA)
Retum on average common equity (ROACE)
Interest rate margin1
Efficiency ratio
P E R C O M M O N S H A R E
Basic income (loss) per share
Diluted income (loss) per share
Cash dividends declared per share
Market price per common share 2
Book value per common share
Tangible book value per common share
Average common shares outstanding
Average diluted common shares outstanding
AT Y E A R E N D
Assets
Loans
Allowance for loan and lease losses
Money market and investment securities
Deposits
Borrowings
Total equity
Tier 1 regulatory capital
Total regulatory capital
CA P I TA L R AT I O S
Total capital
Tier 1 capital
Leverage
1 Tax-equivalent basis.
2 As of 12/31/2014 and 12/31/2013.
$
$
518,073
109,530
61,348
378,253
300,649
392,287
393,946
3.10%
31.38%
4.34%
65.28%
$
1.89
1.87
—
5.87
7.68
7.45
208,752
210,540
$
$
$
514,945
243,751
(15,489)
415,028
(5,164)
(164,487)
(164,487)
(1.28)%
(13.01)%
4.21%
83.10%
(0.80)
(0.80)
—
6.19
5.57
5.30
205,542
205,542
$ 12,727,835
9,339,392
222,395
2,008,380
9,483,945
1,456,959
1,671,743
1,636,004
1,748,120
$ 12,656,925
9,712,139
285,858
2,208,342
9,879,924
1,431,959
1,215,858
1,484,490
1,604,548
19.70%
18.44%
13.27%
17.06%
15.78%
11.71%
Letter to Shareholders
Our Accomplishments
Our strategic endeavors and
progress this year culminated
in the partial recapture of our
deferred tax asset (“DTA”)
valuation allowance. This
achievement represents a
significant milestone in our
operating plan. During 2014,
we also:
• Enhanced profitability;
• Further strengthened our capital
position; and
• Improved our brand recognition.
Our results for 2014 are notable.
We had our most profitable year since
2008 and made substantial improvement
in key operating metrics and risk
diversification strategies. Our brand and
franchise continue to gather momentum
and visibility as we improved market share
in core deposits, mortgage originations
and electronic banking.
demographic shifts in our
W hile economic and
headwinds, our emerging
Florida franchise added
solid loan growth and our strong Eastern Caribbean
main market created strong
franchise provided us with a low-cost and stable
funding source. Our improved risk profile allowed
us to participate in the acquisition and assumption
of assets and deposits of a failed bank in Puerto
Rico. This consolidation has been underway
on the Island for the last decade and will help in
the continued rationalization of the competitive
landscape.
Most Profitable Year Since
Recapitalization
Net income for 2014 amounted to $392 million
or $1.87 per diluted share. This compares to a
net loss of $164 million or $0.80 per share in 2013.
Excluding the benefit of our DTA valuation allowance,
2014 net income was $89 million compared to an
adjusted 2013 net income of $45 million, which
excludes the effect of two separate bulk sale
FIRST BANCORP | 2014 ANNUAL REPORT | 1
2014
Letter to Shareholders
Financial Highlights
PRE-TAX PRE-PROVISION INCOME
Our management team has been working
Dollars in millions
diligently on stress testing as required by the
Dodd-Frank Act Stress Testing program (“DFAST”)
206
and we will be disclosing the results during the
$210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
184
2013
2014
transactions executed in 2013 and the write-down
of the Lehman receivable. Improvements in
non-interest income and strategic reductions
in non-interest expenses are being implemented
through business rationalization initiatives. Most
recently, business rationalization initiatives were
focused on pricing and product changes to
generate additional fee income.
second quarter of 2015. Over the past two years,
Management has placed particular focus on
implementing a robust stress-testing framework
that enhances governance, processes and
systems across legal entities, lines of business,
portfolios and products. The approach has been
to implement a comprehensive methodology that
not only provides the ability to comply with the
regulatory requirements established under the
Dodd-Frank Act, but also facilitates the strategic
planning process by generating information to
allow for a more holistic view of potential
vulnerabilities and opportunities.
Successfully Purchased Two
Residential Mortgage Loan Portfolios
During 2014, the Bank’s residential mortgage
business expanded its market share and captured
the second position in the Puerto Rico market for
residential loan originations. During the second
One such initiative has been the rationalization
quarter of 2014, the Corporation acquired a
of our branch network. A comprehensive branch
$242 million mortgage portfolio from Doral in
optimization plan was conducted across all regions
full satisfaction of a secured commercial borrowing
and, as a result, eight branches were consolidated.
owed to FirstBank. In addition, during the fourth
Through these endeavors and others, we continue
quarter of 2014, the Corporation purchased a
to drive efficiencies and enhance profitability.
$193 million performing residential mortgage
Capital Position Continues
to Grow Strong
Tangible book value per common share increased
portfolio from Doral. With our strong capital base
and improved technology infrastructure through our
partnership with Fidelity Information Services (FIS),
we will continue to pursue growth opportunities
to $7.45 compared to $5.30 in 2013. This was a
that will increase shareholder value.
result of our improved earnings and the partial
recapture of our DTA valuation allowance.
Our risk-based capital ratio grew to 19.7% from
Balance Sheet De-risking
The reduction of non-performing assets (NPAs)
17.1% in 2013. Our capital ratios are among the
is a central priority and will be a continued focus
top 10% of all U.S. banking peers with assets
for Management. As a result of affirmative steps
over $5 billion.
2 | FIRST BANCORP
taken by Management to address asset quality,
non-performing assets have been reduced to
$717 million or 5.6% of total assets as of December
to personalized service have helped to solidify
2014. This figure represents a reduction of 60%
the brand perception among consumers. During
when compared to our peak of $1.8 billion in
2014, FirstBank showed remarkable improvement
the first quarter of 2010. While there was only
in brand recognition. Based on the 2014 market
a slight reduction in the NPA book of $9 million
research done by Gaither/Inmark on consumer
when compared to 2013, the non-performing
financial behavior among banked Puerto Ricans
assets are now in a much better disposition state.
older than 18 years of age, FirstBank grew in
Management is focused on pursuing various
all measured categories. The same study also
work-out strategies with borrowers through
showed that our brand values are ranked as
targeted trouble debt restructurings and spot
most discernible among all commercial banks
sales. The Special Assets Group (SAG) is diligently
in Puerto Rico. We ranked #1 among banks in
proceeding with collection lawsuits, mortgage
the following areas: emotional connection, social
foreclosure execution and other legal remedies
commitment and responsibility, concern for our
currently at its disposal. Additionally, SAG is
clients, well-trained employees, effectiveness
effectively promoting sales of Other Real Estate
and good economic condition.
Owned (OREO) thereby reducing the associated
carrying costs and the security and maintenance
expenses of these foreclosed properties. Today,
our commercial non-performing loans are being
Fostering an Environment
to Grow Our Most Important Asset
The growing acceptance and awareness of
carried at 58% of unpaid principal balance, net
the FirstBank brand is a product of our talented
of specific reserves. Management’s top priorities
and dedicated employees. Committment to
remain controlling migration and reducing NPAs.
professional development, strengthening core
Improving Our Brand Recognition
FirstBank continues to show increased levels
competencies and promoting a culture of
continual learning is the foundation of our
successful business operation. During 2014,
of brand awareness and differentiation. These
the Company launched FirstBank University,
factors help to secure our competitive position
a comprehensive talent development platform
in the marketplace. Steady marketing investments
designed for all employees to aid in developing
and a strategic focus on the Bank’s commitment
core skills needed to outperform peers going
We ranked #1 among banks in the
following areas: emotional connection,
social commitment and responsibility,
concern for our clients, well-trained
employees, effectiveness and good
economic condition.
forward. This centralized platform for continuing
education and advancement consists of five
learning areas that include courses and training
programs with special emphasis on leadership
development. Arming our employees, our most
important asset, with rich learning experiences
will ultimately ensure our strategic plan’s success.
We believe that employees who have opportunities
to learn and grow will connect with the customers
and communities in a memorable way — and that
is what brand building is all about.
FIRST BANCORP | 2014 ANNUAL REPORT | 3
Letter to Shareholders
Your investment and belief
in FirstBank is greatly appreciated.
Thank you for your continued support.
the last five years, First BanCorp has responded
by aligning strategies, resources and talent toward
the successful implementation of its strategic plan.
We remain focused on the implementation of key
initiatives to continue improving our risk profile
and profitability targets. Our improved risk profile
has allowed us to continue strengthening market
Another source of strength for the organization is
position across regions with an enhanced focus
our board of directors. In 2014, we bade farewell
on core business growth. This marked progress
to our esteemed colleague and director Fernando
and momentum propels our Bank closer to
Rodriguez-Amaro, who passed away unexpectedly.
achieving the next critical milestones and sets the
Fernando was a great asset to our board, having
stage to realize the Corporation’s strategic goals.
served for almost 10 years as chairman of the audit
committee. His guidance and aplomb, particularly
during the very difficult years leading up to the
recapitalization in late 2011, will be greatly missed.
Puerto Rico continues to face political and
economic hurdles. We anticipate these obstacles
will persist for the foreseeable future. Despite
these deterrents, our institution is poised and
We welcomed in 2014 and early 2015 two new
committed to be a leader within the Puerto Rico
directors, Juan Acosta Reboyras and Lucy Crespo.
banking market. With the recently announced
Mr. Acosta is a Certified Public Accountant,
failed bank transaction, we have secured our
attorney and partner at the local law firm, Acosta
position as the second largest banking institution
and Ramírez, LLP, and Ms. Crespo is the former
on the island from an asset, loan and core
General Manager of Hewlett Packard in Puerto
deposit standpoint. Our enhanced profitability,
Rico. Both are accomplished professionals, who
capital position, liquidity and core deposit base,
bring a combination of strong accounting, tax,
complemented by our presence in Florida and
technology and cybersecurity expertise to our
the Eastern Caribbean, position FirstBank as a
board of directors.
formidable and relevant franchise.
The Future
There are still challenges ahead, including limited
economic growth in our main market, the impact
of new banking regulations, strong competition and
a low-interest rate environment. Over the course of
We remain focused on improving asset quality
and are closely monitoring and evaluating business
opportunities to enhance shareholder value.
Your investment and belief in FirstBank is greatly
appreciated. Thank you for your continued support.
Sincerely,
Roberto R. Herencia
Chairman of the Board
Aurelio Alemán
President and Chief Executive Officer
4 | FIRST BANCORP
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2014
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
COMMISSION FILE NUMBER 1-14793
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico
(State or other jurisdiction of
incorporation or organization)
1519 Ponce de León Avenue, Stop 23
Santurce, Puerto Rico
(Address of principal executive office)
66-0561882
(I.R.S. Employer
Identification No.)
00908
(Zip Code)
Registrant’s telephone number, including area code:
(787) 729-8200
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($0.10 par value)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A (CUSIP: 318672201);
8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B (CUSIP: 318672300);
7.40% Noncumulative Perpetual Monthly Income Preferred Stock, Series C (CUSIP: 318672409);
7.25% Noncumulative Perpetual Monthly Income Preferred Stock, Series D (CUSIP: 318672508); and
7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E (CUSIP: 318672607)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:2) No (cid:3)
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 (cid:3) No (cid:2)
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes (cid:3) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s 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. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:2)
Non-accelerated filer (cid:2) (Do not check if a smaller reporting company)
Accelerated filer (cid:3)
Smaller reporting company (cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:2) No (cid:3)
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2014 (the last trading day of the registrant’s most recently
completed second quarter) was $579,253,969 based on the closing price of $5.44 per share of common stock on the New York Stock Exchange on June 30, 2014. The registrant
had no nonvoting common equity outstanding as of June 30, 2014. For the purposes of the foregoing calculation only, the registrant has defined affiliates to include (a) the
executive officers named in Part III of this Annual Report on Form 10-K; (b) all directors of the registrant; and (c) each shareholder, including the registrant’s employee benefit
plans but excluding shareholders that file on Schedule 13G, known to the registrant to be the beneficial owner of 5% or more of the outstanding shares of common stock of the
registrant as of June 30, 2014. The registrant’s 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 registrant’s classes of common stock, as of the latest practicable date: 213,089,880 shares as of March 6, 2015.
FIRST BANCORP
2014 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PART II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
PART IV
2
5
31
48
48
48
48
49
54
56
147
148
255
255
255
256
256
256
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261
Forward Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject
to the safe harbor created by such sections. When used in this Form 10-K or future filings by First BanCorp. (the “Corporation”) with
the U.S. Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or stockholder
communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,”
“will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and other terms of similar meaning or import
in connection with any discussion of future operating, financial or other performance 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 to advise readers that various factors, including, but not limited to, the following, could cause actual results to
differ materially from those expressed in, or implied by, such “forward-looking statements”:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
uncertainty about whether the Corporation and FirstBank Puerto Rico (“FirstBank” or “the Bank”) will be able to continue to
fully comply with the written agreement dated June 3, 2010 (the “Written Agreement”) that the Corporation entered into with
the Federal Reserve Bank of New York (the “New York FED” or “Federal Reserve”) and the consent order dated June 2,
2010 (the “FDIC Order”) and together with the Written Agreement, (the “Regulatory Agreements”) that the Corporation’s
banking subsidiary, FirstBank entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the
Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF” or “Commissioner”) that, among other
things, require the Bank to maintain certain capital levels and reduce its special mention, classified, delinquent and non-
performing assets;
the risk of being subject to possible additional regulatory actions;
uncertainty as to the availability of certain funding sources, such as retail brokered certificates of deposit (“brokered CDs”);
the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue
brokered CDs to fund operations and provide liquidity in accordance with the terms of the FDIC Order;
the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s
stockholders in the future due to the Corporation’s need to receive approval from the New York FED and the Board of
Governors of the Federal Reserve System (“the Federal Reserve Board”) to receive dividends from FirstBank or FirstBank’s
failure to generate sufficient cash flow to make a dividend payment to the Corporation;
the strength or weakness of the real estate markets and of the consumer and commercial sectors and their impact on the credit
quality of the Corporation’s loans and other assets, which has contributed and may continue to contribute to, among other
things, high levels of non-performing assets, charge-offs and provisions for loan and lease losses and may subject the
Corporation to further risk from loan defaults and foreclosures;
the ability of FirstBank to realize the benefits of its deferred tax assets subject to the remaining valuation allowance;
additional adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”), and the U.S. Virgin
Islands (“USVI”), and British Virgin Islands (“BVI”), including the interest rate environment, market liquidity, housing
absorption rates, real estate prices, and disruptions in the U.S. capital markets, which has reduced and may once again reduce
interest margins and impact funding sources, and has affected demand for all of the Corporation’s products and services and
reduce the Corporation’s revenues and earnings, and the value of the Corporation’s assets;
3
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
a credit default by the Puerto Rico government or any of its public corporations or other instrumentalities, and recent and any
future downgrades of the long-term and short-term debt ratings of the Puerto Rico government, which could exacerbate
Puerto Rico’s adverse economic conditions;
an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued
recession in Puerto Rico, the current fiscal problems of the Puerto Rico government and recent credit downgrades of the
Puerto Rico government’s debt;
the risk that any portion of the unrealized losses in the Corporation’s investment portfolio is determined to be other-than-
temporary, including unrealized losses on the Puerto Rico government’s obligations;
uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., the USVI and
the BVI, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual
results for future periods to differ materially from prior results and anticipated or projected results;
changes in the fiscal and monetary policies and regulations of the U.S. federal government and the Puerto Rico government,
including those determined by the Federal Reserve Board, the New York Fed, the FDIC, government-sponsored housing
agencies, and regulators in Puerto Rico, the USVI and the BVI;
the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management
policies may not be adequate;
the risk that the FDIC may increase the deposit insurance premium and/or require special assessments to replenish its
insurance fund, causing an additional increase in the Corporation’s non-interest expenses;
the impact on the Corporation’s results of operations and financial condition of acquisitions and dispositions, including the
recent acquisition of certain loans, ten branches and related deposits previously owned by Doral Bank;
a need to recognize impairments on financial instruments, goodwill or other intangible assets relating to acquisitions;
the risk that downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the
Corporation’s ability to access necessary external funds;
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the
Corporation’s businesses, business practices and cost of operations; and
general competitive factors and industry consolidation.
The Corporation does not undertake, and specifically disclaims any obligation, to update any “forward-looking statements” to
reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal
securities laws.
Investors should refer to Item 1A. Risk Factors, in this Annual Report on Form 10-K, for a discussion of such factors and certain
risks and uncertainties to which the Corporation is subject.
4
PART I
First BanCorp., incorporated under the laws of the Commonwealth of Puerto Rico, is sometimes referred to in this Annual Report
on Form 10-K as “the Corporation,” “we,” “our” or “the registrant.”
Item 1. Business
GENERAL
First BanCorp. is a publicly owned financial holding company that is subject to regulation, supervision and examination by the
Federal Reserve Board. The Corporation was incorporated under the laws of the Commonwealth of Puerto Rico to serve as the bank
holding company for FirstBank. The Corporation is a full service provider of financial services and products with operations in Puerto
Rico, the United States and the USVI and BVI. As of December 31, 2014, the Corporation had total assets of $12.7 billion, total
deposits of $9.5 billion and total stockholders’ equity of $1.7 billion.
The Corporation provides a wide range of financial services for retail, commercial and institutional clients. As of December 31,
2014, the Corporation controlled two wholly owned subsidiaries: FirstBank and FirstBank Insurance Agency, Inc. (“FirstBank
Insurance Agency”). FirstBank is a Puerto Rico-chartered commercial bank, and FirstBank Insurance Agency is a Puerto Rico-
chartered insurance agency.
FirstBank is subject to the supervision, examination and regulation of both the OCIF and the FDIC. Deposits are insured through
the FDIC Deposit Insurance Fund. In addition, within FirstBank, the Bank’s USVI operations are subject to regulation and
examination by the United States Virgin Islands Banking Board; its BVI operations are subject to regulation by the British Virgin
Islands Financial Services Commission; and its operations in the state of Florida are subject to regulation and examination by the
Florida Office of Financial Regulation. 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, and two offices
in the USVI and BVI.
FirstBank conducts its business through its main office located in San Juan, Puerto Rico, 54 banking branches in Puerto Rico as of
March 1, 2015, 12 branches in the USVI and BVI and 10 branches in the state of Florida (USA). FirstBank has 6 wholly owned
subsidiaries with operations in Puerto Rico: First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company
specializing in the origination of small loans with 27 offices in Puerto Rico; First Management of Puerto Rico, a domestic corporation
which holds tax-exempt assets; FirstBank Puerto Rico Securities Corp., a broker-dealer subsidiary engaged in municipal bond
underwriting and financial advisory services on structured financings principally provided to government entities in the
Commonwealth of Puerto Rico; FirstBank Overseas Corporation, an international banking entity organized under the International
Banking Entity Act of Puerto Rico; and two other companies that hold and operate certain particular other real estate owned
properties. FirstBank had one active subsidiary with operations outside of Puerto Rico: First Express, a finance company specializing
in the origination of small loans with 2 offices in the USVI.
Effective as of 11:59 p.m. on December 31, 2014, the operations conducted by First Mortgage as a separate subsidiary were merged
with and into FirstBank.
Effective at the close of business on Friday, February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank,
assumed approximately $625 million in deposits related to such branches and purchased approximately $325 million in performing
residential mortgage loans through an alliance with Banco Popular of Puerto Rico (“Popular”) who was the successful lead bidder
with the FDIC on the failed Doral Bank. These numbers, which are as of December 31, 2014, are subject to post-closing adjustments
based on closing totals and purchase accounting adjustments. Refer to “Significant Events Since the Beginning of 2014” below for
additional information.
5
BUSINESS SEGMENTS
The Corporation has six reportable segments: Commercial and Corporate Banking; Consumer (Retail) Banking; Mortgage Banking;
Treasury and Investments; United States Operations; and Virgin Islands Operations. These segments are described below as well as in
Note 31, “Segment Information,” to the Corporation’s audited financial statements for the year ended December 31, 2014 included in
Item 8 of this Form 10-K.
Commercial and Corporate Banking
The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers
represented by specialized and middle-market clients and the public sector. FirstBank has developed expertise in a wide variety of
industries. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and
construction loans, and floor plan financings, as well as other products, such as cash management and business management services.
A substantial portion of this portfolio is secured by the underlying value of the real estate collateral and the personal guarantees of the
borrowers. This segment also includes the Corporation’s broker-dealer activities, which are primarily concentrated in the
underwriting of bonds and financial advisory services provided to government entities in Puerto Rico.
Consumer (Retail) Banking
The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted
mainly through FirstBank’s branch network and loan centers in Puerto Rico. Loans to consumers include auto, boat and personal
loans, credit cards, and lines of credit. 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
FirstBank’s retail network serve as one of the funding sources for the lending and investment activities.
Mortgage Banking
During 2014, the Mortgage Banking segment conducted its operations mainly through FirstBank and its mortgage origination
subsidiary, First Mortgage. Effective as of 11:59 p.m. on December 31, 2014, the operations conducted by First Mortgage as a
separate subsidiary were merged with and into FirstBank. These operations consist of the origination, sale, securitization and servicing
of a variety of residential mortgage loan products and related hedging activities. Originations are sourced through different channels
such as FirstBank branches and purchases from mortgage bankers, and in association with new project developers. The Mortgage
Banking segment 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 FHA’s insurance program whereas loans that meet VA and RD standards are guaranteed by those respective federal
agencies.
Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate
loans can be conforming or 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 the standards are referred to as
non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety
of high quality mortgage products to serve their financial needs through a faster and simpler process 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. Most of the Corporation’s residential mortgage loan portfolio consists of fixed-rate, fully
amortizing, full documentation loans. The Corporation obtained commitment authority to issue Government National Mortgage
Association (“GNMA”) mortgage-backed securities from GNMA and, under this program, the Corporation has been securitizing
FHA/VA mortgage loans into the secondary market.
6
Treasury and Investments
The Treasury and Investments segment is responsible for the Corporation’s treasury and investment management functions. The
treasury function, which includes funding and liquidity management, lends funds to the Commercial and Corporate Banking,
Mortgage Banking and Consumer (Retail) Banking segments to finance their respective lending activities and borrows from those
segments and from the United States Operations segment. Funds not gathered by the different business units are obtained by the
Treasury Division through wholesale channels, such as brokered deposits, advances from the Federal Home Loan Bank (“FHLB”),
and repurchase agreements with investment securities, among others.
United States Operations
The United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland.
FirstBank provides a wide range of banking services to individual and corporate customers primarily in southern Florida through its
10 branches. Our success in attracting core deposits in Florida has enabled us to become less dependent on brokered CDs. The
United States Operations segment offers an array of both retail and commercial banking products and services. Consumer banking
products include checking, savings and money market accounts, retail certificates of deposit (“retail CDs”), internet banking services,
residential mortgages, home equity loans, lines of credit, and automobile loans. Deposits gathered through FirstBank’s branches in the
United States also serve as one of the funding sources for lending and investment activities in Puerto Rico.
The commercial banking services include checking, savings and money market accounts, retail CDs, internet banking services,
cash management services, remote data capture, and automated clearing house, or ACH, transactions. Loan products include the
traditional commercial and industrial (“C&I”) and commercial real estate products, such as lines of credit, term loans and construction
loans.
Virgin Islands Operations
The Virgin Islands Operations segment consists of all banking activities conducted by FirstBank in the USVI and BVI, including
retail and commercial banking services, with a total of twelve branches serving the islands in the USVI of St. Thomas, St. Croix, and
St. John, and the islands in the BVI of Tortola and Virgin Gorda. The Virgin Islands Operations segment is driven by its consumer,
commercial lending and deposit-taking activities.
Loans to consumers include auto, boat, lines of credit, personal and residential mortgage loans. Deposit products include interest
bearing and non-interest bearing checking and savings accounts, IRAs, and retail CDs. Retail deposits gathered through each branch
serve as the funding sources for its own lending activities.
Employees
As of March 1, 2015, the Corporation and its subsidiaries employed 2,617 persons. None of its employees is represented by a
collective bargaining group. The Corporation considers its employee relations to be good.
SIGNIFICANT EVENTS SINCE THE BEGINNING OF 2014
Partial Reversal of Deferred Tax Asset Valuation Allowance
The Corporation recognized an income tax benefit of $302.9 million in the fourth quarter of 2014 related to the reversal of a
significant portion of the valuation allowance recorded against the deferred tax assets of its subsidiary bank, FirstBank. The
Corporation concluded that, as of December 31, 2014, it is more likely than not that FirstBank will generate sufficient taxable income
within the applicable net operating loss carry-forward periods to realize a significant portion of its deferred tax assets and, therefore,
reversed $302.9 million of the valuation allowance.
This conclusion is based upon consideration of a number of factors, including FirstBank’s (i) completion of a sixth consecutive quarter
of profitability and (ii) forecast of future profitability, under several potential scenarios, where the Corporation has assigned more
weight to its continued profitability than to potential future growth which it is planning to achieve. As a result of the partial reversal,
the Corporation’s deferred tax asset amounted to $313.0 million as of December 31, 2014, net of the remaining valuation allowance of
$204.6 million. Refer to Note 24 – Income Taxes in Item 8 of this Form 10-K for a detailed discussion on the Corporation’s deferred
tax assets and the respective valuation allowance.
7
Acquisition of Certain Loans and Deposits of Doral Bank
Effective at the close of business on Friday, February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank,
assumed approximately $625 million in deposits related to such branches and purchased approximately $325 million in performing
residential mortgage loans through an alliance with Popular, who was the successful lead bidder with the FDIC on the failed Doral
Bank.
Under the FDIC’s bidding format, Popular was the lead bidder and party to the purchase and assumption agreement with the FDIC
covering all assets and deposits to be acquired by Popular and its alliance co-bidders. Popular entered into back to back purchase and
assumption agreements with the alliance co-bidders, including FirstBank, for the transferred assets and deposits. Pursuant to the terms
of the purchase and assumption agreement, FirstBank purchased the loans at an aggregate discount of 9.0%, or approximately $29
million, and assumed the deposits at a premium of 1.6%, or approximately $10 million. These numbers, which are as of December 31,
2014, are subject to post-closing adjustments based on closing date totals and purchase accounting adjustments. There is no loss-share
with the FDIC related to the acquired assets.
FirstBank entered into a transition services agreement with Popular that enables FirstBank to receive services reasonably necessary
to operate the acquired branches during the transition period in a manner consistent with market practice, including the servicing of
residential mortgage loans until the acquired assets are converted to FirstBank’s operating system, which is anticipated to occur within
the next 6 months. Upon closing of the completion of the acquisition, the Corporation and FirstBank remained well in excess of “well
capitalized” under the applicable regulatory standards, with no additional capital required to support this transaction, although the
provisions of the Regulatory agreements preclude such designation. The transaction is expected to be accretive to earnings.
Acquisitions of Mortgage Loans from Doral Financial Corporation (“Doral”)
On May 30, 2014, FirstBank purchased from Doral all of its rights, title and interests in first and second mortgage loans having an
unpaid principal balance of approximately $241.7 million for an aggregate price of approximately $232.9 million. Doral had pledged
the mortgage loans to FirstBank as collateral for secured borrowings pursuant to a series of credit agreements between the parties
entered into in 2006. As consideration for the purchase of the mortgage loans, FirstBank credited approximately $232.9 million as full
satisfaction of the outstanding balance of the Doral secured borrowings plus interest owed to FirstBank. The estimated fair value of
the mortgage loans at acquisition was $226.0 million. This transaction resulted in a loss of $6.9 million derived from the difference
between the fair value of the mortgage loans acquired, $226.0 million, and the book value of the secured borrowings of $232.9
million. Approximately $5.5 million of the loss was part of the general allowance for loan losses established for commercial loans in
prior periods; thus, an additional charge of $1.4 million to the provision was recorded in the second quarter of 2014. In addition, the
Corporation recorded $0.6 million of professional service fees in the second quarter of 2014 specifically related to this transaction. On
or about the same date, the parties entered into an Escrow Agreement with Chicago Title Insurance Company pursuant to which Doral
deposited $1,300,000 in funds (the “Escrow Account”) from the proceeds of the transaction in order to cure certain identified title and
tax defects. Under the terms of the Escrow Agreement, Doral had a period to cure the defects using the funds in the Escrow Account.
Acquired loans are recorded at fair value at the date of acquisition. The Corporation concluded that loans with a contractual unpaid
principal balance of $119.2 million and an estimated fair value at acquisition of $102.8 million were acquired with evidence of credit
quality deterioration and, as purchased credit impaired (“PCI”) loans, have been accounted for under Accounting Standards
Codification (“ASC”) 310-30, while loans with a contractual unpaid principal balance of $122.5 million and an estimated fair value at
acquisition of $123.2 million are non-credit impaired purchased loans that have been accounted for under ASC 310-20. This
transaction eliminated FirstBank’s largest single commercial loan exposure.
On October 2, 2014, FirstBank, entered into a Mortgage Loan Purchase and Sale and Interim Servicing Agreement (the “Purchase
Agreement”) with Doral Bank, a wholly-owned subsidiary of Doral. Pursuant to the Purchase Agreement, FirstBank purchased on
October 3, 2014 all rights, title and interests in certain performing residential mortgage loans (the “Mortgage Loans”) with
approximately $192.6 million in outstanding unpaid principal balance.
As consideration for the purchase of the Mortgage Loans, FirstBank paid approximately $192.7 million in cash, less a holdback of
$1.3 million which was deposited into escrow to cover certain representations and warranties made by Doral Bank with respect to the
Mortgage Loans. The Corporation incurred $0.7 million in professional service fees during the third quarter of 2014 specifically
related to this transaction.
8
Settlement of the United States Internal Revenue Service (“IRS”) tax audit
As previously reported, the years 2007 through 2009 were examined by the IRS and disputed issues, primarily related to the
disallowance of certain expenses, were taken to administrative appeals during 2011. As a result of a final settlement with the IRS
Appeals Office in 2014, the Corporation’s unrecognized tax benefits decreased by $4.3 million during 2014. The Corporation released
a portion of its reserve for uncertain tax positions resulting in a tax benefit of $1.8 million and paid $2.5 million to settle the tax
liability resulting from the audit.
Reduction of the U.S. Treasury’s ownership stake in the Corporation
During the fourth quarter of 2014, the U.S. Department of the Treasury (the “U.S. Treasury”) sold approximately 4.4 million shares
of First BanCorp.’s common stock through its first pre-defined written trading plan. On March 9, 2015, the U.S. Treasury announced
the sale of an additional 5 million shares of First BanCorp.’s common stock through its second pre-defined written trading plan. As of
the announcement date, the U.S. Treasury held 10,291,553 shares, or approximately 4.8% of First BanCorp.’s common stock,
excluding the 1.3 million shares underlying a warrant exercisable at $3.29 per share. Back in 2013, the U.S. Treasury sold 13,261,356
shares of First BanCorp.’s common stock at $6.75 per share in a registered offering.
Downgrades of the debt ratings of the Puerto Rico Government and public instrumentalities and related government actions
A significant portion of the Corporation’s financial activities and credit exposure is concentrated in Puerto Rico, which has endured
a prolonged period of economic and fiscal challenges.
In February 2014, the three principal rating agencies (Moody’s Investor Services, Standard and Poor’s and Fitch Ratings) lowered
their ratings on the General Obligation bonds of the Commonwealth of Puerto Rico and the bonds of several other Commonwealth
instrumentalities to non-investment grade ratings. In connection with their rating actions, the rating agencies noted various factors,
including high levels of public debt, the lack of clear economic growth catalysts, recurring fiscal budget deficits, the financial
condition of the public sector employee pension plans, and liquidity concerns regarding the Commonwealth and Government
Development Bank for Puerto Rico (“GDB”) and their ability to access the capital markets.
In March 2014, the Commonwealth of Puerto Rico sold $3.5 billion in General Obligation bonds, yielding 8.72%. GDB has
traditionally served as the principal source of short-term liquidity to the Commonwealth and its public instrumentalities and
municipalities. Most of the proceeds of the bond issue were used to refinance outstanding bonds and notes, including repaying
approximately $1.9 billion of lines of credit extended by GDB to the Commonwealth and certain public instrumentalities.
On June 28, 2014, Governor Alejandro García Padilla signed into law the Puerto Rico Public Corporations Debt Enforcement and
Recovery Act (the “Recovery Act”), which provides a framework for certain public corporations, including the Puerto Rico Electric
Power Authority (“PREPA”), to restructure their debt obligations in order to ensure that the services they provide to the public are not
interrupted. On July 1, 2014, Moody’s, as a consequence of the enactment of the Recovery Act, again downgraded the majority of the
Puerto Rico central government and public instrumentalities’ obligations, expressing its concern for all of Puerto Rico’s municipal
debt based on the deteriorating fiscal situation on the island and the possibility that application of the new law may further limit the
Commonwealth’s ability to access the capital markets. Both S&P and Fitch later issued ratings downgrades for various Puerto Rico
municipal issuers, including PREPA. In February 2015, a federal judge ruled that the Recovery Act is pre-empted by the Federal
Bankruptcy Court and therefore void. After this decision, S&P and Moody’s downgraded Puerto Rico’s General Obligation bonds
deeper into non-investment grade category.
PREPA faces significant fiscal and financial challenges that have to be addressed in the short-term in order to stabilize its
operations. These include $696 million in outstanding short-term credit facilities from various banks that, by their terms, matured in
July and August of 2014 but with respect to which the lenders have entered into forbearance agreements until March 31, 2015,
significant recurring operational and budgetary shortfalls, high electricity rates compared to U.S. utilities, high levels of debt, limited
fuel diversification for electricity generation, significant nondiscretionary capital expenditure needs, and burdensome U.S. Federal
environmental regulatory requirements. PREPA appointed a chief restructuring officer, who is assisting PREPA in evaluating and
implementing changes with a view to achieving long-term sustainability. The Corporation has $75 million in outstanding lines of
credit to PREPA as of December 31, 2014. As a result of the forbearance, this credit was classified as a Troubled Debt Restructuring
(“TDR”) loan during the third quarter of 2014. The loan has been maintained in accrual status based on the estimated cash flow
analyses performed on this noncollateral dependent loan, repayment prospects and compliance with contractual terms.
9
As of December 31, 2014, the Corporation had $339.0 million in credit facilities granted to the Puerto Rico government, its
municipalities and public corporations, of which $308.0 million was outstanding, compared to $397.8 million outstanding as of
December 31, 2013. Approximately $201.4 million of the outstanding credit facilities consists of loans to municipalities in Puerto
Rico. Municipal debt exposure is secured by ad valorem taxation without limitation as to rate or amount on all taxable property within
the boundaries of each municipality. The good faith, credit, and unlimited taxing power of the applicable municipality have been
pledged to the repayment of all outstanding bonds and notes. Approximately $13.2 million consists of loans to units of the central
government, and approximately $93.4 million consists of loans to public corporations, including the $75 million direct exposure to
PREPA. Furthermore, the Corporation had $133.3 million outstanding as of December 31, 2014 in financing to the hotel industry in
Puerto Rico guaranteed by the Tourism Development Fund (“TDF”), compared to $200.4 million as of December 31, 2013.
In addition, as of December 31, 2014, the Corporation had outstanding $61.2 million in obligations of the Puerto Rico government,
mainly bonds of the GDB and the Puerto Rico Building Authority, as part of its available-for-sale investment securities portfolio,
carried on its books at a fair value of $43.2 million.
Also in 2014, Act 24-2014 was approved by the Puerto Rico Legislature, seeking to further strengthen the liquidity of the GDB and
the GDB’s oversight of public funds.
Among other measures, Act 24-2014 grants the GDB the ability to exercise additional oversight of certain public funds deposited at
private financial institutions and grants the GDB the legal authority, subject to an entity’s ability to request waivers under certain
specified circumstances, to require such public funds (other than funds of the Legislative Branch, the Judicial Branch, the University
of Puerto Rico, governmental pension plans, municipalities and certain other independent agencies) to be deposited at the GDB, which
is expected to maximize liquidity and to result in more efficient management of public resources. As anticipated, certain public
corporations and agencies withdrew from FirstBank approximately $341.6 million during the second quarter of 2014. The Corporation
will continue to focus on transactional accounts and to seek to obtain deposits from entities excluded from Act 24-2014.
In February 2015, the Governor of Puerto Rico announced a proposal for a new tax code that would replace the current 7% sales
and use tax with a 16% value-added tax, while lowering income taxes. Refer to Supervision and Regulation – Puerto Rico Income
Taxes – Proposed Tax Reform below for additional details.
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 Exchange Act, free of charge on or through its
internet website at www.firstbankpr.com (under “Investor Relations”), 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 Corporation’s corporate governance guidelines and principles, the charters of the audit,
asset/liability, compensation and benefits, credit, compliance, risk, corporate governance and nominating committees and the codes of
conduct and independence principles mentioned below, free of charge on or through its internet website at www.firstbankpr.com
(under “Investor Relations”):
• Code of Ethics for CEO and Senior Financial Officers
• Code of Ethics applicable to all employees
• Corporate Governance Standards
• Independence Principles for Directors
• Luxury Expenditure Policy
The corporate governance guidelines and principles 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.
10
The public may read and copy any materials that First BanCorp. files with the SEC at the SEC’s 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 (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, 2014, the Corporation also had a presence in the state of Florida and in the USVI and BVI. 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, brokerage firms with retail operations, and credit unions in Puerto Rico, the Virgin Islands and the
state of Florida. The Corporation’s 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 Corporation’s 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
Corporation’s 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 in 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 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 Corporation’s 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
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. Numerous additional regulations and changes to
regulations are anticipated as a result of the Dodd-Frank Act, and future legislation may provide additional regulatory oversight of
FirstBank. Any change in applicable laws or regulations may have a material adverse effect on the business of commercial banks and
bank holding companies, including FirstBank and the Corporation.
Dodd-Frank Act.
The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry. The Dodd-
Frank Act includes, the regulations adopted to date include, and the regulations still under development thereunder will include,
provisions that have affected and will affect large and small financial institutions alike, including several provisions that have affected
and will affect how banks and bank holding companies will be regulated in the future. As a result of the Dodd-Frank Act, which
became law on July 21, 2010, there has been and will be in the future additional regulatory oversight and supervision of the
Corporation and its subsidiaries.
The Dodd-Frank Act, among other things, imposes new capital requirements on bank holding companies; provides that a bank
holding company must serve as a source of financial and managerial strength to each of its subsidiary banks and stand ready to
commit resources to support each of them; changes the base for FDIC insurance assessments to a bank’s average consolidated total
assets minus average tangible equity, rather than upon its deposit base, and permanently raises the current standard deposit insurance
limit to $250,000; and expands the FDIC’s authority to raise insurance premiums. The legislation also calls for the FDIC to raise the
ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of
increased assessments on insured depository institutions with assets of less than $10 billion.
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The Dodd-Frank Act establishes as an independent entity, within the Federal Reserve, the Bureau of Consumer Financial Protection
(the “CFPB”), which has broad rulemaking, supervisory and enforcement authority over consumer financial products and services,
including deposit products, residential mortgages, home-equity loans and credit cards, and contains provisions on mortgage-related
matters such as steering incentives, and determinations as to a borrower’s ability to repay the principal amount and prepayment
penalties.
The CFPB has had primary examination and enforcement authority over FirstBank and other banks with over $10 billion in assets
with respect to consumer financial products and services since July 21, 2011.
The Dodd-Frank Act also limits interchange fees payable on debit card transactions. In June, 2011, the Federal Reserve Board
approved a final debit card interchange rule, which is now fully operational. The rule caps a debit card issuer’s base fee at 21 cents
per transaction and allows an additional 5 basis-point charge per transaction to help cover fraud losses. The debit card interchange rule
reduced our interchange fee revenue in line with industry-wide expectations, beginning with the quarter ended December 31, 2011.
The new pricing negatively impacted FirstBank fee income by an approximate $2.0 million in 2012.
The Dodd-Frank Act includes provisions that affect corporate governance and executive compensation at all publicly-traded
companies and allows financial institutions to pay interest on business checking accounts. The legislation also restricts proprietary
trading, places restrictions on the owning or sponsoring of hedge and private equity funds, and regulates the derivatives activities of
banks and their affiliates.
Section 171 of the Dodd-Frank Act (“the Collins Amendment”), among other things, eliminates certain trust-preferred securities
from Tier I capital. Preferred securities issued under the U.S. Department of the Treasury’s (the “Treasury”) Troubled Asset Relief
Program (“TARP”) are exempt from this treatment. Bank holding companies, such as the Corporation, must fully phase out these
instruments from Tier 1 capital by January 1, 2016 (25% allowed in 2015 and 0% in 2016); however, these instruments may remain in
Tier 2 capital until the instruments are redeemed or mature.
Regulatory Capital and Liquidity Coverage Developments. In July 2013, the federal banking agencies adopted final rules for U.S.
banks that revise important aspects of the minimum regulatory capital requirements, the components of regulatory capital, and the
risk-based capital treatment of bank assets and off-balance sheet exposures. The final rules, with which the Corporation and our
subsidiary bank must comply beginning January 1, 2015, generally are intended to align U.S. regulatory capital requirements with
international regulatory capital standards adopted by the Basel Committee on Banking Supervision (“Basel Committee”), in particular
the most recent international capital accord adopted in 2010 (and revised in 2011) known as “Basel III.” The new rules will increase
the quantity and quality of capital required by, among other things, establishing a new minimum common equity Tier 1 ratio of 4.5%
of risk-weighted assets and an additional common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. In
addition, banks and bank holding companies are required to have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and
a total risk-based ratio of 8.0%. The final rules also revise the definition of capital by expanding the conditions for the inclusion of
equity capital instruments and minority interests as Tier 1 capital, and will impose limitations on capital distributions and certain
discretionary bonus payments if additional specified amounts, or “buffers,” of common equity Tier 1 capital are not met.
Consistent with Basel III and the Collins Amendment, the final rules also establish a more conservative standard for including an
instrument such as trust-preferred securities as Tier 1 capital for bank holding companies with total consolidated assets of $15 billion
or more as of December 31, 2009. Bank holding companies such as the Corporation must fully phase out these instruments from Tier
I capital by January 1, 2016, although qualifying trust preferred securities may be included as Tier 2 capital until the instruments are
redeemed or mature. As of December 31, 2014, the Corporation had $225 million in trust preferred securities that are subject to the
phase-out from Tier 1 capital under the final regulatory capital rules discussed above.
In addition, the final rules revise and harmonize the bank regulators’ rules for calculating risk-weighted assets to enhance risk
sensitivity and address weaknesses that have been identified, by applying a variation of the Basel III “standardized approach” for the
risk-weighting of bank assets and off-balance sheet exposures to all U.S. banking organizations other than large, internationally active
banks. These new regulatory capital requirements are discussed in further detail in “Regulation and Supervision – Federal Reserve
Board Capital Requirements” and “Regulation and Supervision – FDIC Capital Requirements.”
12
The final capital rules became effective for the Corporation and our subsidiary bank on a- multi-year transitional basis starting on
January 1, 2015, and in general will be fully effective as of January 1, 2019; the new general minimum regulatory capital requirements
and the “standardized approach” for risk weighting of a banking organization’s assets, however, fully apply to us as of January 1,
2015. We generally expect that the final rules will increase our regulatory capital requirements and will require us to hold more
capital against certain of our assets and off-balance sheet exposures. The Corporation’s estimated pro-forma common equity Tier 1
ratio, Tier 1 capital ratio, total capital ratio, and the leverage ratio under the Basel III rules, giving effect as of December 31, 2014 to
all the provisions that will be phased-in between January 1, 2015 and January 1, 2019, was 15.1%, 15.5%, 19.2%, and 11.7%,
respectively. These ratios would exceed the fully phased-in minimum capital ratios under Basel III.
On September 3, 2014, the U.S. banking regulators issued their final rule implementing a key component of the Basel III capital
framework - the Liquidity Coverage Ratio (“LCR”). The LCR is a short-term liquidity measure intended to ensure that banking
organizations maintain a sufficient pool of liquid assets to cover net cash outflows over a 30-day stress period. The LCR
requirements, which would not affect the Corporation or the Bank, are applicable to large, internationally active banking organizations
with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, and to
consolidated subsidiary depository institutions of these banking organizations with $10 billion or more in total consolidated assets.
International Regulatory Capital and Liquidity Coverage Developments
Internationally, both the Basel Committee and the Financial Stability Board (established in April 2009 by the Group of Twenty
(“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial
system with greater international consistency, cooperation and transparency) have committed to raise capital standards and liquidity
buffers within the banking system under Basel III. In 2010 (revised in 2011), the Group of Governors and Heads of Supervision
agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 equity ratio to 6.0%,
with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with
implementation by January 2019. U.S. bank regulators approved a revised regulatory capital framework for implementing Basel III in
July 2013 (see discussion above).
On October 31, 2014, the Basel Committee issued its final requirements for a Net Stable Funding Ratio (“NSFR”). The NSFR
compares the amount of an institution’s available stable funding (“ASF”, the ratio’s numerator) to its required stable funding (“RSF”,
the ratio’s denominator) to measure how the institution’s asset base is funded. “ASF” is defined as the portion of capital and liabilities
expected to be reliable over the time horizon considered by the NSFR, which extends to one year. ASF generally is calculated by
reference to the broad characteristics of the relative stability of an institution’s funding sources, including the contractual maturity of
its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. The amount of
RSF of a specific institution is a function of the liquidity characteristics and residual maturities of the assets and off-balance sheet
exposures held by the institution. This ratio should be equal to at least 100% on an ongoing basis by January 1, 2018 according to the
Basel Committee standard. While the NSFR is intended to be applied to large, internationally active banks, at the discretion of
national supervisors it can be applied to other banking organizations or classes of banking organizations. The U.S. federal banking
agencies are expected to issue a proposal for implementation of the NSFR in the U.S. sometime in 2015.
Prudential Regulation Developments. In May 2012, the federal banking agencies issued general supervisory guidance for stress
testing practices applicable to banking organizations with more than $10 billion in total consolidated assets, such as us and our
subsidiary bank, which became effective in July 2012. This guidance outlines broad principles for a satisfactory stress testing
framework, including principles related to governance, controls and use of results, and describes various stress testing approaches and
how stress testing should be used at various levels within an organization. In October 2012, the Federal Reserve Board and the other
federal banking agencies issued a final rule implementing the requirements of the Dodd-Frank Act that generally required bank
holding companies with total consolidated assets of between $10 billion and $50 billion to comply with annual company-run stress
testing requirements.
As a result of these changes, the Corporation is subject to two new stress testing rules that implement provisions of the Dodd-Frank
Act, one issued by the Federal Reserve Board that applies to First BanCorp. on a consolidated basis and one issued by the FDIC that
applies to the Bank. These Dodd-Frank Act stress tests are designed to require banking organizations to assess the potential impact of
different scenarios on their earnings, losses and capital over a set time period, with consideration given to certain relevant factors,
including the organization's condition, risks, exposures, strategies, and activities. The Dodd-Frank Act stress tests require banking
organizations with total consolidated assets of more than $10 billion but less than $50 billion, including the Corporation and the Bank,
to conduct annual company-run stress tests using certain scenarios that the Federal Reserve Board will publish by November 15 of
each year, report the results to their primary federal regulator and the Federal Reserve Board by March 31 of the following year, and
publicly disclose, beginning in 2015, a summary of the results by June 30 of that year.
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On February 1, 2014, the Federal Reserve approved a final rule strengthening supervision and regulation of large U.S. bank
holding companies and foreign banking organizations, as required by the Dodd-Frank Act. Most of its enhanced prudential standards
apply only to institutions with total consolidated assets of $50 billion or more, which would not affect the Corporation. The final rule,
however, requires publicly traded U.S. bank holding companies with total consolidated assets of $10 billion or more, such as the
Corporation, to establish enterprise-wide risk committees. These new requirements complement the stress testing and resolution
planning requirements for large bank holding companies that the Federal Reserve previously finalized. The Corporation must comply
with these new requirements by January 1, 2015, and expects to be in compliance. The final rule requires the Corporation’s risk
management framework to be commensurate with the Corporation’s structure, risk profile, complexity, activities and size, and must
include policies and procedures establishing risk-management governance, risk-management policies, and risk control infrastructure
for the Corporation’s global operations and processes and systems for implementing and monitoring compliance with such policies
and procedures. Requirements applicable to the risk committee include a requirement that one independent director chair the
committee, with the Corporation determining the appropriate proportion of independent directors on the committee, based on its size,
scope, and complexity, provided that it meets the minimum requirement of one independent director. Also, at least one director with
risk-management experience must be appointed to the risk committee.
On March 5, 2014, the Federal Reserve Board and the other federal banking agencies published final supervisory guidance
describing their supervisory expectations for the Dodd-Frank Act stress tests to be conducted by financial institutions, including the
Corporation and the Bank.
The final guidance provides flexibility to accommodate different risk profiles, sizes, business lines, market areas, and complexity
approaches for banking institutions in the $10 billion to $50 billion asset range, and provides examples of practices that would be
consistent with supervisory expectations. Affected banking organizations, including the Corporation, were required to submit to
regulators their first company-run Dodd-Frank Act stress tests no later than March 31, 2014. Public disclosure of the results for the
severely adverse economic scenario is expected to be made for the first time during the second quarter of 2015 on the Corporation’s
website. The final guidance also confirms that banking organizations with assets between $10 billion and $50 billion are not subject to
the more extensive capital planning and stress-testing requirements that apply to bank holding companies with assets of at least $50
billion, including the Federal Reserve Board capital plan rule, the annual Comprehensive Capital Analysis and Review, the Dodd-
Frank Act supervisory stress tests, and related data collections.
Consumer Financial Protection Bureau. New regulations implement the Dodd-Frank Act amendments to the Equal Credit
Opportunity Act, the Truth in Lending Act (“TILA”), and the Real Estate Settlement Procedures Act (“RESPA”). In general, among
other changes, these regulations: (i) require lenders to make a reasonable good faith determination of a prospective residential
mortgage borrower’s ability to repay based on specific underwriting criteria, certain of which need to be supported through the
verification of third party records, and require stricter underwriting of “qualified mortgages,” discussed below, that presumptively
satisfy the ability to pay requirement (thereby providing the lender a safe harbor from compliance claims), (ii) specify new limitations
on loan originator compensation and establish criteria for the qualifications of, and registration or licensing of loan originators, (iii)
further restrict certain high-cost mortgage loans by expanding the coverage of the Home Ownership and Equity Protections Act of
1994, (iv) expand mandated loan escrow accounts for certain loans, (v) revise existing appraisal requirements under the Equal Credit
Opportunity Act and require provision of a free copy of all appraisals to applicants for first lien loans, (vi) establish new appraisal
standards for “higher-risk mortgages” under TILA, and (vii) combine in a single, new form required loan disclosures under the TILA
and RESPA.
In January 2013, the CFPB issued a final regulation defining a “qualified mortgage” for purposes of the Dodd-Frank Act, and
setting standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. This regulation also
affords safe harbor legal protections for lenders making qualified loans that are not “higher priced.” It is unclear how this regulation,
or this regulation in tandem with an anticipated rule defining “qualified residential mortgage” and setting standards governing loans
that are to be packaged and sold as securities, will affect the mortgage lending market by potentially curbing competition, increasing
costs or tightening credit availability.
In January 2013, the CFPB also issued a final regulation containing new mortgage servicing rules that took effect in January 2014
and are applicable to the Bank. The announced goal of the CFPB is to bring greater consumer protection to the mortgage servicing
market.
These changes affect notices given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate
adjustments and options for avoiding “force-placed” insurance. Servicers are prohibited from processing foreclosures when a loan
modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.
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The servicer must provide direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application.
Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or
transferred. These new standards are expected to add to our cost of conducting a mortgage servicing business.
On December 15, 2014, the CFPB proposed further changes to these mortgage servicing rules. The proposed changes generally
would clarify and amend provisions regarding force-placed insurance notices, policies and procedures, early intervention, loss
mitigation requirements and periodic statement requirements under the CFPB mortgage servicing rules. The proposed amendments
also would address proper compliance regarding certain servicing requirements when a consumer is a potential or confirmed successor
in interest, is in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act. Comment on these
new proposals closes on March 16, 2015.
The Volcker Rule. This section of the Dodd-Frank Act, subject to important exceptions, generally prohibits a banking entity such as
the Corporation or FirstBank from acquiring or retaining any ownership in, or acting as sponsor to, a hedge fund or private equity
fund. The Volcker Rule also prohibits these entities from engaging, for their own account, in short-form proprietary trading of certain
securities, derivatives, commodity futures and options on these instruments.
Final regulations implementing the Volcker Rule were adopted by the financial regulatory agencies on December 10, 2013. The
regulations became effective on April 1, 2014, although affected banking organizations generally will have until July 21, 2017 to bring
most of their private fund activities into conformance with the Volcker Rule and the new regulations; banking entities, however, will
have only until July 21, 2015 to bring their proprietary trading activities into compliance with the Volcker Rule.
Banking organizations are expected to engage in “good faith efforts” to bring all of their covered activities into compliance by the
July 2015 or 2017 (whichever is applicable) conformance date. The Corporation does not believe that it or the Bank engages in any
significant amount of proprietary trading as defined in the Volcker Rule and believes that any impact would be minimal. In addition, a
review of the Corporation’s investments was undertaken to determine if any meet the Volcker Rule’s definition of covered funds.
Based on that review, the Corporation’s investments are not considered covered funds under the Volcker Rule.
Future Legislation and Regulation. Much of the Dodd-Frank Act must be implemented through regulations adopted by the various
federal financial institutions regulatory agencies, including the FDIC and CFPB. While the federal agencies have adopted regulations
that implement many requirements of the Dodd-Frank Act, important regulatory actions (e.g., the adoption of rules regarding the
compensation of financial institutions executives) that could have an impact on the Corporation and the Bank remain to be taken.
Additional consumer protection laws may be enacted, and the FDIC, Federal Reserve and CFPB have adopted and will adopt in the
future new regulations that have addressed or may address, among other things, banks’ credit card, overdraft, collection, privacy and
mortgage lending practices. Additional consumer protection legislation and regulatory activity is anticipated in the near future.
Such proposals and legislation, if finally adopted and implemented, would change banking laws and our operating environment
and that of our subsidiaries in ways that could be substantial and unpredictable. We cannot determine whether such proposals and
legislation will be adopted, or the ultimate effect that such proposals and legislation, if enacted, or regulations issued to implement the
same, would have upon our financial condition or results of operations.
Bank Holding Company Activities and Other Limitations
The Corporation is registered and subject to regulation under the Bank Holding Company Act of 1956, as amended (the “Bank
Holding Company Act” or “BHC 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. In addition,
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.
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.
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The Bank Holding Company Act also permits a bank holding company to elect to become a financial holding company and engage
in a broad range of activities that are financial in nature. The Corporation filed an election with the Federal Reserve Board and became
a financial holding company under the Bank Holding Company Act. 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 Bank Holding Company 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) domestic activities permitted for existing bank holding company; (g) foreign
activities permitted for existing bank holding company; and (h) merchant banking activities.
A financial holding company that ceases to meet certain standards is subject to a variety of restrictions, depending on the
circumstances, including precluding the undertaking of new activities or the acquisition of shares or control of other companies. Until
compliance is restored, the Federal Reserve Board has broad discretion to impose appropriate limitations on the financial holding
company’s 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 Corporation and FirstBank must be well-capitalized and well-
managed for regulatory purposes, and FirstBank must earn “satisfactory” or better ratings on its periodic Community Reinvestment
Act (“CRA”) examinations to preserve the financial holding company status. By reason of, among other things, the Written
Agreement, the Bank is not treated as “well-capitalized” and therefore is restricted in its ability to undertake new financial activities.
The potential restrictions are different if the lapse pertains to the CRA. In that case, until all the subsidiary institutions are restored
to at least a “satisfactory” CRA rating status, the financial holding company may not engage, directly or through a subsidiary, in any
of the additional financial activities permissible under the Bank Holding Company Act or 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 Bank Holding Company Act does not require divestiture for this type of situation.
Under provisions of the Dodd-Frank Act and Federal Reserve Board policy, a bank holding company such as the Corporation is
expected to act as a source of financial and managerial 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 company’s 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, 2014, and the date hereof, FirstBank was and
is the only depository institution subsidiary of the Corporation. The Dodd-Frank Act directs the Federal Reserve Board to adopt
regulations adopting the statutory source-of-strength requirements, but implementing regulations have not yet been proposed.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOX”) implemented a range of corporate governance and other 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 the federal securities laws. In addition, SOX has 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 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 control over financial reporting.
The Corporation includes in its annual report on Form 10-K its management’s assessment regarding the effectiveness of the
Corporation’s internal control over financial reporting. The internal control report includes a statement of management’s
responsibility for establishing and maintaining adequate internal control over financial reporting for the Corporation; management’s
assessment as to the effectiveness of the Corporation’s internal control over financial reporting based on management’s evaluation, as
of year-end; and the framework used by management as criteria for evaluating the effectiveness of the Corporation’s internal control
over financial reporting.
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As of December 31, 2014, First BanCorp’s management concluded that its internal control over financial reporting was effective.
The Corporation’s independent registered public accounting firm reached the same conclusion.
Emergency Economic Stabilization Act of 2008
Turmoil in the U.S. financial sector during 2008 resulted in the passage on October 3, 2008 of the Emergency Economic
Stabilization Act of 2008 (the “EESA”) and the adoption of several programs by the U.S. Treasury, as well as several actions by the
Federal Reserve Board. The EESA authorized the U.S. Treasury to access up to $700 billion to protect the U.S. economy and restore
confidence and stability to the financial markets. One such program under the TARP was action by U.S. Treasury to make significant
investments in U.S. financial institutions through the Capital Purchase Program (“CPP”). The U.S. Treasury’s stated purpose in
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 U.S. Treasury approved, a capital purchase in the amount of $400,000,000. The Corporation
entered into a Letter Agreement, dated as of January 16, 2009, including the Securities Purchase Agreement Standard Terms
(collectively the “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 Fixed Rate Cumulative Perpetual Preferred Stock, Series F (the
“Series F Preferred Stock”), and (ii) a warrant to purchase 389,483 shares of the Corporation’s common stock at an exercise price of
$154.05 per share, subject to certain anti-dilution and other adjustments (the “warrant”). The TARP transaction closed on January 16,
2009. On July 20, 2010, we exchanged the Series F Preferred Stock, plus accrued dividends on the Series F Preferred Stock, for
424,174 shares of a new series of preferred stock, fixed rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the
“Series G Preferred Stock”), and amended the warrant. On October 7, 2011, we exercised our right to convert the Series G Preferred
Stock into 32,941,797 shares of common stock. As a result of the issuance of $525 million of common stock in October 2011, the
warrant was adjusted to provide for the issuance of approximately 1,285,899 shares of common stock at an exercise price of $3.29 per
share. On August 16, 2013, a secondary offering of the Corporation’s common stock was completed by certain of the Corporation’s
existing stockholders, including the U.S. Treasury which sold 13 million shares in such secondary offering. In the fourth quarter of
2014, the U.S. Treasury sold an additional 4.4 million shares in accordance with its first pre-defined written trading plan. On March 9,
2015, the U.S. Treasury announced the sale of an additional 5 million shares of First BanCorp.’s common stock through its second
pre-defined written trading plan. As of the announcement date, the U.S. Treasury owned approximately 4.8% of the Corporation’s
outstanding common stock, excluding the shares underlying the warrant.
Under the terms of the amended Letter Agreement with the Treasury, (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 EESA
and applicable guidance or regulations issued by the Secretary of Treasury on or prior to January 16, 2009 and (ii) each Senior
Executive Officer, as defined in the amended Letter Agreement, executed a written waiver releasing Treasury and the Corporation
from any claims that such officers may otherwise have as a result of the Corporation’s 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 amended Letter Agreement, the Corporation must remain in compliance with these requirements.
American Recovery and Reinvestment Act of 2009
On February 17, 2009, the Congress enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”). The ARRA
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 ARRA includes provisions relating to compensation paid by institutions that receive government assistance under TARP,
including institutions that had already received such assistance, effectively amending the existing compensation and corporate
governance requirements of Section 111(b) of the EESA. The provisions include restrictions on the amounts and forms of
compensation payable, provisions for possible reimbursement of previously paid compensation and a requirement that compensation
be submitted to a non-binding “say on pay” shareholder vote.
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Later in 2009, the U.S Treasury issued regulations implementing the compensation requirements under ARRA, which amended the
requirements of EESA. The regulations made effective the compensation provisions of ARRA and include rules requiring: (i) review
of prior compensation by a Special Master; (ii) restrictions on paying or accruing bonuses, retention awards or incentive compensation
for certain employees; (iii) regular review of all employee compensation arrangements by the company’s senior risk officer and
compensation committee to ensure that the arrangements do not encourage unnecessary and excessive risk-taking or manipulation of
the reporting of earnings; (iv) recoupment of bonus payments based on materially inaccurate information; (v) the prohibition of
severance or change in control payments for certain employees; (vi) the adoption of policies and procedures to avoid excessive luxury
expenses; and (vii) the mandatory “say on pay” vote by shareholders (which was effective beginning in February 2009). In addition,
the regulations also introduced several additional requirements and restrictions, including: (i) Special Master review of ongoing
compensation in certain situations; (ii) prohibition on tax gross-ups for certain employees; (iii) disclosure of perquisites; and (iv)
disclosure regarding compensation consultants.
USA PATRIOT Act and Other Anti-Money Laundering Requirements.
As a regulated depository institution, FirstBank is subject to the Bank Secrecy Act, which imposes a variety of reporting and other
requirements, including the requirement to file suspicious activity and currency transaction reports that are designed to assist in the
detection and prevention of money laundering and other criminal activities. In addition, under Title III of the USA PATRIOT Act of
2001, 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 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.
Regulations implementing the Bank Secrecy Act and the USA PATRIOT Act are published and primarily enforced by the Financial
Crimes Enforcement Network, a bureau of the Treasury. Failure of a financial institution to comply with the Bank Secrecy Act’s or
USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution, including the
possibility of regulatory enforcement or other legal action, including significant civil money penalties, against the Corporation or the
Bank. The Corporation also is required to comply with federal economic and trade sanctions requirements enforced by the Office of
Foreign Assets Control (“OFAC”), a bureau of the Treasury. The Corporation has adopted appropriate policies, procedures and
controls to address compliance with the Bank Secrecy Act, USA PATRIOT Act and economic/trade sanctions requirements, and to
implement banking agency, Treasury and OFAC regulations.
Community Reinvestment
The CRA encourages banks to help meet the credit needs of the local communities in which the bank offer it services, including
low- and moderate-income individual and geographies, consistent with safe and sound operation of the bank.
CRA requires the federal supervisory agencies, as part of the general examination of supervised banks, to assess the bank’s 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 received a “satisfactory” CRA rating in its most recent examination by the FDIC.
Failure to adequately serve the communities could result in the denial by the regulators to merge, consolidate or acquire new assets,
as well as expand or relocate branches.
State Chartered Non-Member Bank and Banking Laws and Regulations in General
FirstBank is subject to regulation and examination by the OCIF, the CFPB and the FDIC, and is subject to comprehensive federal
and state regulations dealing with a wide variety of subjects. The federal and state laws and regulations which are applicable to 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
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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.
There are periodic examinations by the OCIF, the CFPB and the FDIC of FirstBank to test the Bank’s compliance with various
statutory and regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which
an institution can engage. The regulation and supervision by the FDIC are intended primarily for the protection of the FDIC’s
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, 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.
Regulatory Agreements
Effective June 2, 2010, FirstBank, by and through its Board of Directors, entered into the FDIC Order with the FDIC and OCIF.
The FDIC Order provides for various things, including (among other things) the following: (1) having and retaining qualified
management; (2) increased participation in the affairs of FirstBank by its Board of Directors; (3) development and implementation by
FirstBank of a capital plan to attain a leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10% and a total risk-
based capital ratio of at least 12%; (4) adoption and implementation of strategic, liquidity, and fund management and profit and budget
plans and related projects within certain timetables set forth in the FDIC Order and on an ongoing basis; (5) adoption and
implementation of plans for reducing FirstBank’s positions in certain classified assets and delinquent and non-accrual loans within
timeframes set forth in the FDIC Order; (6) refraining from lending to delinquent or classified borrowers already obligated to
FirstBank on any extensions of credit so long as such credit remains uncollected, except where FirstBank’s failure to extend further
credit to a particular borrower would be detrimental to the best interests of FirstBank, and any such additional credit is approved by
FirstBank’s Board of Directors; (7) refraining from accepting, increasing, renewing, or rolling over brokered CDs without the prior
written approval of the FDIC; (8) establishment of a comprehensive policy and methodology for determining the allowance for loan
and lease losses and the review and revision of FirstBank’s loan policies, including the non-accrual policy; and (9) adoption and
implementation of adequate and effective programs of independent loan review, appraisal compliance, and an effective policy for
managing FirstBank’s sensitivity to interest rate risk. The foregoing summary is not complete and is qualified in all respects by
reference to the actual language of the FDIC Order. Although all of FirstBank’s regulatory capital ratios exceeded the minimum
capital ratios for “well-capitalized” levels, as well as the minimum capital ratios required by the FDIC Order, as of December 31,
2014, FirstBank cannot be treated as a “well-capitalized” institution under regulatory guidance while operating under the FDIC Order.
Effective June 3, 2010, the Corporation entered into the Written Agreement with the New York FED. The Written Agreement
provides, among other things, that the holding company must serve as a source of strength to FirstBank, and that, except with the
consent generally of the New York FED and the Federal Reserve Board, (1) the holding company may not pay dividends to
stockholders or receive dividends from FirstBank, (2) the holding company and its nonbank subsidiaries may not make payments on
trust-preferred securities or subordinated debt, and (3) the holding company cannot incur, increase, or guarantee debt or repurchase
any capital securities. The Written Agreement also requires that the holding company submit a capital plan that reflects sufficient
capital at the Corporation on a consolidated basis, which must be acceptable to the New York FED, and follow certain guidelines with
respect to the appointment or change in responsibilities of senior officers. The foregoing summary is not complete and is qualified in
all respects by reference to the actual language of the Written Agreement.
The Corporation submitted its Capital Plan setting forth how it plans to improve capital positions to comply with the FDIC Order
and the Written Agreement over time. In addition to the Capital Plan, the Corporation submitted to its regulators a liquidity and
brokered CD plan, including a contingency funding plan, a non-performing asset reduction plan, a budget and profit plan, a strategic
plan, and a plan for the reduction of classified and special mention assets. As of December 31, 2014, the Corporation had completed
all of the items included in the Capital Plan and is continuing to work on reducing non-performing loans. Further, the Corporation has
reviewed and enhanced the Corporation’s loan review program, various credit policies, the Corporation’s treasury and investment
policy, the Corporation’s asset classification and allowance for loan and lease losses and non-accrual policies, the Corporation’s
charge-off policy, and the Corporation’s appraisal program. The Regulatory Agreements also require the submission to the regulators
of quarterly progress reports.
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The FDIC Order imposes no other restrictions on FirstBank’s products or services offered to customers, nor does it or the Written
Agreement impose any type of penalties or fines upon FirstBank or the Corporation. Concurrent with the FDIC Order, the FDIC has
granted FirstBank temporary waivers to enable it to continue accessing the brokered CD market through March 31, 2015. FirstBank
will request approvals for future periods, although no assurance can be given that future approvals will be given.
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 Corporation’s net assets in excess of capital or, in the absence
of such excess, from the Corporation’s 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 organization’s capital needs, asset quality, and overall financial
condition.
In 2009, the Federal Reserve published the “Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock
Redemptions, and Stock Repurchases at Bank Holding Companies” (the “Supervisory Letter”), which discussed the ability of bank
holding companies to declare dividends and to repurchase equity securities. The Supervisory Letter is generally consistent with prior
Federal Reserve supervisory policies and guidance, although it places greater emphasis on discussions with the regulators prior to
dividend declarations and redemption or repurchase decisions even when not explicitly required by the regulations. The Federal
Reserve provides that the principles discussed in the letter are applicable to all bank holding companies, but are especially relevant for
bank holding companies that are either experiencing financial difficulties and/or receiving public funds under the Treasury’s TARP
Capital Purchase Program. To that end, the Supervisory Letter specifically addresses the Federal Reserve’s supervisory considerations
for TARP participants.
The Supervisory Letter provides that a board of directors should “eliminate, defer, or severely limit” dividends if: (i) the bank
holding company’s net income available to shareholders for the prior four quarters, net of dividends paid during that period, is not
sufficient to fully fund the dividends; (ii) the bank holding company’s rate of earnings retention is inconsistent with capital needs and
overall macroeconomic outlook; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum
regulatory capital adequacy ratios. The Supervisory Letter further suggests that bank holding companies should inform the Federal
Reserve in advance of paying a dividend that: (i) exceeds the earnings for the quarter in which the dividend is being paid; or (ii) could
result in a material adverse change to the organization’s capital structure.
In prior years, the principal source of funds for the Corporation’s parent holding company was dividends declared and paid by its
subsidiary, FirstBank. Pursuant to the Written Agreement with the Federal Reserve, the Corporation cannot directly or indirectly take
dividends or any other form of payment representing a reduction in capital from the Bank without the prior written approval of the
Federal Reserve. 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 bank’s 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.
We suspended dividend payments on our common and preferred dividends commencing with the preferred dividend payments for
the month of August 2009. Furthermore, so long as any shares of preferred stock remain outstanding and until we obtain the Federal
Reserve’s approval, we cannot declare, set apart or pay any dividends on shares of our common stock unless any accrued and unpaid
dividends on our preferred stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date
have been paid or are paid contemporaneously and the full monthly dividend on our preferred stock for the then current month has
been or is contemporaneously declared and paid or declared and set apart for payment.
20
Limitations on Transactions with Affiliates and Insiders
Certain transactions between financial institutions such as FirstBank and its affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act and by Federal Reserve Regulation W. An affiliate of a financial institution in general 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 institution’s 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 institution’s 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 Dodd-Frank Act added
derivatives and securities lending and borrowing transactions to the list of “covered transactions” subject to Section 23A restrictions.
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 persons, may not
exceed, together with all other outstanding loans to such persons and affiliated interests, the financial institution’s loans to one
borrower limit, generally equal to 15% of the institution’s 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 institution’s 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 risk-based and leverage 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 Holding
Company Act. The Federal Reserve Board’s historical risk-based capital guidelines have been based upon the 1988 capital accord
(“Basel I”) of the Basel Committee. These historical requirements, however, which included a legacy simplified risk-weighting
system for the calculations of risk-based assets, as well as lower leverage capital requirements, have been superseded by new risk-
based and leverage capital requirements that go into effect, on a multi-year transitional basis, on January 1, 2015.
As discussed above, in July 2013, U.S. banking regulators approved a revised regulatory capital framework for U.S. banking
organizations (the “Basel III rules”) that is based on international regulatory capital requirements adopted by the Basel Committee on
Banking Supervision over the past several years.
The Basel III rules introduce new minimum capital ratios and capital conservation buffer requirements, change the composition of
regulatory capital, require a number of new adjustments to and deductions from regulatory capital, and introduce a new “Standardized
Approach” for the calculation of risk-weighted assets that will replace the risk-weighting requirements under the current U.S.
regulatory capital rules. The new minimum regulatory capital requirements and the Standardized Approach for the calculation of risk-
weighted assets will become effective for the Corporation on January 1, 2015. The capital conservation buffer requirements, and the
regulatory capital adjustments and deductions under the Basel III rules will be phased-in over several years ending on December 31,
2018.
The Federal Reserve Board’s current risk-based capital 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.
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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. Legacy Federal Reserve Board leverage capital guidelines mandated a
minimum leverage ratio of Tier 1 capital to adjusted quarterly average total assets less certain amounts (“leverage amounts”) equal to
3% for bank holding companies meeting certain criteria (including those having the highest regulatory rating), with all other banking
organizations being required to maintain a leverage ratio of at least 3% plus an additional cushion of at least 100 basis points and in
some cases more.
The Federal Reserve Board’s regulatory capital 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., Tier 1 after deducting all intangibles) in evaluating proposals for expansion or new activities.
The Federal Reserve Board’s Basel III rules introduce a new and separate ratio of Common Equity Tier 1 capital (“CET1”) to risk-
weighted assets. CET1, a narrower subcomponent of total Tier 1 capital, generally consists of common stock and related surplus,
retained earnings, accumulated other comprehensive income (“AOCI”), and qualifying minority interests. Certain banking
organizations, however, including the Corporation and FirstBank, will be allowed to make a one-time permanent election in early
2015 to continue to exclude AOCI items. The Corporation and FirstBank expect to make this election in order to avoid significant
variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the securities portfolio. In
addition, the Basel III rules also will require the Corporation to maintain an additional CET1 capital conservation buffer of 2.5%.
Under the rules, the Corporation will be required to maintain: (i) a minimum CET1 to risk-weighted assets ratio of at least 4.5%, plus
the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 ratio of at least 7% upon full implementation, (ii) a
minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a
required minimum Tier 1 capital ratio of 8.5% upon full implementation, (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to
risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of
10.5% upon full implementation, and (iv) a required minimum leverage ratio of 4% (as contrasted to the legacy 3% requirement),
calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets. The new basic minimum risk-based and
leverage capital requirements will be effective for the Corporation on January 1, 2015. The phase-in of the capital conservation buffer
will begin on January 1, 2016 with a first year requirement of 0.625% of additional CET1, which will be progressively increased over
a four-year period, increasing by that same percentage amount on each subsequent January 1 until it reaches the fully-phased in 2.5%
CET1 requirement on January 1, 2019.
In addition, the Basel III rules require a number of new deductions from and adjustments to CET1, including deductions from CET1
for mortgage servicing rights, and deferred tax assets dependent upon future taxable income; these adjustments generally will be
phased in over a four-year period beginning on January 1, 2015. In the case of mortgage servicing assets and deferred tax assets
attributable to temporary differences, among others, these items would be required to be deducted to the extent that any one such
category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
In addition, the Federal Reserve Board’s Basel III rules require that certain non-qualifying capital instruments, including
cumulative preferred stock and Trust Preferred Securities (“TRuPs”), be excluded from Tier 1 capital. In general, banking
organizations such as the Corporation and the Bank, that are not advanced approaches banks, must begin to phase out TRuPs from
Tier 1 capital by January 1, 2015.
The Corporation will be allowed to include 25% of the $225 million outstanding qualifying TRuPs as Tier 1 capital in 2015 and the
TRuPs must be fully phased out from Tier 1 capital by January 1, 2016. However, the Corporation’s TRuPs may continue to be
included in Tier 2 capital until the instruments are redeemed or mature.
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Under the legacy Federal Reserve Board risk based capital requirements, a bank holding company’s assets are adjusted to take into
account different risk characteristics, with the categories generally ranging from 0% (requiring no additional capital) for assets such as
cash to 100% for assets such as commercial mortgage loans, commercial and industrial loans and consumer loans. Off-balance sheet
items also are adjusted to take into account certain risk characteristics. The Basel III rules supersede this framework and establish a
“standardized approach” for risk-weightings that expands the risk-weighting categories from the four major risk-weighting categories
under the current regulatory capital rules (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories,
depending on the nature of the assets. In a number of cases, the Standardized Approach will result in higher risk weights for a variety
of asset categories. Specific changes to the risk-weightings of assets under the current regulatory capital rules include, among other
things: (i) applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition,
development and construction loans, (ii) assigning a 150% risk weight to exposures that are 90 days past due (other than qualifying
residential mortgage exposures, which remain at an assigned risk-weighting of 100%), and (iii) establishing a 20% credit conversion
factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, in
contrast to the 0% risk-weighting under the prior rules.
The Corporation’s estimated pro-forma CET1 ratio, Tier 1 capital ratio, total capital ratio, and leverage ratio under the Basel III
rules, giving effect as of December 31, 2014 to all the provisions that will be phased-in between January 1, 2015 and January 2019,
was 15.1%, 15.5%, 19.2%, and 11.7%, respectively. These ratios would exceed the fully phased-in minimum capital ratios under
Basel III.
FDIC Capital Requirements
The FDIC historically promulgated regulations and a statement of policy regarding the capital adequacy of state-chartered non-
member banks like FirstBank. These regulations and statement of policy were based upon the Basel I regulatory capital requirements
adopted by the Basel Committee. These requirements have been substantially similar to those adopted by the Federal Reserve Board
regarding bank holding companies, as described above. As is the case with the Federal Reserve Board’s requirements, the FDIC’s
historical requirements, which included the same legacy simplified risk-weighting system for the calculation of risk-based assets, as
well as lower leverage capital requirements, have been superseded by new risk-based and leverage capital requirements that go into
effect, on a multi-year transitional basis, on January 1, 2015.
The FDIC’s Basel III rules that apply to the Bank are substantively the same as the Federal Reserve Board rules that apply to the
Corporation, as discussed above in “Regulation and Supervision -- Regulatory Capital” and “Regulation and Supervision – Federal
Reserve Board Capital Requirements.” Under the FDIC rules, the Bank will be required to maintain; (i) a minimum CET1 to risk-
weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 ratio of at
least 7% upon full implementation, (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5%
capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5% upon full implementation, (iii) a minimum
ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a
required minimum total capital ratio of 10.5% upon full implementation, and (iv) a required minimum leverage ratio of 4%, calculated
as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets. The new basic minimum risk-based and leverage
capital requirements were effective for the Bank on January 1, 2015. The phase-in of the capital conservation buffer will begin on
January 1, 2016 with a first year requirement of 0.625% of additional CET1, which will be progressively increased over a four-year
period, increasing by that same percentage amount on each subsequent January 1 until it reaches the fully-phased in 2.5% CET1
requirement on January 1, 2019.
The FDIC’s Basel III rules similarly require the same deductions from and adjustments to CET1 as are required under the Federal
Reserve Board rules, including deductions from CET1 for mortgage servicing rights, and deferred tax assets dependent upon future
taxable income. In the case of mortgage servicing assets and deferred tax assets, among others, these items would be required to be
deducted to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
Under current regulatory capital requirements, the effect of AOCI is excluded for the purposes of calculating the required regulatory
capital ratios. By comparison, under the Basel III rules, the effects of certain AOCI items are not excluded. The Bank, however, will
be allowed to make a one-time permanent election in early 2015 to continue to exclude AOCI items, and expects to make this election
in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of
the securities portfolio.
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Prompt Corrective Action. The PCA provisions of the FDIA require the federal bank regulatory agencies to take prompt corrective
action against any undercapitalized insured depository institution. The FDIA establishes five capital categories: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Well-capitalized insured
depository institutions (“institutions”) significantly exceed the required minimum level for each relevant capital measure. Adequately
capitalized institutions include institutions that meet but do not significantly exceed the required minimum level for each relevant
capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant
capital measures. Significantly undercapitalized institutions are those with capital levels significantly below the minimum
requirements for any relevant capital measure. Critically undercapitalized institutions have minimal capital and are at serious risk for
government seizure.
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. An 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 CDs 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 CDs.
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 institution’s capital, the agency’s corrective
powers include, among other things:
•
•
•
•
•
•
•
prohibiting the payment of principal and interest on subordinated debt;
prohibiting the holding company from making distributions without prior regulatory approval;
placing limits on asset growth and restrictions on activities;
placing additional restrictions on transactions with affiliates;
restricting the interest rate the institution may pay on deposits;
prohibiting the institution from accepting deposits from correspondent banks; and
in the most severe cases, appointing a conservator or receiver for the institution
An 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 institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from
an institution’s holding company is entitled to a priority of payment in bankruptcy.
The banking agencies’ Basel III rules, discussed above, revise the PCA requirements by (i) introducing a separate CET1 ratio
requirement for each PCA capital category (other than critically undercapitalized) with the required CET1 ratio being 6.5% for well-
capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each PCA capital category with the minimum Tier 1
capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that
allows a bank with a composite supervisory rating of 1 to have a 3% leverage ratio and still be adequately capitalized and maintaining
the minimum leverage ratio for well-capitalized status at 5%. The Basel III rules do not change the total risk-based capital requirement
(10% for well-capitalized status) for any PCA capital category. The new PCA requirements became effective on January 1, 2015.
Although o Although our regulatory capital ratios exceeded the required established minimum capital ratios for a “well-
capitalized” institution as of December 31, 2014, as well as the capital requirements in the FDIC Order, because of the FDIC Order,
FirstBank cannot be regarded as “well-capitalized” as of December 31, 2014. A bank’s capital category, as determined by applying the
prompt corrective action provisions of the law, may not constitute an accurate representation of the overall financial condition or
prospects of a bank, such as the Bank, and should be considered in conjunction with other available information regarding the
financial condition and results of operations of the bank.
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Set forth below are the Corporation's and Firstbank's capital ratios as of December 31, 2014 based on Federal Reserve and FDIC
guidelines, respectively, and the capital ratios required to be attained and maintained under the FDIC Order:
First BanCorp.
FirstBank
Banking Subsidiary
Well-
Capitalized
Consent Order
Minimum
19.70%
19.37%
10.00%
12.00%
18.44%
13.27%
18.10%
13.04%
6.00%
5.00%
10.00%
8.00%
As of December 31, 2014
Total capital (Total capital to
risk-weighted assets)
Tier 1 capital ratio (Tier 1 capital
to risk-weighted assets)
Leverage ratio (1)
_______________
(1) Tier 1 capital to average assets.
Deposit Insurance
The increase in deposit insurance coverage to up to $250,000 per customer, the FDIC’s expanded authority to increase insurance
premiums, as well as the increase in the number of bank failures after the 2008 financial crisis have resulted in an increase in deposit
insurance assessments for all banks, including FirstBank. The Dodd-Frank Act changes the requirements for the Deposit Insurance
Fund by requiring that the designated reserve ratio for the Deposit Insurance Fund for any year may not be less than 1.35 percent of
estimated insured deposits or the comparable percentage of the new deposit assessment base. In addition, the FDIC must take steps as
necessary for the reserve ratio to reach 1.35 percent of estimated insured deposits by September 30, 2020. If the reserve ratio exceeds
1.5 percent, the FDIC must dividend to Deposit Insurance Fund members the amount above the amount necessary to maintain the
Deposit Insurance Fund at 1.5 percent, but the FDIC Board of Directors may, in its sole discretion, suspend or limit the declaration of
payment of dividends. The FDIC has adopted a Deposit Reserve Fund restoration plan that projects that the designated reserve ratio
will reach 1.35 percent by the 2020 deadline.
On February 7, 2011, the FDIC adopted a rule which redefines the assessment base for deposit insurance as required by the Dodd-
Frank Act, makes changes to assessment rates, implements the Dodd-Frank Act’s Deposit Insurance Fund dividend provisions, and
revises the risk-based assessment system for all large insured depository institutions (institutions with at least $10 billion in total
assets), such as FirstBank.
If the FDIC is appointed conservator or receiver of a bank upon the bank’s insolvency or the occurrence of other events, the FDIC
may sell some, part or all of a bank’s assets and liabilities to another bank or repudiate or disaffirm certain types of contracts to which
the bank was a party if the FDIC believes such contract is burdensome and its disaffirmance will aid in the administration of the
receivership. In resolving the estate of a failed bank, the FDIC as receiver will first satisfy its own administrative expenses, and the
claims of holders of U.S. deposit liabilities also have priority over those of other general unsecured creditors.
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.
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FirstBank is a member of the FHLB of New York and as such is required to acquire and hold shares of capital stock in the FHLB in
an amount 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. All loans, advances and other extensions of credit made by the FHLB to FirstBank are
secured by a portion of FirstBank’s mortgage loan portfolio, certain other investments and the capital stock of the FHLB held by
FirstBank.
Ownership and Control
Because of FirstBank’s status as an FDIC-insured bank, as defined in the Bank Holding Company Act, the Corporation, as the
owner of FirstBank’s 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 25% or more 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 10% or
more of any class of voting stock and either (i) the corporation has registered securities under Section 12 of the Exchange Act, 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 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.”
Standards for Safety and Soundness
The FDIA 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 implementing regulations and guidelines of the FDIC and the other federal bank regulatory agencies 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 regulations and guidelines
require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The regulations and 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. The FDIC Order requires FirstBank to obtain FDIC approval prior to
issuing, increasing, renewing or rolling over brokered CDs and required it to develop a plan to reduce its reliance on brokered CDs.
The FDIC has issued temporary approvals permitting FirstBank to renew and/or roll over certain amounts of brokered CDs maturing
through March 31, 2015. FirstBank will continue to request approvals for future periods in a manner consistent with the plan it
submitted pursuant to the FDIC Order to reduce its reliance on brokered CDs, although there is no assurance that such approvals will
be granted.
Puerto Rico Banking Law
As a commercial bank organized under the laws of the Commonwealth of Puerto Rico, 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”).
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The Banking Law contains various provisions relating to FirstBank and its affairs, including its incorporation and organization, the
rights and responsibilities of its directors, officers and stockholders and its corporate powers, lending limitations, capital requirements,
and investment requirements. 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 a 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 o n which
they are received; (3) money deposited in other banks provided said deposits are authorized by the Commissioner and 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.
Section 17 of the Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or
corporation in an aggregate amount of up to fifteen percent (15%) of the sum of: (i) the bank’s paid-in capital; (ii) the bank’s reserve
fund; (iii) 50% of the bank’s 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 bank’s paid-in capital, reserve
fund, 50% of retained earnings, subject to certain limitations, 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 may be wholly secured by bonds, securities
and other evidences 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 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 officer, director, agent nor employee of a Puerto Rico commercial bank may serve as an 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 any such position with an affiliate 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 amount in the reserve fund equals 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, acquires 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.
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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
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 52”)
The business and operations of FirstBank International Branch (“FirstBank IBE” or 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 52, 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 52
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 52 and the IBE Regulations, each of FirstBank IBE and FirstBank Overseas Corporation must maintain
books and records of all its transactions in the ordinary course of business. 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 52 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 52, 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.
In 2012, the Puerto Rico Government approved Act Number 273 (“Act 273”). Act 273 replaces, prospectively, IBE Act 52 with the
objective of improving the conditions for conducting international financial transactions in Puerto Rico. An IBE existing on the date
of approval of Act 273, such as FirstBank IBE and FirstBank Overseas Corporation, can continue operating under IBE Act 52, or, it
can voluntarily convert to an International Financial Entity (“IFE”) under Act 273 so it may broaden its scope of Eligible IFE
Activities, as defined below, and obtain a grant of tax exemption under Act 273.
IFEs are licensed by the Commissioner, and authorized to conduct certain Act 273 specified financial transactions (“Eligible IFE
Activities”). Once licensed, an IFE can request a grant of tax exemption (“Tax Grant”) from the Puerto Rico Department of Economic
Development and Commerce, which will enumerate and secure the following tax benefits provided by Act 273 as contractual rights
(i.e., regardless of future changes in Puerto Rico law) for a fifteen (15) year period:
(1) to the IFE:
(cid:2)
(cid:2)
a fixed 4% Puerto Rico income tax rate on the net income derived by the IFE from its Eligible IFE Activities; and
full property and municipal license tax exemptions on such activities.
(2) to its shareholders:
(cid:2)
(cid:2)
6% income tax rate on distributions to Puerto Rico resident shareholders of earnings and profits derived from the Eligible IFE
Activities; and
full Puerto Rico income tax exemption on such distributions to non-Puerto Rico resident shareholders.
The primary purpose of IFEs is to attract Unites States and foreign investors to Puerto Rico. Consequently, Act 273 authorizes
them to engage in traditional banking and financial transactions, principally with non-residents of Puerto Rico. Furthermore, the scope
of Eligible IFE Activities encompasses a wider variety of transactions than those previously authorized to IBEs.
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As of the date of the issuance of this Annual Report on Form 10-K, FirstBank IBE and FirstBank Overseas Corporation are
operating under IBE Act 52.
Puerto Rico Income Taxes
Under the Puerto Rico Internal Revenue Code of 2011, as amended (the “2011 PR Code”), the Corporation and its subsidiaries are
treated as separate taxable entities and are not entitled to file a consolidated tax return and, thus, the Corporation is not able to utilize
losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a Net Operating
Loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carryforward
period. In the case of losses incurred during tax years that commenced after December 31, 2004 and ended before January 1, 2013,
the carryforward period was extended to 12 years. The carryover period for an NOL incurred during taxable years commencing after
December 31, 2012 is 10 years. The 2011 PR Code provides a dividend received deduction of 100% on dividends received from
“controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.
Under the 2011 PR Code, as amended, First BanCorp. is subject to a maximum statutory tax rate of 39%. The 2011 PR Code also
includes an alternative minimum tax of 30% that applies if the Corporation’s regular income tax liability is less than the alternative
minimum tax requirements. Prior to the approval of Act No. 40 (“Act 40”), which amended the 2011 PR Code as explained below,
First Bancorp.’s maximum statutory tax rate was 30% for the year ended December 31, 2012.
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 the IBE of
the Bank and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales are exempt
from Puerto Rico and U.S. income taxation. The IBE 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 on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at normal
rates to the extent that an IBE’s net income exceeds 20% of the bank’s total net taxable income.
In 2013, the Puerto Rico Government approved Act No. 40, (“Act 40”), known as the “Tax Burden Adjustment and Redistribution
Act,” which amended the 2011 PR Code. One of the main provisions of Act 40 that impacted financial institutions was the national
gross receipts tax. The national gross receipts tax for financial institutions is computed on the basis of 1% of gross income, net of
allowable exclusions. Subject to certain limitations, a financial institution is able to claim a credit of 0.5% of its gross income against
its regular income tax of the alternative minimum tax (“AMT”). The Corporation’s national gross receipts tax expense for the year
ended December 31, 2014 amounted to $5.7 million compared to $5.9 million recorded for 2013. This expense included as part of
“Taxes, other than income taxes” in the consolidated statement of income (loss). In 2014, the Corporation recorded a $2.9 million
benefit related to this credit as a reduction to the provision for income taxes compared to a benefit of $3.0 million recorded in 2013.
On December 22, 2014, the Governor of Puerto Rico signed Act No. 238, which amended the 2011 PR Code. Act No. 238 clarifies
that the national gross receipts tax will not be applicable to taxable years starting after December 31, 2014.
Proposed Tax Reform
On February 11, 2015 the Governor of Puerto Rico introduced a tax reform through House Bill 2329 (“the Bill”) to be known upon
enactment as the Puerto Rico Internal Revenue Code of 2015 (“2015 Code”). The proposed tax regime intends to simplify the Puerto
Rico taxation for individuals and corporations, as well as provide a relief in the income tax arena by reducing both corporate and
individual tax rates. To compensate for the reduction in income taxes, the Bill replaces the current Sales and Use Tax (“SUT”) with a
Value Added Tax (“VAT”), increasing the tax rate on consumption from 7% to 16%. Moreover, the VAT would have a broader basis,
as most of the products and services are expected to be taxable.
The Bill is proposing few changes to the taxation of corporations, including, among others, the following:
(cid:2) A flat corporate tax rate of 30%, instead of the gradual income tax rate of 39%.
(cid:2) Surtax and recapture are expected to be eliminated.
(cid:2) For taxable years commenced after December 31, 2014, taxpayers would have to depreciate assets using only the straight line
method. Moreover, those assets placed in service in prior periods would have to be depreciated using the straight line method
for their remaining useful life based on their tax basis as of such year.
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(cid:2) For AMT, the tax would be the higher of:
o 25% of the alternative minimum taxable income (“AMTI”) or
o 1.5% of purchases or transfers of inventory from related persons or Home Office (certain items would continue to be
subject to a reduced rate). No waiver would be available to further reduce the rate on this component.
(cid:2) All expenses for services rendered or allocated from related persons or Home Office not subject to income tax in Puerto Rico
will not be deductible in the determination of the AMTI.
(cid:2) Net capital gains would no longer be subject to a reduced rate since the Bill is proposing a 30% rate.
(cid:2) Dividend distributions to individuals, estates and trusts would be subject to a 30% tax.
(cid:2) Dividend distributions to foreign entities would remain subject to a 10% withholding tax at source.
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 any 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 that 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, the licensing of employees and sales, solicitation
and advertising practices, and by the Federal Reserve as to certain consumer protection provisions mandated by the GLB Act and its
implementing regulations.
Mortgage Banking Operations
In addition to FDIC and CFPB regulation, FirstBank is subject to the rules and regulations of the FHA, VA, FNMA, FHLMC,
GNMA, and the U.S Department of Housing and Urban Development (“HUD”) 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 audited financial statements to FHA, VA, FNMA, FHLMC,
GNMA and HUD and each regulatory entity has its own financial requirements. FirstBank’s affairs are also subject to supervision and
examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance with applicable regulations, policies
and procedures. Mortgage origination activities are subject to, among other requirements, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act, and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder that, 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 the 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
RISKS RELATING TO THE CORPORATION’S BUSINESS
We are operating under agreements with our regulators.
We are subject to supervision and regulation by the Federal Reserve Board. We are a bank holding company and a financial
holding company under the Bank Holding Company Act of 1956, as amended.
As a financial holding company, we are permitted to engage in a broader spectrum of “financial” activities than those permitted to
bank holding companies that are not financial holding companies.At this time, as a result of, among other things, the Regulatory
Agreements, under the BHC Act, we currently are not able to engage in new financial activities, and we may not be able to acquire
shares or control of other companies. In addition, we are subject to restrictions because of the Regulatory Agreements that our
subsidiary FirstBank entered into with the FDIC and we entered into with the Federal Reserve, as further described above.
On June 4, 2010, we announced that FirstBank agreed to the FDIC Order issued by the FDIC and OCIF, and we entered into the
Written Agreement with the Federal Reserve. These Regulatory Agreements stemmed from the FDIC’s examination as of the period
ended June 30, 2009 conducted during the second half of 2009. Although our regulatory capital ratios exceeded the required
established minimum capital ratios for a “well-capitalized” institution as of December 31, 2014 and complied with the capital ratios
required by the FDIC Order, FirstBank cannot be regarded as “well-capitalized” as of December 31, 2014 because of the FDIC Order.
Under the FDIC Order, FirstBank agreed to address specific areas of concern to the FDIC and OCIF through the adoption and
implementation of procedures, plans and policies designed to improve the safety and soundness of FirstBank. These actions include,
among others: (1) having and retaining qualified management; (2) increased participation in the affairs of FirstBank by its Board of
Directors; (3) development and implementation by FirstBank of a capital plan to attain a leverage ratio of at least 8%, a Tier 1 risk-
based capital ratio of at least 10% and a total risk-based capital ratio of at least 12%; (4) adoption and implementation of strategic,
liquidity and fund management, and profit and budget plans and related projects within certain timetables set forth in the FDIC Order
and on an ongoing basis; (5) adoption and implementation of plans for reducing FirstBank’s positions in certain classified assets and
delinquent and non-accrual loans; (6) refraining from lending to delinquent or classified borrowers already obligated to FirstBank on
any extensions of credit so long as such credit remains uncollected, except where FirstBank’s failure to extend further credit to a
particular borrower would be detrimental to the best interests of FirstBank, and any such additional credit is approved by FirstBank’s
Board of Directors, or a designated committee thereof; (7) refraining from accepting, increasing, renewing or rolling over brokered
CDs without the prior written approval of the FDIC; (8) establishment of a comprehensive policy and methodology for determining
the allowance for loan and lease losses and the review and revision of FirstBank’s loan policies, including the non-accrual policy; and
(9) adoption and implementation of adequate and effective programs of independent loan review, appraisal compliance and an
effective policy for managing FirstBank’s sensitivity to interest rate risk.
The Written Agreement, which is designed to enhance our ability to act as a source of strength to FirstBank, requires that we obtain
prior Federal Reserve approval before declaring or paying dividends, receiving dividends from FirstBank, making payments on
subordinated debt or trust-preferred securities, incurring, increasing or guaranteeing debt (whether such debt is incurred, increased or
guaranteed, directly or indirectly, by us or any of our non-banking subsidiaries) or purchasing or redeeming any capital stock. The
Written Agreement also required us to submit to the Federal Reserve a capital plan and requires that we submit progress reports,
comply with certain notice provisions prior to appointing new directors or senior executive officers and comply with certain payment
restrictions on severance payments and indemnification restrictions.
We anticipate that we will need to continue to dedicate significant resources to our efforts to comply with the Regulatory
Agreements, which may increase operational costs or adversely affect the amount of time our management has to conduct our
operations.
If we fail to comply with the Regulatory Agreements in the future, we may become subject to additional regulatory enforcement
action up to and including the appointment of a conservator or receiver for FirstBank.
Our high level of non-performing loans may adversely affect our future results from operations.
Our level of non-performing loans increased $28.2 million to $578.5 million, or 5% during 2014, which represents approximately
6% of our $9.3 billion loan portfolio. Total non-performing assets decreased $8.6 million to $716.8 million, or 1% during 2014. If we
are unable to effectively maintain the quality of our loan portfolio, our financial condition and results of operations may be materially
and adversely affected.
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Certain funding sources may not be available to us and our funding sources may prove insufficient and/or costly to replace.
FirstBank relies primarily on customer deposits, the issuance of brokered CDs, and advances from the Federal Home Loan Bank to
maintain its lending activities and to replace certain maturing liabilities. As of December 31, 2014, we had $3.2 billion in brokered
deposits (including CDs and money market accounts) outstanding, representing approximately 34% of our total deposits, and a
reduction of $254.1 million from December 31, 2013. Approximately $1.8 billion in brokered CDs mature over the next twelve
months, and the average term to maturity of the retail brokered CDs outstanding as of December 31, 2014 was approximately 1.0
years. None of these CDs are callable at the Corporation’s option.
Although FirstBank has historically been able to replace maturing deposits and advances, we may not be able to replace these funds
in the future if our financial condition or general market conditions were to change or the FDIC did not approve our request to issue
brokered deposits, as required by the FDIC Order. The FDIC Order requires FirstBank to obtain FDIC approval prior to issuing,
increasing, renewing or rolling over brokered deposits and to maintain the plan to reduce its reliance on brokered deposits. Although
the FDIC has issued temporary approvals permitting FirstBank to renew and/or roll over certain amounts of brokered CDs maturing in
the past and we have received approval from the FDIC to issue brokered deposits through March 31, 2015, the FDIC may not continue
to issue such approvals, even if the requests are consistent with our plans to reduce reliance on brokered deposits, and, even if issued,
such approvals may not be for amounts of brokered deposits sufficient for FirstBank to meet its funding needs. The use of brokered
deposits has been particularly important for the funding of our operations. If we are unable to issue brokered deposits, or are unable to
maintain access to our other funding sources, our results of operations and liquidity would be adversely affected.
Alternate sources of funding may carry higher costs than sources currently utilized. If we are required to rely more heavily on more
expensive funding sources, profitability would be adversely affected. We may determine to seek debt financing in the future to
achieve our long-term business objectives. Any future debt financing requires the prior approval of the Federal Reserve, and the
Federal Reserve may not approve such financing. Additional borrowings, if sought, may not be available to us, or if available, may not
be on acceptable terms. The availability of additional financing will depend on a variety of factors such as market conditions, the
general availability of credit, our credit ratings and our credit capacity. In addition, the Bank may seek to sell loans as an additional
source of liquidity. If additional financing sources are unavailable or are not available on acceptable terms, our profitability and future
prospects could be adversely affected.
We depend on cash dividends from FirstBank to meet our cash obligations.
As a holding company, dividends from FirstBank provided a substantial portion of our cash flow used to service the interest
payments on our trust-preferred securities and other obligations. As outlined in the Written Agreement, we cannot receive any cash
dividends from FirstBank without the prior written approval of the Federal Reserve. In addition, FirstBank is limited by law in its
ability to make dividend payments and other distributions to us based on its earnings and capital position. Our inability to receive
approval from the Federal Reserve to receive dividends from FirstBank, or FirstBank’s failure to generate sufficient cash flow to make
dividend payments to us, may adversely affect our ability to meet all projected cash needs in the ordinary course of business and may
have a detrimental impact on our financial condition.
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be
transferred to legal surplus until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred
to the legal surplus account from the retained earnings account are not available for distribution to the Corporation without the prior
consent of the OCIF.
If we do not obtain Federal Reserve approval to pay interest, principal or other sums on subordinated debentures or trust-preferred
securities, a default under certain obligations may occur.
The Written Agreement provides that we cannot declare or pay any dividends or make any distributions of interest, principal or
other sums on subordinated debentures or trust-preferred securities without prior written approval of the Federal Reserve. With respect
to our $232 million of outstanding subordinated debentures, we have elected to defer the interest payments that were due in quarterly
periods since March 2012. The aggregate amount of payments deferred and accrued approximates $21.9 million as of December 31,
2014.
Under the indentures, we have the right, from time to time, and without causing an event of default, to defer payments of interest
on the subordinated debentures by extending the interest payment period at any time and from time to time during the term of the
subordinated debentures for up to twenty consecutive quarterly periods. We may continue to elect extension periods for future
quarterly interest payments if the Federal Reserve advises us that it will not approve such future quarterly interest payments. Our
inability to receive approval from the Federal Reserve to make distributions of interest, principal or other sums on our trust-preferred
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securities and subordinated debentures could result in a default under those obligations if we need to defer such payments for longer
than twenty consecutive quarterly periods.
Credit quality may result in additional losses.
The quality of our credits has continued to be under pressure as a result of continued recessionary conditions in the markets we
serve that have led to, among other things, high unemployment levels, low absorption rates for new residential construction projects
and further declines in property values. Our business depends on the creditworthiness of our customers and counterparties and the
value of the assets securing our loans or underlying our investments. When the credit quality of the customer base materially decreases
or the risk profile of a market, industry or group of customers changes materially, our business, financial condition, allowance levels,
asset impairments, liquidity, capital and results of operations are adversely affected.
We have a commercial and construction loan portfolio held for investment in the amount of $4.3 billion as of December 31, 2014.
Due to their nature, these loans entail a higher credit risk than consumer and residential mortgage loans, since they are larger in size,
concentrate more risk in a single borrower and are generally more sensitive to economic downturns. Furthermore, given the slowdown
in the real estate market, the properties securing these loans may be difficult to dispose of if they are foreclosed. As of December 31,
2014, we had $300.4 million in nonperforming commercial and construction loans held for investment. We may incur additional credit
losses over the near term, either because of continued deterioration of the quality of the loans or because of sales of such loans, which
would likely accelerate the recognition of losses. Any such losses would adversely impact our overall financial performance and
results of operations.
Our allowance for loan and lease losses may not be adequate to cover actual losses, and we may be required to materially increase
our allowance, which may adversely affect our capital, financial condition and results of operations.
We are subject to the risk of loss from loan defaults and foreclosures with respect to the loans we originate and purchase. We establish
a provision for loan and lease losses, which leads to reductions in our income from operations, in order to maintain our allowance for
inherent loan and lease losses at a level that our management deems to be appropriate based upon an assessment of the quality of the
loan and lease portfolio. Management may fail to accurately estimate the level of inherent loan and lease losses or may have to
increase our provision for loan and lease losses in the future as a result of new information regarding existing loans, future increases in
non-performing loans, changes in economic and other conditions affecting borrowers or for other reasons beyond our control. In
addition, bank regulatory agencies periodically review the adequacy of our allowance for loan and lease losses and may require an
increase in the provision for loan and lease losses or the recognition of additional classified loans and loan charge-offs, based on
judgments different than those of management.
The level of the allowance reflects management’s estimates based upon various assumptions and judgments as to specific credit
risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political and
regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the
allowance for loan and lease losses inherently involves a high degree of subjectivity and requires management to make significant
estimates and judgments regarding current credit risks and future trends, all of which may undergo material changes. If our estimates
prove to be incorrect, our allowance for credit losses may not be sufficient to cover losses in our loan portfolio and our expense
relating to the additional provision for credit losses could increase substantially.
Any such increases in our provision for loan and lease losses or any loan losses in excess of our provision for loan and lease losses
would have an adverse effect on our future financial condition and results of operations. Given the difficulties facing some of our
largest borrowers, these borrowers may fail to continue to repay their loans on a timely basis or we may not be able to assess
accurately any risk of loss from the loans to these borrowers. Also, additional economic weakness, which has resulted in downgrades
of Puerto Rico’s general obligation debt to non-investment grade, among other consequences, could require increases in reserves.
Changes in collateral values of properties located in stagnant or distressed economies may require increased reserves.
Further deterioration of the value of real estate collateral securing our construction, commercial and residential mortgage loan
portfolios would result in increased credit losses. As of December 31, 2014, approximately 2%, 18% and 32% of our loan portfolio
consisted of construction, commercial mortgage and residential real estate loans, respectively.
A substantial part of our loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in
Puerto Rico, the USVI, the BVI, or the U.S. mainland, the performance of our loan portfolio and the collateral value backing the
transactions are dependent upon the performance of and conditions within each specific real estate market. Puerto Rico has been in an
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economic recession since 2006. Sustained weak economic conditions that have affected Puerto Rico and the United States over the last
several years have resulted in declines in collateral values.
Construction and commercial loans, mostly secured by commercial and residential real estate properties, entail a higher credit risk
than consumer and residential mortgage loans since they are larger in size, may have less collateral coverage, concentrate more risk in
a single borrower and are generally more sensitive to economic downturns. As of December 31, 2014, commercial mortgage and
construction real estate loans amounted to $1.8 billion or 20% of the total loan portfolio.
We measure the impairment of a loan based on the fair value of the collateral, if collateral dependent, which is generally obtained
from appraisals. Updated appraisals are obtained when we determine that loans are impaired and are updated annually thereafter. In
addition, appraisals are also obtained for certain residential mortgage loans on a spot basis based on specific characteristics such as
delinquency levels, age of the appraisal and loan-to-value ratios. The appraised value of the collateral may decrease or we may not be
able to recover collateral at its appraised value. A significant decline in collateral valuations for collateral dependent loans may require
increases in our specific provision for loan losses and an increase in the general valuation allowance. Any such increase would have an
adverse effect on our future financial condition and results of operations. During the year ended December 31, 2014, net charge-offs
specifically related to values of properties collateralizing construction, commercial mortgage and residential mortgage loan portfolios
totaled $5.5 million, $15.2 million and $23.3 million, respectively.
The recent acquisition of certain assets and deposits of Doral Bank through an alliance with another financial institution could
magnify certain of the risks the Corporation already faces and could present new risks.
On February 27, 2015, the Corporation through an alliance with another local financial institution who was the successful lead
bidder with the FDIC on the failed Doral Bank, acquired certain assets and deposits of Doral Bank. The transaction could magnify
certain of the risks the Corporation already faces that are described in these “Risk Factors” and could present new risks, including the
following:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
risks associated with weak economic conditions in the economy and in the real estate market in Puerto Rico, which
adversely affect real estate prices, the job market, consumer confidence and spending habits, which may affect, among
other things, the continued status of the loans acquired as performing loans, charge-offs and provision expense;
risks associated with maintaining customer relationships, including managing any potential customer confusion caused
by the alliance structure;
risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC-assisted transaction;
changes in interest rates and market liquidity which may reduce interest margins;
changes in market rates and prices that may adversely impact the value of financial assets and liabilities;
difficulties in converting or integrating Doral Bank branches or any difficulties of the alliance co-bidder in providing
transition support;
transaction expenses; and
failure to realize the anticipated acquisition benefits in the amounts and within the time frames expected.
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 our earnings. Net interest
income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-
bearing liabilities. Differences in the re-pricing structure of our assets and liabilities may result in changes in our profits when interest
rates change.
Increases in interest rates may reduce the value of holdings of securities.
Fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise, which may require
recognition of a loss (e.g., the identification of an other-than-temporary impairment on our available-for-sale investment portfolio),
thereby adversely affecting our results of operations. Market-related reductions in value also influence our ability to finance these
securities. Furthermore, increases in interest rates may result in an extension of the expected average life of certain fixed-income
securities, such as fixed-rate passthrough mortgage-backed securities. Such an extension could exacerbate the drop in market value
related to shifts in interest rates.
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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 our profits by reducing the amount of loan interest income.
Accelerated prepayments may adversely affect net interest income.
In general, fixed-income portfolio yields would decrease if the re-investment of pre-payment amounts is at lower rates. Net
interest income could also be affected by prepayments of mortgage-backed securities. Acceleration in the prepayments of mortgage-
backed securities would lower yields on these securities, as the amortization of premiums paid upon the 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 accretion of the discount would accelerate. These risks are directly linked to future period market
interest rate fluctuations. Also, net interest income in future periods might be affected by our investment in callable securities because
decreases in interest rates might prompt the early redemption of such securities.
Changes in interest rates on loans and borrowings may adversely affect net interest income.
Basis risk is the risk of adverse consequences resulting from unequal changes in the difference, also referred to as the “spread” or
basis, between the rates for two or more different instruments with the same maturity and 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. For example,
the interest expense for liability instruments such as brokered CDs might not change by the same amount as interest income received
from loans or investments. To the extent that the interest rates on loans and borrowings change at different speeds and by different
amounts, the margin between our LIBOR-based assets and the higher cost of the brokered CDs might be compressed and adversely
affect net interest income.
If all or a significant portion of the unrealized losses in our investment securities portfolio on our consolidated balance sheet is
determined to be other-than-temporarily impaired, we would recognize a material charge to our earnings and our capital ratios
would be adversely affected.
For the years ended December 31, 2012, 2013, and 2014, we recognized a total of $2.0 million, $0.2 million, and $0.4 million,
respectively, in other-than-temporary impairments. To the extent that any portion of the unrealized losses in our investment securities
portfolio of $42.5 million as of December 31, 2014 is determined to be other-than-temporary and, in the case of debt securities, the
loss is related to credit factors, we would recognize a charge to earnings in the quarter during which such determination is made and
capital ratios could be adversely affected. Even if we do not determine that the unrealized losses associated with this portfolio require
an impairment charge, increases in these unrealized losses adversely affect our tangible common equity ratio, which may adversely
affect credit rating agency and investor sentiment towards us. Any negative perception also may adversely affect our ability to access
the capital markets or might increase our cost of capital. Valuation and other-than-temporary impairment determinations will continue
to be affected by external market factors including default rates, severity rates and macro-economic factors.
Downgrades in our credit ratings could further increase the cost of borrowing funds.
The Corporation’s ability to access new non-deposit sources of funding could be adversely affected by downgrades in our credit
ratings. The Corporation’s liquidity is to a certain extent contingent upon its ability to obtain external sources of funding to finance its
operations. The Corporation’s current credit ratings and any downgrades in such credit ratings can hinder the Corporation’s access to
new forms of external funding and/or cause external funding to be more expensive, which could in turn adversely affect results of
operations. Also, changes in credit ratings may further affect the fair value of unsecured derivatives that consider the Corporation’s
own credit risk as part of the valuation.
Defective and repurchased loans may harm our business and financial condition.
In connection with the sale and securitization of loans, we are required to make a variety of customary representations and
warranties regarding First BanCorp. on the loans sold or securitized. Our obligations with respect to these representations and
warranties are generally outstanding for the life of the loan, and relate to, among other things:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
compliance with laws and regulations;
underwriting standards;
the accuracy of information in the loan documents and loan file; and
the characteristics and enforceability of the loan
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A loan that does not comply with these representations and warranties may take longer to sell, may impact our ability to obtain third
party financing for the loan, and may not be saleable or may be saleable only at a significant discount. If such a loan is sold before we
detect non-compliance, we may be obligated to repurchase the loan and bear any associated loss directly, or we may be obligated to
indemnify the purchaser against any loss, either of which could reduce our cash available for operations and liquidity. Management
believes that it has established controls to ensure that loans are originated in accordance with the secondary market’s requirements, but
mistakes may be made, or certain employees may deliberately violate our lending policies.
Our controls and procedures may fail or be circumvented, our risk management policies and procedures may be inadequate and
operational risk could adversely affect our consolidated results of operations.
We may fail to identify and manage risks related to a variety of aspects of our business, including, but not limited to, operational
risk, interest-rate risk, trading risk, fiduciary risk, legal and compliance risk, liquidity risk and credit risk. We have adopted and
periodically improved various controls, procedures, policies and systems to monitor and manage risk. Any improvements to our
controls, procedures, policies and systems, however, may not be adequate to identify and manage the risks in our various businesses.
If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets or our businesses or for
other reasons, we could incur losses or suffer reputational damage or find ourselves out of compliance with applicable regulatory
mandates or expectations.
We may also be subject to disruptions from external events that are wholly or partially beyond our control, which could cause
delays or disruptions to operational functions, including information processing and financial market settlement functions. In addition,
our customers, vendors and counterparties could suffer from such events. Should these events affect us, or the customers, vendors or
counterparties with which we conduct business, our consolidated results of operations could be negatively affected. When we record
balance sheet reserves for probable loss contingencies related to operational losses, we may be unable to accurately estimate our
potential exposure, and any reserves we establish to cover operational losses may not be sufficient to cover our actual financial
exposure, which may have a material impact on our consolidated results of operations or financial condition for the periods in which
we recognize the losses.
Cyber-attacks, system risks and data protection breaches could present significant reputational, legal and regulatory costs.
First BanCorp. is under continuous threat of cyber-attacks especially as we continue to expand customer services via the internet
and other remote service channels. Three of the most significant cyber-attack risks that we face are e-fraud, denial-of-service and
computer intrusion that might result in loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and
extract funds from customer bank accounts. Denial-of-service disrupts services available to our customers through our on-line banking
system. Computer intrusion attempts might result in the breach of sensitive customer data, such as account numbers and social
security numbers, and could present significant reputational, legal and/or regulatory costs to the Corporation if successful. Our risk
and exposure to these matters remains heightened because of the evolving nature and complexity of the threats from organized
cybercriminals and hackers, and our plans to continue to provide electronic banking services to our customers.
If personal, non-public, confidential or proprietary information of our customers in our possession were to be mishandled or
misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse
could include, for example, if such information were erroneously provided to parties who are not permitted to have the information,
either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately
taken by third parties.
We rely on other companies to perform key aspects of our business infrastructure.
Third parties perform key aspects of our business operations such as data processing, information security, recording and
monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected
these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those
resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes,
failure of a vendor to provide services for any reason or poor performance of services, or failure of a vendor to notify us o f a
reportable event, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our
business. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties interfere with
the vendor’s ability to serve us. Replacing these third party vendors could also create significant delay and expense. Accordingly, use
of such third parties creates an inherent risk to our business operations.
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Hurricanes and other weather-related events could cause a disruption in our operations or other consequences that could have an
adverse impact on our results of operations.
A significant portion of our operations is located in a region susceptible to hurricanes. Such weather events can cause disruption to
our operations and could have a material adverse effect on our overall results of operations. We maintain hurricane insurance,
including coverage for lost profits and extra expense; however, there is no insurance against the disruption to the markets that we
serve that a catastrophic hurricane could produce. Further, a hurricane in any of our market areas could adversely impact the ability of
borrowers to timely repay their loans and may adversely impact the value of any collateral held by us. The severity and impact of
future hurricanes and other weather-related events are difficult to predict and may be exacerbated by global climate change. The
effects of future hurricanes and other weather-related events could have an adverse effect on our business, financial condition or
results of operations.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled people we need to support
our business.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities
in which we engage can be intense, and we may not be able to hire people or retain them, particularly in light of uncertainty
concerning compensation restrictions applicable to banks but not applicable to other financial services firms. The unexpected loss of
services of one or more of our key personnel could adversely affect our business because of the loss of their skills, knowledge of our
markets and years of industry experience and, in some cases, because of the difficulty of promptly finding qualified replacement
employees. Similarly, the loss of key employees, either individually or as a group, could result in a loss of customer confidence in our
ability to execute banking transactions on their behalf.
Further increases in the FDIC deposit insurance premium or in FDIC required reserves may have a significant financial impact
on us.
The FDIC insures deposits at FDIC-insured depository institutions up to certain limits. The FDIC charges insured depository
institutions premiums to maintain the Deposit Insurance Fund (the “DIF”). Economic conditions since 2008 have resulted in higher
bank failures. In the event of a bank failure, the FDIC takes control of a failed bank and ensures payment of deposits up to insured
limits using the resources of the DIF. The FDIC is required by law to maintain adequate funding of the DIF, and the FDIC may
increase premium assessments to maintain such funding.
The Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will require institutions with
assets greater than $10 billion to bear an increased responsibility for funding the prescribed reserve to support the DIF. Since then, the
FDIC addressed plans to bolster the DIF by increasing the required reserve ratio for the industry to 1.35 percent (ratio of reserves to
insured deposits) by September 30, 2020, as required by the Dodd-Frank Act. The FDIC has also adopted a final rule raising its
industry target ratio of reserves to insured deposits to 2 percent, 65 basis points above the statutory minimum, but the FDIC does not
project that goal to be met for several years.
The FDIC’s revised rule on deposit insurance assessments implements a provision in the Dodd-Frank Act that changes the
assessment base for deposit insurance premiums from one based on domestic deposits to one based on average consolidated total
assets minus average Tier 1 capital. The rule changes the assessment rate schedules for insured depository institutions so that
approximately the same amount of revenue would be collected under the new assessment base as would be collected under the
previous rate schedule and the schedules previously proposed by the FDIC. The rule also revises the risk-based assessment system for
all large insured depository institutions (generally, institutions with at least $10 billion in total assets, such as FirstBank). Under the
rule, the FDIC uses a scorecard method to calculate assessment rates for all such institutions.
The FDIC may further increase FirstBank’s premiums or impose additional assessments or prepayment requirements in the future.
The Dodd-Frank Act has removed the statutory cap for the reserve ratio, leaving the FDIC free to set this cap going forward.
Our businesses may be adversely affected by litigation.
From time to time, our customers, or the government on their behalf, may make claims and take legal action relating to our
performance of fiduciary or contractual responsibilities. We may also face employment lawsuits or other legal claims. In any such
claims or actions, demands for substantial monetary damages may be asserted against us resulting in financial liability or an adverse
effect on our reputation among investors or on customer demand for our products and services. We may be unable to accurately
estimate our exposure to litigation risk when we record balance sheet reserves for probable loss contingencies. As a result, any
reserves we establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which may
have a material adverse impact on our consolidated results of operations or financial condition.
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In the ordinary course of our business, we are also subject to various regulatory, governmental and law enforcement inquiries,
investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may be
specifically directed at us. In regulatory enforcement matters, claims for disgorgement, the imposition of penalties and the imposition
of other remedial sanctions are possible.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often
been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of
management’s attention and resources.
The resolution of legal actions or regulatory matters, if unfavorable, could have a material adverse effect on our consolidated results
of operations for the quarter in which such actions or matters are resolved or a reserve is established.
Our businesses may be negatively affected by adverse publicity or other reputational harm.
Our relationships with many of our customers are predicated upon our reputation as a fiduciary and a service provider that adheres
to the highest standards of ethics, service quality and regulatory compliance. Adverse publicity, regulatory actions, like the Regulatory
Agreements, litigation, operational failures, the failure to meet customer expectations and other issues with respect to one or more of
our businesses could materially and adversely affect our reputation, or our ability to attract and retain customers or obtain sources of
funding for the same or other businesses. Preserving and enhancing our reputation also depends on maintaining systems and
procedures that address known risks and regulatory requirements, as well as our ability to identify and mitigate additional risks that
arise due to changes in our businesses, the market places in which we operate, the regulatory environment and customer expectations.
If any of these developments has a material adverse effect on our reputation, our business will suffer.
Changes in accounting standards issued by the Financial Accounting Standards Board may adversely affect our financial
statements.
Our financial statements are subject to the application of U.S. Generally Accepted Accounting Principles (“GAAP”), which are
periodically revised and expanded. Accordingly, from time to time, we are required to adopt new or revised accounting standards
issued by the Financial Accounting Standards Board. Market conditions have prompted accounting standard setters to promulgate new
requirements that further interpret or seek to revise accounting pronouncements related to financial instruments, structures or
transactions as well as to revise standards to expand disclosures. The impact of accounting pronouncements that have been issued but
not yet implemented is disclosed in footnotes to our financial statements, which are incorporated herein by reference. An assessment
of proposed standards is not provided as such proposals are subject to change through the exposure process and, therefore, the effects
on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards that we are required to
adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes
could have a material adverse effect on our financial condition and results of operations.
Any impairment of our goodwill or amortizable intangible assets may adversely affect our operating results.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
Under GAAP, we review our 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 reduced future cash flow estimates and
slower growth rates in the industry.
The goodwill impairment evaluation process requires us to make estimates and assumptions with regards to the fair value of our
reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of
goodwill that would, in turn, negatively impact our results of operations and the reporting unit where the goodwill is recorded. We
conducted our 2014 evaluation of goodwill during the fourth quarter of 2014.
The Step 1 evaluation of goodwill allocated to the Florida reporting unit under both valuation approaches (market and discounted
cash flow analysis) indicated that the fair value of the unit was above the carrying amount of its equity book value as of the valuation
date (October 1), which meant that Step 2 was not undertaken. Goodwill with a carrying value of $28.1 million was not impaired as of
December 31, 2014 or 2013, nor was any goodwill written off due to impairment during 2014, 2013, and 2012. If we are required to
record a charge to earnings in our consolidated financial statements because an impairment of the goodwill or amortizable intangible
assets is determined, our results of operations could be adversely affected.
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Recognition of deferred tax assets is dependent upon the generation of future taxable income by the Bank.
As of December 31, 2014, the Corporation had a deferred tax asset of $313.0 million (net of a valuation allowance of $204.6
million), including $188.4 million associated with NOLs. Under Puerto Rico law, the Corporation and its subsidiaries, including
FirstBank, which incurred most of the NOLs, are treated as separate taxable entities and are not entitled to file consolidated tax
returns. To obtain the full benefit of the applicable deferred tax asset attributable to NOLs, FirstBank must have sufficient taxable
income within the applicable carry forward period (7 years for taxable years beginning before January 1, 2005, 12 years for taxable
years beginning after December 31, 2004 and before December 31, 2012, and 10 years for taxable years beginning after December 31,
2012). The Bank incurred all of its NOLs on or after 2009. Accounting for income taxes requires that companies assess whether a
valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset
that is more likely than not to be realized.
The Corporation concluded that, as of December, 31, 2014, it is more likely than not that FirstBank will generate sufficient taxable
income within the applicable NOL carry-forward periods to realize a significant portion of its deferred tax assets and recorded a partial
reversal of its valuation allowance in the amount of $302.9 million in the fourth quarter of 2014. As a result of the partial reversal, the
Corporation’s valuation allowance decreased to $204.6 million, as of December 31, 2014, from $522.7 million as of December 31,
2013. Due to significant estimates utilized in determining the valuation allowance and the potential for changes in facts and
circumstances, it is reasonably possible that, in the future, the Corporation will not be able to reverse the remaining valuation
allowance or that the Corporation will need to increase its current deferred tax asset valuation allowance.
The Corporation’s judgments regarding accounting policies and the resolution of tax disputes may impact the Corporation’s
earnings and cash flow.
Significant judgment is required in determining the Corporation’s effective tax rate and in evaluating its tax positions. The
Corporation provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement
criteria prescribed by applicable GAAP.
Fluctuations in federal, state, local and foreign taxes or a change to uncertain tax positions, including related interest and penalties,
may impact the Corporation’s effective tax rate. When particular tax matters arise, a number of years may elapse before such matters
are audited and finally resolved. In addition, tax positions may be challenged by the IRS and the tax authorities in the jurisdictions in
which we operate and we may estimate and provide for potential liabilities that may arise out of tax audits to the extent that uncertain
tax positions fail to meet the recognition standard under applicable GAAP. Unfavorable resolution of any tax matter could increase the
effective tax rate and could result in a material increase in our tax expense. Resolution of a tax issue may require the use of cash in the
year of resolution. Tax year 2012 is currently under examination by the IRS. If any issues addressed in this examination are resolved
in a manner not consistent with the Corporation’s expectations, the Corporation could be required to adjust its provision for income
taxes in the period in which such resolution occurs.
We must respond to rapid technological changes, and these changes may be more difficult or expensive than anticipated.
If competitors introduce new products and services embodying new technologies, or if new industry standards and practices
emerge, our existing product and service offerings, technology and systems may become obsolete. Further, if we fail to adopt or
develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future
customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial
services industry is changing rapidly and, in order to remain competitive, we must continue to enhance and improve the functionality
and features of our products, services and technologies. These changes may be more difficult or expensive than we anticipate.
RISKS RELATING TO THE BUSINESS ENVIRONMENT AND OUR INDUSTRY
Difficult market conditions have affected the financial industry and may adversely affect us in the future.
Given that most of our business is in Puerto Rico and the United States and given the degree of interrelation between Puerto Rico’s
economy and that of the United States, we are exposed to downturns in the U.S. economy, including factors such as unemployment
and underemployment levels in the United States and real estate valuations. The deterioration of these conditions could adversely
affect the credit performance of mortgage loans, credit default swaps and other derivatives, and result in significant write-downs of
asset values by financial institutions, including government-sponsored entities as well as major commercial banks and investment
banks.
Despite improving labor markets in the U.S. in the past year, an elevated amount of underemployment and household debt, the
prolonged low interest rate environment, along with a continued sluggish recovery in the consumer real estate market and certain
commercial real estate market in the U.S., pose challenges for the U.S. economic performance and the financial services industry.
39
In particular, we may face the following risks:
• Our 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.
• The models used to estimate losses inherent in the credit exposure require 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.
• Our 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 and repurchase agreements) on favorable
terms, or at all, could be adversely affected by disruptions in the capital markets or other events, including deteriorating
investor expectations.
• Competitive dynamics in the industry could change as a result of consolidation of financial services companies in
connection with adverse changes in market conditions.
• We may be unable to continue to comply with the Regulatory Agreements, which could result in further regulatory
enforcement actions.
• We expect to continue to face increased regulation of our industry. Compliance with such regulation may increase our costs
and limit our ability to pursue business opportunities.
• There may be downward pressure on our stock price.
The deterioration of economic conditions in the U.S. and disruptions in the financial markets could adversely affect our ability to
access capital and our business, financial condition and results of operations.
Continuation of the economic slowdown and decline in the real estate market in Puerto Rico could continue to harm our 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 has
declined over the past few years and this trend may continue to reduce the level of mortgage loans we produce in the future and
adversely affect our business. During periods of rising interest rates, the refinancing of many mortgage products tends 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.
The actual rates of delinquencies, foreclosures and losses on loans have been higher during the economic slowdown. Rising
unemployment, lower interest rates and declines in housing prices have had a 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 our ability to sell
loans, the prices we receive for loans, the values of mortgage loans held for sale or residual interests in securitizations, which could
continue to harm our financial condition and results of operations. In addition, any additional material decline in real estate values
would further weaken the collateral loan-to-value ratios and increase the possibility of loss if a borrower defaults. In such event, we
will be subject to the risk of loss on such real estate arising from borrower defaults to the extent not covered by third-party credit
enhancement.
The Corporation’s credit quality may be adversely affected by Puerto Rico’s current economic condition.
A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has
endured a prolonged period of economic and fiscal challenges. Based on the first six months of fiscal year 2013-2014, the main
economic indicators suggest that the Puerto Rico economy remains weak. According to the Puerto Rico Planning Board, the
Commonwealth’s gross national product (“GNP”) contracted (in real terms) from 2006 through 2011, reflecting its first period of
slight economic growth in 2012 and 2013 when GNP grew 0.9% and 0.3%, respectively. For the fiscal years ending June 30, 2014 and
2015, the Puerto Rico Planning Board projects a slight economic growth in real GNP of 0.1% and 0.2%, respectively. This continued
period of economic stagnation may have an adverse effect on employment and could have an adverse effect on Commonwealth tax
revenues.
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The Government has implemented a multi-year budget plan for reducing the deficit. Some of the measures implemented by the
government include increasing corporate taxes and reforming the employee retirement systems of the Commonwealth. Since the
government is an important source of employment in Puerto Rico, these measures had a temporary adverse effect on the island’s
already weak economy. The seasonally adjusted unemployment rate in Puerto Rico decreased to 13.7% in December 2014, compared
to 15.45% in December 2013. The seasonally adjusted payroll non-farm employment decreased by 0.9% in December 2014, compared
to December 2013. On July 1, 2014, the Governor of Puerto Rico signed a balanced budget for fiscal year 2015, the first balanced
budget in more than a decade.
The economy of Puerto Rico is highly sensitive to global oil prices since the island does not have a significant mass transit system
available to the public and most of its electricity is powered by oil, making it highly vulnerable to fluctuations in oil prices. A
substantial increase in the price of oil could adversely impact the economy by reducing disposable income and increasing the
operating costs for most businesses and government operations. Consumer spending is particularly sensitive to wide fluctuations in oil
prices. Several bills have been filed at the Legislative Assembly that address energy costs in Puerto Rico. One bill supported by the
Governor proposes to transform the Telecommunications Regulatory Board into the Energy and Telecommunications Commission,
which will be responsible for all energy and telecommunications regulatory matters. This new entity would also be responsible for all
tariff-related issues. Another bill approved by the Senate proposes the creation of a regulatory agency that will approve or reject
energy rates for all energy producers in Puerto Rico and would be responsible for opening Puerto Rico’s energy market to
competition. Both proposals are intended to substantially reduce Puerto Rico’s energy costs.
The decline in Puerto Rico’s economy since 2006 has resulted, among other things, in a decline in our loan originations, an increase
in the level of our non-performing assets, loan loss provisions and charge-offs, particularly in our construction and commercial loan
portfolios, an increase in the rate of foreclosure loss on mortgage loans, and a reduction in the value of our loan portfolio, all of which
have adversely affected our profitability. Any further potential deterioration of economic activity could result in further adverse effects
on our profitability.
As of December 31, 2014, the Corporation had $339.0 million in credit facilities granted to the Puerto Rico government, its
municipalities and public corporations, of which $308.0 million was outstanding, compared to $397.8 million outstanding as of
December 31, 2013. Approximately $201.4 million of the outstanding credit facilities consists of loans to municipalities in Puerto
Rico. Municipal debt exposure is secured by ad valorem taxation without limitation as to rate or amount on all taxable property within
the boundaries of each municipality. The good faith, credit, and unlimited taxing power of the applicable municipality have been
pledged to the repayment of all outstanding bonds and notes. Approximately $13.2 million consists of loans to units of the central
government, and approximately $93.4 million consists of loans to public corporations. Furthermore, the Corporation had $133.3
million outstanding as of December 31, 2014 in financing to the hotel industry in Puerto Rico guaranteed by the TDF, compared to
$200.4 million as of December 31, 2013.
On June 28, 2014, the governor of Puerto Rico signed into law The Recovery Act to provide a legislative framework for certain
public corporations that are experiencing severe financial stress to address their financial obstacles through an orderly, statutory
process that allows them to handle their debts, while ensuring the continuity of essential services to citizens and infrastructure
upgrades.
As of December 31, 2014, the Corporation had an exposure to public corporations covered by the Recovery Act amounting to $93.4
million, including the $75 million direct exposure to PREPA. In August 2014, PREPA entered into a forbearance agreement with a
group of banks, including FirstBank, to extend further its maturing credit lines to March 31, 2015. As a result of the forbearance, the
credit was classified as a TDR loan during the third quarter of 2014. The loan has been maintained in accrual status based on the
estimated cash flow analyses performed on this non-collateral dependent loan and repayment prospects.
In addition, as of December 31, 2014, the Corporation had outstanding $61.2 million in obligations of the Puerto Rico government,
mainly bonds of the GDB and the Puerto Rico Building Authority, as part of its available-for-sale investment securities portfolio,
carried on its books at a fair value of $43.2 million.
On February 4, 2014, S&P downgraded the Commonwealth of Puerto Rico’s debt to BB+, one level below investment grade. S&P
also downgraded to levels below investment grade the credit rating of the GDB and other government entities. On February 7, 2014,
Moody’s downgraded the Commonwealth of Puerto Rico general obligation bonds to Ba2, two notches below investment grade.
Moody’s also downgraded to Ba2 the Public Building Authority Bonds, the Pension Funding Bonds, the GDB senior notes, the
Municipal Finance Authority Bonds, the Puerto Rico Infrastructure Finance Authority Special Tax Revenue Bonds, the Convention
Center District Authority Hotel Occupancy Tax Revenue Bonds, the Puerto Rico Highway and Transportation Authority
Transportation Revenue Bonds, various ratings of the Puerto Rico Aqueduct and Sewer Authority, and the Puerto Rico Electric Power
Authority. In addition, the Puerto Rico Sales Tax Financing Corporation’s senior-lien bonds were downgraded by Moody’s to Baa1
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from A2, retaining investment grade status. Following the downgrades by S&P and Moody’s, Fitch became the third agency to
downgrade the Commonwealth of Puerto Rico debt to BB, two notches below investment grade. On March 11, 2014, the
Commonwealth of Puerto Rico sold $3.5 billion in general obligation bonds at a yield of 8.72% to refinance short-term liabilities and
to address liquidity needs.
In July 2014, the Puerto Rico debt and the debt of certain public corporations were downgraded further into speculative grade by
these credit agencies after the enactment of The Recovery Act. In February 2015, a federal judge ruled that the Recovery Act is pre-
empted by the Federal Bankruptcy Court and therefore void. After this decision, S&P and Moody’s downgraded Puerto Rico’s general
obligation debt deeper into non-investment grade category. S&P now rates Puerto Rico’s general obligation bonds at B, five notches
below investment grade, Moody’s at Caa1, seven notches below investment grade, and Fitch at BB-, three notches below investment
grade. The issuers of Puerto Rico government and agencies bonds held by the Corporation have not defaulted, and the contractual
payments on these securities have been made as scheduled.
It is uncertain how the financial markets may react to any potential further rating downgrades of Puerto Rico’s debt obligation.
However, further deterioration in the fiscal situation, could adversely affect the value of our portfolio of Puerto Rico government and
agencies securities.
In February 2015, the Governor of Puerto Rico announced a proposal for a new tax code that would replace the current 7% sales
and use tax with a 16% value-added tax, while lowering income taxes. While legislation for the new tax code has been introduced, it is
too early to determine what changes will be made during the legislative process and what effect this proposal, if enacted into law, will
have on economic activity.
As of December 31, 2014, the Corporation had $227.4 million of Puerto Rico public sector deposits ($208.1 million in transactional
accounts and $19.3 million in time deposits) compared to $546.5 million as of December 31, 2013. Approximately 54% is from
municipalities in Puerto Rico and 46% is from public corporations and the central government and agencies.
In 2014, Act 24-2014 was approved by the Puerto Rico Legislature, seeking to further strengthen the liquidity of the GDB and the
GDB’s oversight of public funds.
Among other measures, Act 24-2014 grants the GDB the ability to exercise additional oversight of certain public funds deposited at
private financial institutions and grants the GDB the legal authority, subject to an entity’s ability to request waivers under certain
specified circumstances, to require such public funds (other than funds of the Legislative Branch, the Judicial Branch, the University
of Puerto Rico, governmental pension plans, municipalities and certain other independent agencies) to be deposited at the GDB, which
is expected to maximize liquidity and to result in a more efficient management of public resources. As anticipated, certain public
corporations and agencies withdrew from FirstBank approximately $341.6 million during the second quarter of 2014. The Corporation
will continue to focus on transactional accounts and to seek to obtain deposits from entities excluded from Act 24-2014.
The failure of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by future failures of financial institutions and the
actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing,
counterparty and other relationships. We have 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, we are 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, we may experience
delays in recovering the assets posted as collateral, or we may incur a loss to the extent that the counterparty was holding collateral in
excess of the obligation to such counterparty, such as the loss of our assets that we pledged to Lehman Brothers, Inc., which we have
been trying to recover, so far unsuccessfully.
In addition, many of these transactions expose us 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 us cannot be realized or is liquidated at prices not sufficient to recover
the full amount of the loan or derivative exposure due to us. Any losses resulting from our routine funding transactions may materially
and adversely affect our financial condition and results of operations.
42
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance
structure, financial condition or results of operations.
We and our subsidiaries are subject to extensive regulation by multiple regulatory bodies. These regulations may affect the manner
and terms of delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties,
lawsuits or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our
business operations. Changes in these regulations can significantly affect the services that we are asked to provide as well as our costs
of compliance with such regulations. In addition, adverse publicity and damage to our reputation arising from the failure or perceived
failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.
The financial crisis resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the
financial services industry. The U.S. government intervened on an unprecedented scale, responding by temporarily enhancing the
liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money
market funds and certain types of debt issuances and increasing insurance on bank deposits.
These programs have subjected financial institutions, particularly those participating in TARP, to additional restrictions, oversight
and costs. In addition, new proposals for legislation are periodically introduced in the U.S. Congress that could further substantially
increase regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the
industry to conduct business consistent with historical practices, including in the areas of interest rates, financial product offerings and
disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other
things. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing
regulations are applied.
In recent years, regulatory oversight and enforcement have increased substantially, imposing additional costs and increasing the
potential risks associated with our operations. If these regulatory trends continue, they could adversely affect our business and, in turn,
our consolidated results of operations.
We could be adversely affected by changes in tax laws and regulations or the interpretation of such laws and regulations.
The Corporation and its subsidiaries are subject to Puerto Rico income tax laws on their income from all sources. As Puerto Rico
corporations, First BanCorp. and its subsidiaries are treated as foreign corporations for U.S. and USVI income tax purposes and are
generally subject to U.S. and USVI income tax only on their income from sources within the U.S. and USVI or income effectively
connected with the conduct of a trade or business in those regions. These tax laws are complex and subject to different interpretations.
We must make judgments and interpretations about the application of these inherently complex tax laws when determining our
provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance.
In February 2015, the Governor of Puerto Rico announced a proposal for a new tax code that would, among other things, replace
the current 7% sales and use tax with a 16% value-added tax, while lowering income taxes. While legislation for the new tax code has
been introduced, it is too early to determine what changes will be made during the legislative process. Legislative changes, particularly
changes in tax laws, could adversely impact our results of operations.
Financial services legislation and regulatory reforms may have a significant impact on our business and results of operations and
on our credit ratings.
The Corporation faces increased regulation and regulatory scrutiny as a result of, among other things, its participation in the TARP.
The U.S. Treasury acquired shares of Common Stock from the Corporation in October 2011 in exchange for shares of preferred stock
that it owned because of the Corporation’s issuance of preferred stock to Treasury in January 2009 pursuant to the TARP. In July
2010, the Corporation issued to Treasury a warrant, which amends, restates and replaces the original warrant that it issued to Treasury
in January 2009 under the TARP. The Corporation’s participation in the TARP also imposes limitations on the payments it may make
to its senior leaders.
The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry. The Dodd-
Frank Act includes, and the regulations developed and to be developed thereunder include or will include, provisions affecting large
and small financial institutions alike.
The Collins Amendment of the Dodd-Frank Act, among other things, requires the federal banking agencies to establish minimum
leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Regulations
implementing the Collins Amendment set as a floor for the capital requirements of the Corporation and FirstBank a minimum capital
requirement computed using the FDIC’s general risk-based capital rules.
43
As previously discussed, the federal banking agencies have adopted final rules for U.S. banks that revise in important respects the
minimum regulatory capital requirements, the components of regulatory capital, and the risk-based capital treatment of bank assets
and off-balance sheet exposures. The final rules, which became effective for the Corporation and FirstBank beginning January 1,
2015, generally are intended to align U.S. regulatory capital requirements with Basel III international regulatory capital standards
adopted by the Basel Committee on Banking Supervision in 2010 (and revised in 2011) known as “Basel III.” The new rules increase
the quantity and quality of required capital by, among other things, establishing a new minimum common equity Tier 1 ratio of 4.5%
of risk-weighted assets and an additional common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. In
addition, banks and bank holding companies are required to have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and
a total risk-based ratio of 8.0%. The final rules also revise the definition of capital by expanding the conditions for the inclusion of
equity capital instruments and minority interests as Tier 1 capital, and impose limitations on capital distributions and certain
discretionary bonus payments if additional specified amounts, or “buffers,” of common equity Tier 1 capital are not met.
Consistent with Basel III and the Collins Amendment, the final rules also establish a more conservative standard for including an
instrument such as trust-preferred securities as Tier 1 capital for bank holding companies with total consolidated assets of $15 billion
or more as of December 31, 2009, setting out a phase-out schedule. Bank holding companies such as the Corporation must fully phase
out these instruments from Tier I capital by January 1, 2016, although qualifying trust preferred securities may be included as Tier 2
capital until the instruments are redeemed or mature. As of December 31, 2014, the Corporation had $225 million in trust preferred
securities that are subject to the phase-out from Tier 1 capital under the final regulatory capital rules discussed above.
In addition, the final rules revise and harmonize the bank regulators’ rules for calculating risk-weighted assets to enhance risk
sensitivity and address weaknesses that have been identified recently, by applying a variation of the Basel III “standardized approach”
for the risk-weighting of bank assets and off-balance sheet exposures to all U.S. banking organizations other than large, internationally
active banks.
The final capital rules became effective for the Corporation and our subsidiary bank on a multi-year transitional basis starting on
January 1, 2015, and in general will be fully effective as of January 1, 2019. First BanCorp. and FirstBank were able to meet well-
capitalized capital ratios upon implementation of the requirements. Although we expect to continue to exceed the minimum
requirements for well capitalized status under the new capital rules, there can be no assurance that we will remain well capitalized.
Moreover, for as long as we and FirstBank are subject to the provisions of the Regulatory Agreements, we cannot be considered to be
well-capitalized.
Additional regulatory proposals and legislation, if finally adopted, would change banking laws and our operating environment and
that of our subsidiaries in substantial and unpredictable ways. The ultimate effect that such legislation, if enacted, or regulations
would have upon our financial condition or results of operations may be adverse.
Rulemaking changes implemented by the CFPB will result in higher regulatory and compliance costs related to originating and
servicing residential mortgage loans and may adversely affect our results of operations.
The Dodd-Frank Act significantly changed the regulation of single-family residential mortgage lending in the United States. Among
other things, the law transferred rule-making and enforcement powers from a number of federal agencies to the CFPB, imposed new
risk retention and recordkeeping requirements on lenders (such as the Bank) that sell single-family residential mortgage loans in the
secondary market, required revision of disclosure documents, limited loan originator compensation and expanded recordkeeping and
reporting requirements under other federal statutes.
New regulations implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act
(“TILA”), and the Real Estate Settlement Procedures Act (“RESPA”). See “Regulation and Supervision – Consumer Financial
Protection Bureau.”
Among other consequences of these numerous changes, the new ability to repay requirements may result in reduced credit
availability and higher borrowing costs to cover the costs of compliance. The ability of borrowers to raise new defenses in foreclosure
proceedings on defaulted mortgage loans also may lead to increased foreclosure costs, extend foreclosure timeliness, and increase the
severity of loan losses. Increased repurchase and indemnity requests with respect to mortgage loans sold into the secondary markets
may also result.
Some of these new rules became effective in June 2013, while others became effective in January 2014. These and other changes
required by the Dodd-Frank Act will require substantial modifications to the entire mortgage lending and servicing industry. Their
impact may involve changes to our operations and increased compliance costs in making single-family residential mortgage loans.
Additional rulemaking affecting the residential mortgage business may occur, which may cause us to incur additional increased
regulatory and compliance costs.
44
Compliance with stress testing requirements may be challenging.
The Corporation is currently subject to supervisory guidance for stress testing practices issued by the federal banking agencies in
May 2012. This guidance outlines broad principles for a satisfactory stress testing framework and describes various stress testing
approaches and how stress testing should be used at various levels within an organization. As previously discussed, the Corporation is
also subject to two new stress testing rules that implement provisions of the Dodd-Frank Act, one issued by the Federal Reserve Board
that applies to First BanCorp. on a consolidated basis and one issued by the FDIC that applies to the Bank.
Under the Dodd-Frank Act stress tests, the Corporation’s first annual company-run stress testing should be submitted to regulators
no later than March 31, 2015. Public disclosure of the results for the severely adverse economic scenario is expected to be made
during the second quarter of 2015 on the Corporation’s website. Such public disclosure of stress test results could result in reputational
harm if the Corporation’s results are worse than those of its competitors or otherwise indicate that the Corporation’s risk profile is
excessive or elevated. Furthermore, given that the Corporation will be subject to multiple stress testing requirements that are
administered at different levels by more than one federal banking agency, and compliance with such requirements will be complicated,
if the Corporation fails to fully comply with these requirements, it may be subject to regulatory action.
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal
Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. 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 business,
financial condition and results of operations may be adverse.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending
laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and
regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal
agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution's performance
under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including
damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and
restrictions on entering new business lines. Private parties may also have the ability to challenge an institution's performance under
fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial
condition and results of operations.
We face a risk of noncompliance and enforcement action related to the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to
institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as
appropriate. The Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of
those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well
as the U.S. Department of Justice, Drug Enforcement Administration and IRS. We are also subject to increased scrutiny of compliance
with trade and economic sanctions requirements and rules enforced by the Office of Foreign Assets Control. If our policies,
procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may
include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of
our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering
and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse
effect on our business, financial condition and results of operations.
45
RISKS RELATING TO AN INVESTMENT IN THE CORPORATION’S COMMON AND PREFERRED STOCK
Sales in the public market under an outstanding resale registration statement filed with the SEC by the small group of large
stockholders that hold in the aggregate approximately 44.7% of our outstanding shares could adversely affect the trading price of
our common stock.
The following stockholders own an aggregate of approximately 44.7% of our outstanding shares of common stock: funds affiliated
with Thomas H. Lee Partners L.P. (“THL”), which own approximately 19.7%; funds managed by Oaktree Capital Management, L.P.
(“Oaktree”), which own approximately 19.7%; and U.S. Treasury which owns approximately 5.4%, including the shares of common
stock issuable upon exercise of the warrant. We are obligated to keep the prospectus, which is part of the resale registration statement,
current so that the securities can be sold in the public market at any time. The resale of the securities in the public market, or the
perception that these sales might occur, could cause the market price of our common stock to decline.
Issuance of additional equity securities in the public market and other capital management or business strategies that we may
pursue also may depress the market price of our common stock and could result in dilution of holders of our common stock and
preferred stock.
Generally, we are not restricted from issuing additional equity securities, including common stock. We may choose or be required
in the future to identify, consider and pursue additional capital management strategies to bolster our capital position. We may issue
equity securities (including convertible securities, preferred securities, and options and warrants on our common or preferred stock
securities) in the future for a number of reasons, including to finance our operations and business strategy, adjust our leverage ratio,
address regulatory capital concerns, restructure currently outstanding debt or equity securities or satisfy our obligations upon the
exercise of outstanding options or warrants. Future issuances of our equity securities, including common stock, in any transaction that
we may pursue may dilute the interests of our existing holders of our common stock and preferred stock and cause the market price of
our common stock to decline.
The Corporation has outstanding a warrant held by the Treasury to purchase 1,285,899 shares of common stock. If the warrant is
exercised, the issuance of shares of Common Stock would reduce our income per share, and further reduce the book value per share
and voting power of our current common stockholders.
Additionally, THL and Oaktree have anti-dilution rights, which they acquired when they purchased shares of common stock in the
$525 million capital raise, completed in October 2011 that have been, and will be in the future, triggered, subject to certain exceptions,
upon our issuance of additional shares of common stock. In such a case, THL and Oaktree had, and will have, the right to acquire the
amount of shares of common stock that will enable them to maintain their percentage ownership interest in the Corporation.
The market price of our common stock may continue to be subject to significant fluctuations and volatility.
The stock markets have experienced high levels of volatility since 2008. These market fluctuations have adversely affected, and
may continue to adversely affect, the trading price of our common stock. In addition, the market price of our common stock has been
subject to significant fluctuations and volatility because of factors specifically related to our businesses and may continue to fluctuate
or decline.
46
Factors that could cause fluctuations, volatility or a decline in the market price of our common stock, many of which could be
beyond our control, include the following:
• uncertainties and developments related to the resolution of the Puerto Rico Government fiscal problems;
• our ability to continue to comply with the Regulatory Agreements;
• any additional regulatory actions against us;
• changes or perceived changes in the condition, operations, results or prospects of our businesses and
market assessments of these changes or perceived changes;
• announcements of strategic developments, acquisitions and other material events by us or our competitors,
including any failures of banks;
• changes in governmental regulations or proposals, or new governmental regulations or proposals, affecting
us;
• a continuing recession in the Puerto Rico market and a lack of growth in our other principal markets in the
Virgin Islands and the United States;
• the departure of key employees;
• changes in the credit, mortgage and real estate markets;
• operating results that vary from the expectations of management, securities analysts and investors;
• operating and stock price performance of companies that investors deem comparable to us; and
• the public perception of the banking industry and its safety and soundness.
In addition, the stock market in general, and the NYSE and the market for commercial banks and other financial services companies
in particular, have experienced significant price and volume fluctuations that sometimes have been unrelated or disproportionate to the
operating performance of those companies. These broad market and industry factors may seriously harm the market price of our
common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial
costs, potential liabilities and the diversion of management’s attention and resources.
Our suspension of dividends may have adversely affected and may further adversely affect our stock price and could result in the
expansion of our Board of Directors.
In March 2009, the Federal Reserve Board issued a supervisory guidance letter intended to provide direction to bank holding
companies (“BHCs”) on the declaration and payment of dividends, capital redemptions and capital repurchases by BHCs in the
context of their capital planning process. The letter reiterates the long-standing Federal Reserve Board supervisory policies and
guidance to the effect that BHCs should only pay dividends from current earnings. More specifically, the letter heightens expectations
that BHCs will inform and consult with the Federal Reserve Board supervisory staff on the declaration and payment of dividends that
exceed earnings for the period for which a dividend is being paid. In consideration of the financial results reported for the second
quarter ended June 30, 2009, we decided, as a matter of prudent fiscal management and following the Federal Reserve Board
guidance, to suspend the payment of dividends. Furthermore, our Written Agreement with the Federal Reserve Board precludes us
from declaring any dividends without the prior approval of the Federal Reserve. We cannot anticipate if and when the payment of
dividends might be reinstated.
This suspension may have adversely affected and may continue to adversely affect our stock price. Further, because dividends on
our Series A through E Preferred Stock have not been paid since we suspended dividend payments in August 2009, the holders of the
preferred stock have the right to appoint two additional members to our Board of Directors. Any member of the Board of Directors
appointed by the holders of Series A through E Preferred Stock is required to vacate his or her office if the Corporation resumes the
payment of dividends in full for twelve consecutive monthly dividend periods.
47
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of March 1, 2015, First BanCorp owned the following three main offices located in Puerto Rico:
- 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 garage and an adjacent parking lot are
owned by the Corporation.
-
Service Center – a building located on 1130 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. These facilities accommodate
branch operations, data processing and administrative and certain headquarter offices. The building houses 180,000 square
feet of modern facilities and over 1,000 employees from operations, FirstMortgage and FirstBank Insurance Agency
headquarters and customer service. In addition, it has parking for 750 vehicles and 9 training rooms, including classrooms for
training tellers and a computer room for interactive trainings, as well as a spacious cafeteria for employees and customers
- Consumer Lending Center – A three-story building with a three-level parking garage located at 876 Muñoz Rivera Avenue,
Hato Rey, Puerto Rico. This facility is fully occupied by the Corporation.
The Corporation owns 28 branch and office premises and auto lots and leased 89 branch premises, loan and office centers and
other facilities. In certain situations, financial services such as mortgage and, insurance businesses and commercial banking services
are located in the same building. All of these premises are located in Puerto Rico, Florida and the USVI and BVI. Management
believes that the Corporation’s properties are well maintained and are suitable for the Corporation’s business as presently conducted.
Item 3. Legal Proceedings
Reference is made to Note 28, Regulatory matters, commitments and contingencies, included in the Notes to Consolidated Financial
Statements in Item 8 of this Report, which is incorporated herein by reference.
Item 4. Mine Safety Disclosure.
Not applicable.
48
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Information about Market and Holders
The Corporation’s common stock is traded on the NYSE under the symbol FBP. On March 6, 2015, there were 560 holders of
record of the Corporation’s common stock, not including beneficial owners whose shares are held in the name of brokers or other
nominees. The last sales price for the common stock on that date was $6.46.
On July 30, 2009, the Corporation announced the suspension of the payment of common and preferred stock dividends. The
Corporation has no current plans to resume dividend payments on the common or preferred stock. The common stock ranks junior to
all series of preferred stock as to dividend rights and as to rights on liquidation, dissolution or winding up of the Corporation.
The following table sets forth, for the periods indicated, the per share high and low closing sales prices and the cash dividends
declared on the Corporation’s common stock during such periods.
Quarter Ended
2014:
Fourth Quarter Ended December 31, 2014
Third Quarter Ended September 30, 2014
Second Quarter Ended June 30, 2014
First Quarter Ended March 31, 2014
2013:
Fourth Quarter Ended December 31, 2013
Third Quarter Ended September 30, 2013
Second Quarter Ended June 30, 2013
First Quarter Ended March 31, 2013
High
Low
Last
Dividends
per Share
$
$
$
$
5.89
5.57
5.66
6.04
6.38
8.61
7.19
6.30
$
$
4.56
4.75
4.87
4.42
5.06
5.67
5.64
4.59
$
$
5.87
4.75
5.44
5.44
6.19
5.68
7.08
6.23
-
-
-
-
-
-
-
-
On August 16, 2013, THL, Oaktree and the U.S. Treasury completed a secondary offering of the Corporation’s common stock. The
U.S. Treasury sold 12 million shares of common stock, THL sold 8 million shares of common stock, and Oaktree sold 8 million shares
of common stock. Subsequently, on September 11, 2013, the underwriters in the secondary offering exercised their option to purchase
an additional 2.9 million shares of common stock from the selling stockholders (1,261,356 shares from the U.S. Treasury, 840,903
shares from THL and 840,904 shares from Oaktree). The Corporation did not receive any proceeds from the offering.
During the fourth quarter of 2014, the U.S. Treasury sold approximately 4.4 million shares of First BanCorp.’s common stock
through its first pre-defined written trading plan. On March 9, 2015, the U.S. Treasury announced the sale of an additional 5 million
shares of First BanCorp.’s common stock through its second pre-defined written trading plan. Back in 2013, the U.S. Treasury sold
13,261,356 shares of First BanCorp.’s common stock at $6.75 per share in a registered offering.
As of March 9, 2015, each of THL and Oaktree owned 19.7% of the Corporation’s outstanding common stock and the Treasury
owned 4.8%, excluding the 1.3 million common shares underlying the warrant owned by the Treasury, which is exercisable for $3.29
per share.
Effective April 1, 2013, the Board determined to increase the salary amounts paid to certain executive officers primarily by paying
the increased salary amounts in the form of shares of the Corporation’s Common Stock, instead of cash. The Corporation issued
312,850 shares of common stock with a weighted average market value of $5.20 in 2014 as such additional salary amounts (2013 –
220,639 shares with a weighted average market value of $6.23). The Corporation withheld 105,000 shares from the common stock
paid to the officers as additional compensation to cover employee payroll and income tax withholding liabilities in 2014 (2013 –
71,326 shares); these shares are held as treasury shares. The Corporation paid any fractional share of salary stock that the officer was
entitled to in cash.
49
In 2014, the Corporation granted 1,219,711 shares of restricted stock to certain executive officers, other employees, and
independent directors (2013 – 743,185 shares).
The Corporation has 50,000,000 authorized shares of preferred stock. First BanCorp has five outstanding series of nonconvertible,
noncumulative preferred stock: 7.125% noncumulative perpetual monthly income preferred stock, Series A (liquidation preference
$25 per share); 8.35% noncumulative perpetual monthly income preferred stock, Series B (liquidation preference $25 per share);
7.40% noncumulative perpetual monthly income preferred stock, Series C (liquidation preference $25 per share); 7.25%
noncumulative perpetual monthly income preferred stock, Series D (liquidation preference $25 per share,); and 7.00% noncumulative
perpetual monthly income preferred stock, Series E (liquidation preference $25 per share) (collectively the “Series A through E
Preferred Stock”). Effective January 17, 2012, the Corporation delisted all of its outstanding series of non-convertible, non-cumulative
preferred stock from the NYSE. The Corporation has not arranged for listing on another national securities exchange or for quotation
of the Series A through E Preferred Stock in a quotation medium.
The Series A through E Preferred Stock rank on a parity with respect to dividend rights and rights upon liquidation, winding up or
dissolution. Holders of each series of preferred stock are 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 terms of the Corporation’s Series A through E 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 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 through E Preferred Stock, except with the consent of the holders of at least two-thirds of the outstanding aggregate
liquidation preference of such preferred stock.
2013 Exchange Offer
On February 14, 2013, the Corporation commenced an offer to issue up to 10,087,488 shares of its common stock, in exchange for
(the “Exchange Offer”) any and all of the issued and outstanding shares of its Series A through E Preferred Stock ($63 million in
aggregate liquidation preference value). The Exchange Offer was terminated on April 9, 2013 given that the Corporation did not
receive the consent required from holders of the Series A through E Preferred Stock to amend the certificates of designation of each
series of the Series A through E Preferred Stock to delete the right to designate two board members once the Corporation has not paid
dividends on the Preferred Stock for a specified period (the Preferred Stock Amendment). The Preferred Stock Amendment was a
condition to completion of the Exchange Offer. In addition, the related consent solicitation also terminated, and no consent fee became
payable with respect to consents granted in favor of the Preferred Stock Amendment. All shares of the Series A through E Preferred
Stock that were tendered were returned promptly to the tendering holders.
2014 Exchange
In 2014, the Corporation issued an aggregate of 4,597,121 shares of its common stock in exchange for an aggregate 1,077,726
shares of the Corporation’s Series A through E Preferred Stock, having an aggregate liquidation value of $26.9 million. The shares of
common stock were issued to holders of the Series A through E Preferred Stock in separate and unrelated transactions in reliance upon
the exemption set forth in Section 3(a)(9) of the Securities Act, for securities exchanged by an issuer with existing security holders
where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange.
50
Dividends
The Corporation had a policy of paying quarterly cash dividends on its outstanding shares of common stock subject to its earnings
and financial condition. On July 30, 2009, after reporting a net loss for the quarter ended June 30, 2009, the Corporation announced
that the Board of Directors resolved to suspend the payment of the common and preferred dividends, effective with the preferred
dividend for the month of August 2009. The Corporation’s ability to pay future dividends will necessarily depend upon its earnings
and financial condition as well as its receipt of approval from the Federal Reserve to pay dividends. 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.
The Corporation withheld in 2014 approximately 105,000 shares (2013- 71,326 shares) from the common stock paid to certain
senior officers as additional compensation and 68,870 shares of restricted stock that vested during 2014, to cover employee payroll
and income tax withholding liabilities; these shares are also held as treasury shares. As of December 31, 2014 and December 31, 2013,
the Corporation had 740,049 and 566,179 shares held as treasury stock, respectively.
The 2011 PR Code requires the withholding of income tax from dividend income sourced within Puerto Rico to be received by any
individual, resident of Puerto Rico or not, trusts and estates and by non-resident custodians, partnerships, and corporations.
Resident U.S. Citizens
A special tax of 10% will be imposed on any 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 a trade or business in Puerto Rico
during the taxable year in which the dividend, if any, 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 a trade or business in Puerto Rico are not subject to the
10% withholding, but they must declare any dividend as gross income on their Puerto Rico income tax return.
51
Securities authorized for issuance under equity compensation plans
The following table summarizes equity compensation plans approved by security holders and equity compensation plans that were
not approved by security holders as of December 31, 2014:
(a)
(b)
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
warrants and rights
Weighted Average Exercise
Price of Outstanding
Options, warrants and rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
82,575 (1)
N/A
82,575
$
$
-
N/A
-
4,951,990 (2)
N/A
4,951,990
Plan category
Equity compensation plans
approved by stockholders
Equity compensation plans
not approved by stockholders
Total
(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 force 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"), which was initially approved
by stockholders on April 29, 2008 and amended with stockholder approval on December 9, 2011 to increase the number of shares reserved for
issuance under the Omnibus Plan. The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock
appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. As amended, this plan provides for the
issuance of up to 8,169,807 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. As of December
31, 2014, 4,951,990 shares of Common Stock were available for future issuance under the Omnibus Plan.
Purchase of equity securities by the issuer and affiliated purchasers
The following table provides information relating to the Corporation's purchases of shares of its common stock in the three-month
period ended December 31, 2014.
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Or Programs
Average
Price
Paid
Maximum
Number of Shares
That May Yet be
Purchased Under
These Plans or
Programs
Total number of
shares purchased (1)
13,739 $
8,640
52,947
75,326 $
4.83
5.12
5.74
5.50
-
-
-
-
-
-
-
-
Period
October, 2014
November, 2014
December, 2014
Total
(1) Reflects shares of common stock withheld from the common stock paid to certain senior officers as additional compensation which
the Corporation calls salary stock, and upon vesting of restricted stock to cover minimum tax withholding obligations. The
Corporation intends to continue to satisfy statutory tax withholding obligations in connection with shares paid as salary stock to
certain senior officers and the vesting of outstanding restricted stock through the withholding of shares.
52
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 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, 2009 in each of First BanCorp 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 BanCorp.’s 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, 2009 plus (ii) the change in the per share price since the
measurement date, by the share price at the measurement date.
PERFORMANCE OF FIRST BANCORP'S
COMMON STOCK BASED ON TOTAL RETURN
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
First Bank
S&P 500
S&P Supercom Banks Index
53
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,
2014. This information should be read in conjunction with the audited consolidated financial statements and the related notes thereto.
SELECTED FINANCIAL DATA
(In thousands, except for per share and financial ratios)
2014
Year Ended December 31,
2012
2013
2011
2010
Condensed Income Statements:
Total interest income
Total interest expense
Net interest income
Provision for loan and lease losses
Non-interest income (loss)
Non-interest expenses
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Net income (loss) attributable to common
stockholders - basic
Net income (loss) attributable to common
stockholders - diluted
Per Common Share Results:
Net earnings (loss) per common share -
basic
Net earnings (loss) per common share -
diluted
Cash dividends declared
Average shares outstanding
Average shares outstanding diluted
Book value per common share
Tangible book value per common share (1)
Balance Sheet Data:
Total loans, including loans held for sale
Allowance for loan and lease losses
Money market and investment securities
Intangible assets
Deferred tax asset, net
Total assets
Deposits
Borrowings
Total preferred equity
Total common equity
Accumulated other comprehensive (loss) income,
net of tax
Total equity
$
633,949 $
645,788 $
637,777 $
659,615 $
832,686
115,876
518,073
109,530
61,348
378,253
91,638
300,649
392,287
130,843
514,945
243,751
(15,489)
415,028
(159,323)
(5,164)
(164,487)
176,072
461,705
120,499
49,391
354,883
35,714
(5,932)
29,782
266,103
393,512
236,349
107,981
338,054
(72,910)
(9,322)
(82,232)
371,011
461,675
634,587
117,903
366,158
(421,167)
(103,141)
(524,308)
393,946
(164,487)
29,782
173,226
(122,045)
393,946
(164,487)
29,782
195,763
(122,045)
1.89 $
(0.80) $
0.15 $
2.69 $
(10.79)
1.87 $
-
208,752
210,540
7.68 $
7.45 $
(0.80) $
-
205,542
205,542
5.57 $
5.30 $
0.14 $
-
205,366
205,828
6.89 $
6.60 $
2.18 $
-
64,466
89,658
6.73 $
6.54 $
(10.79)
-
11,310
11,310
29.71
27.73
9,339,392 $
222,395
2,008,380
9,712,139 $ 10,139,508 $ 10,575,214 $ 11,956,202
553,025
3,369,332
435,414
1,986,669
285,858
2,208,342
493,917
2,200,888
54,866
7,644
49,907
313,045
42,141
9,269
12,727,835 12,656,925 13,099,741 13,127,275 15,593,077
9,907,754 12,059,110
9,483,945
60,944
4,867
39,787
5,442
9,864,546
9,879,924
1,456,959
36,104
1,653,990
1,431,959
63,047
1,231,547
1,640,399
63,047
1,393,546
1,622,741
63,047
1,361,899
2,311,848
425,009
615,232
(18,351)
1,671,743
(78,736)
1,215,858
28,430
1,485,023
19,198
1,444,144
17,718
1,057,959
$
$
$
$
$
54
Selected Financial Ratios (In Percent):
Profitability:
Return on Average Assets
Return on Average Total Equity
Return on Average Common Equity
Average Total Equity to Average Total Assets
Interest Rate Spread (2)
Interest Rate Margin (2)
Tangible common equity ratio (1)
Dividend payout ratio
Efficiency ratio (3)
Asset Quality:
Allowance for loan and lease losses to loans held
for investment
Net charge-offs to average loans (4)
Provision for loan and lease losses to net
charge-offs
Non-performing assets to total assets (4)
Non-performing loans held for investment to total
loans held for investment (4)
Allowance to total non-performing loans held
for investment
Allowance to total non-performing loans held for
investment, excluding residential real estate loans
Year Ended December 31,
2014
2013
2012
2011
2010
3.10
30.25
31.38
10.25
4.16
4.34
12.51
-
(1.28)
(12.39)
(13.01)
10.36
4.01
4.21
8.71
-
0.23
2.04
2.14
11.24
3.41
3.68
10.44
-
(0.57)
(7.31)
(13.38)
7.83
2.59
2.86
10.25
-
2.93
(36.23)
(80.07)
8.10
2.48
2.77
3.80
-
65.28
83.10
69.44
67.41
63.18
2.40
2.97
4.33
4.68
4.74
1.81
4.01
1.74
2.68
4.76
0.63 x
5.63
0.69 x
5.73
0.67 x
9.45
0.80 x
10.19
1.04 x
10.02
5.66
5.14
9.70
10.78
10.63
42.45
57.69
44.63
43.39
44.64
64.80
85.56
65.78
61.73
65.30
Other Information:
Common stock price: End of period
___________
(1) Non-GAAP measures. Refer to "Capital" discussion below for additional information about the components and a reconciliation of
these measures.
(2) On a tax-equivalent basis and excluding the changes in fair value of derivative instruments and financial liabilities measured at fair value
(see "Net Interest Income" below for a reconciliation of these non-GAAP measures).
(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 liabilities measured at fair value.
(4) Loans used in the denominator in calculating net charge-offs, non-performing loans and non-performing asset rates include credit-
impaired loans. However, the Corporation separately tracks and reports purchased credit-impaired loans and excludes these from
non-performing loan and non-performing asset statistics.
4.58 $
6.19 $
5.87 $
$
3.49 $
6.90
55
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the
accompanying consolidated audited financial statements of First BanCorp. and should be read in conjunction with such 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 and FirstBank Insurance Agency. Through its wholly owned subsidiaries, the Corporation operates offices in Puerto Rico,
the United States Virgin Islands and British Virgin Islands, and the State of Florida (USA), concentrating in commercial banking,
residential mortgage loan originations, finance leases, credit cards, personal loans, small loans, auto loans, and insurance agency and
broker-dealer activities.
As described in Item 8, Note 28 to the Consolidated Financial Statements, “Regulatory Matters, Commitments, and Contingencies,”
FirstBank is currently operating under a Consent Order (the “FDIC Order”) with the Federal Deposit Insurance Corporation (“FDIC”)
and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and First BanCorp. is operating
under a Written Agreement (the “Written Agreement” and collectively with the FDIC Order, the “Regulatory Agreements”) with the
Federal Reserve Bank of New York (the “New York FED” or “Federal Reserve”).
OVERVIEW OF RESULTS OF OPERATIONS
First BanCorp.'s results of operations generally 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 Corporation's results of operations also depend on the provision for loan and lease losses, non-interest
expenses (such as personnel, occupancy, deposit insurance premium and other costs), non-interest income (mainly service charges and fees
on deposits, insurance income and revenues from broker-dealer operations), gains (losses) on sales of investments, gains (losses) on
mortgage banking activities, and income taxes.
Net income for the year ended December 31, 2014 amounted to $392.3 million, $1.87 per diluted share, compared to net loss of
$164.5 million, $0.80 per diluted share, for 2013 and net income of $29.8 million, $0.14 per diluted share, for 2012. Net income for
2014 includes a $302.9 million, $1.44 per diluted share, income tax benefit associated with the partial reversal of the valuation
allowance recorded against the deferred tax assets of the Corporation’s banking subsidiary, FirstBank. The results for 2013 were
negatively impacted by two significant items: (i) an aggregate loss of $140.8 million (pre-tax) on two separate bulk sales of adversely
classified and non-performing assets and valuation adjustments to certain loans transferred to held for sale, and (ii) a $66.6 million
loss related to the write-off of assets pledged as collateral to Lehman Brothers, Inc. together with an additional $2.5 million for a loss
contingency of attorneys’ fees awarded to the counterparty related to this matter. Excluding these items, adjusted net income for the
year ended December 31, 2013 was $45.4 million.
The following table shows a reconciliation with respect to the net income and earnings per share for the year ended December 31,
2013 that excludes the charges identified in the foregoing paragraph with the corresponding measures calculated and presented in
accordance with GAAP:
(In thousands, except per share information)
Net (loss) income
(Loss) earnings per common share:
Basic
Diluted
Year ended
December 31, 2013
As Reported (GAAP)
Bulk Sales
Transaction Impact
Write-off collateral
pledged to Lehman
and related
contingency for
attorneys' fees
Year Ended
December 31, 2013
Adjusted
(Non-GAAP)(1)
$
$
$
(164,487)
$
140,842
$
69,074 $
45,429
(0.80)
$
(0.80)
$
0.68
0.68
$
$
0.34
$
0.34 $
0.22
0.22
(1) Refer to "Basis of Presentation" below for additional information.
56
The key drivers of the Corporation’s financial results include the following:
• Net interest income for the year ended December 31, 2014 was $518.1 million compared to $514.9 million and $461.7 million
for the years ended December 31, 2013 and 2012, respectively. The increase for 2014 compared to 2013 was driven by a 12
basis points reduction in the average cost of funding, or a decrease of approximately $13.1 million in interest expense, achieved
through lower deposit pricing, improved deposit mix, and the maturity of high-cost borrowings. In addition, net interest
income and margin were favorably impacted by an increase of $8.7 million in interest income attributable to acquisitions of
residential mortgage loans from another financial institution completed in 2014 and a $3.1 million increase in prepayment
penalties collected on commercial loans. Prepayment penalties in 2014 include $2.5 million paid by a borrower to compensate
for the economic loss sustained by the Corporation in the early termination of an interest rate swap agreement that provided an
economic hedge of the cash flows associated with a commercial mortgage loan paid off in the fourth quarter of 2014. These
variances were partially offset by lower yields on consumer loans and a decrease in the average volume of commercial and
construction loans. The net interest margin, excluding fair value adjustments and the aforementioned $2.5 million prepayment
penalty income, increased 7 basis points to 4.17% for the year ended December 31, 2014 compared to 2013. For a definition
and reconciliation of this non-GAAP measure, refer to “Net Interest Income” below.
The increase for 2013 compared to 2012 was driven by a 42 basis points reduction in the average cost of funding achieved
through lower deposit pricing (mainly brokered CDs), improved deposit mix, and the maturity of high-cost borrowings. In
addition, net interest income and margin were favorably impacted by a higher average volume of U.S. agency MBS. The net
interest margin, excluding fair value adjustments, increased 47 basis points to 4.10% for the year ended December 31, 2013
compared to 2012 as it was favorably impacted by the aforementioned items as well as the reduction in non-performing loans
and the full-year contribution of the credit card portfolio acquired from FIA Card Services (“FIA”) in late May 2012.
• The provision for loan and lease losses for 2014 was $109.5 million compared to $243.8 million and $120.5 million for 2013
and 2012, respectively. The provision for the year ended December 31, 2013 includes a charge of $132.0 million related to the
bulk sales of adversely classified and non-performing assets and the transfer of certain construction and commercial loans to
held for sale in the first half of 2013. The provision for loan and lease losses for 2014 decreased by $2.2 million as compared
to the provision for loan and lease losses for 2013, adjusted to exclude the impact of the bulk sales of assets and transfer of
certain commercial loans to held for sale in 2013, mainly as a result of higher recoveries in the United States region, a decrease
in the size of the construction and commercial portfolios, and an improved residential mortgage loans portfolio composition
following the sale of non-performing residential assets in 2013, partially offset by an increase in the provision for consumer
loans.
Excluding the impact of the bulk sales of assets and the transfer of loans to held for sale, the provision for loan and lease losses
for the year ended December 31, 2013 was $111.7 million, a decrease of $8.8 million compared to 2012. The decrease was
mainly attributable to a reduction in charges to specific reserves for commercial and construction loans commensurate with the
decline in the level of impaired and adversely classified loans, particularly higher charges in 2012 related to a construction loan
in the Virgin Islands that was transferred to held for sale in 2013. In addition, the decrease was attributable to lower provision
requirements for the Puerto Rico residential mortgage loan portfolio driven by lower charge-offs, an improved portfolio
composition following the bulk sale of non-performing residential assets in 2013, and the impact in 2012 of adjustments to loss
factors that were reflective of market conditions, including assumptions regarding loss severities that took into consideration
qualitative and quantitative factors such as loan resolution and liquidation strategies and average time for liquidation, partially
offset by an increase in the provision for consumer loans.
As mentioned above, the Corporation completed two bulk sales of assets in the first half of 2013, including: (i) a bulk sale of
non-performing residential mortgage loans with a book value of $203.8 million and OREO properties with a book value of
$19.2 million, completed in the second quarter of 2013, and (ii) a bulk sale of adversely classified assets, mainly commercial
and construction loans, with a book value of $211.4 million and other real estate owned (“OREO”) properties with a book
value of $6.3 million, completed in the first quarter of 2013. In addition, during the first quarter of 2013, the Corporation
transferred to held for sale non-performing loans with an aggregate book value of $181.6 million. The following table shows
the impact of the bulk sales on net charge-offs, provision for loan and lease losses, and non-interest expenses for the year
ended December 31, 2013:
57
(Dollars in thousands)
2013
As Reported
(GAAP)
Bulk Sales
Transaction
Impact
Loans Transferred To
Held For Sale Impact
Excluding Bulk Sales
and Loans Transferred
To Held For Sale
Impact (Non-GAAP)
Total net charge-offs
Total net charge-offs to average loans
Residential mortgage
Residential mortgage loans net charge-offs to
average loans
Commercial mortgage
Commercial mortgage loans net charge-offs to
average loans
Commercial and Industrial
Commercial and Industrial loans net charge-offs
to average loans
Construction
Construction loans net charge-offs to average loans
Provision for loan and lease losses
Residential mortgage
Commercial Mortgage
Commercial & Industrial
Construction
Non-interest expenses
Professional fees
Net loss on OREO operations
Other expenses
$
393,307 $
4.01%
127,999
196,491 $
35,953 $
98,972
-
4.77%
62,602
3.44%
105,213
3.52%
41,247
15.11%
243,751 $
92,755
38,048
43,608
15,461
415,028 $
47,952
42,512
29,983
$
$
40,057
14,553
44,678
-
12,784
21,400
126,780 $
68,838
29,753
20,766
7,423
8,840 $
6,938
1,879
23
5,222 $
-
(1,033)
-
6,255
- $
-
-
-
160,863
1.68%
29,027
1.13%
7,992
0.45%
60,535
2.04%
7,063
2.91%
111,749
23,917
9,328
22,842
1,783
406,188
41,014
40,633
29,960
Net charge-offs totaled $173.0 million for the year ended December 31, 2014, or 1.81% of average loans, including $6.9 million
of charge-offs resulting from the difference between the fair value of mortgage loans acquired from Doral Financial Corporation
(“Doral”) in the second quarter of 2014 of $226.0 million, and the book value of the secured borrowing that such institution owed
to FirstBank. Net charge-offs for the year ended December 31, 2013 totaled $393.3 million, or 4.01% of average loans, including
$232.4 million of net charge-offs related to the bulk sales of adversely classified and non-performing loans and the transfer of
certain loans to held for sale in 2013. Based on adjusted net charge-offs that exclude from net charge-offs for 2014 the impact of
charge-offs resulting from the Doral transaction and, for 2013, the bulk sales of assets and the transfer of loans to held for sale,
adjusted net charge-offs for 2014 amounted to $166.1 million, or 1.74% of average loans, an increase of $5.2 million compared to
adjusted net charge-offs for 2013, mainly reflecting higher charge-offs in the consumer and commercial mortgage loan portfolios
in Puerto Rico. The net charge-offs, excluding the impact of the acquisition of mortgage loans from Doral, the bulk sales of
assets and the transfer of loans to held for sale, is a Non-GAAP measure; refer to “Basis of Presentation” discussion below for
additional information. Also refer to the discussions under “Provision for loan and lease losses” and “Risk Management” below
for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.
(cid:2) The Corporation recorded non-interest income of $61.3 million for the year ended December 31, 2014 compared to non-interest
loss of $15.5 million and non-interest income of $49.4 million for the years ended December 31, 2013 and 2012, respectively.
Excluding the $66.6 million impact of the Lehman collateral write-off recorded in the second quarter of 2013, non-interest
income for 2013 totaled $51.1 million. Non-interest income for 2014 increased by $10.3 million as compared to non-interest
income for 2013, excluding the Lehman collateral write-off. The increase in 2014, as compared to 2013, mainly reflects a $9.4
million decrease in losses related to the Bank’s investment in CPG/GS PR NPL, LLC (“CPG/GS”) as the value of the investment
in this unconsolidated entity became zero in the second quarter of 2014. The increase in adjusted non-interest income was also
attributable to a $0.9 million increase in insurance commission income, net of reserves and the impact in 2013 of a $1.5 million
charge related to lower of cost or market adjustments on commercial and construction loans held for sale. These variances were
partially offset by a $2.1 million decrease in revenues from mortgage banking activities driven by a decline in the volume of sales
and securitizations. Refer to “Non-Interest Income” below for additional information.
58
Excluding the impact of the Lehman collateral write-off, non-interest income increased by $1.7 million in 2013 when compared
to 2012. The increase was mainly related to a lower loss on the investment in CPG/GS. The Corporation recorded $16.7 million
of equity in loss of unconsolidated entity in 2013 compared to a loss of $19.3 million in 2012. Other positive variances include:
(i) a $1.8 million reduction in other-than-temporary impairments on available-for-sale debt and equity securities, and (ii) higher
Automated Teller Machine (“ATM”) and Point of Sale (“POS”) interchange fees as well as merchant fees, an increase of
approximately $4.6 million. These positive variances were partially offset by, among other things,: (i) a $3.1 million decrease in
revenues from the mortgage banking business mainly due to lower profit margins on sales and securitizations of residential
mortgage loans, (ii) lower of cost or market adjustments on commercial and construction loans held for sale that resulted in a
charge of $1.5 million in 2013, mainly related to the restructuring of a commercial mortgage loan held for sale in which the
Corporation received certain properties in partial satisfaction of a debt arrangement, and (iii) a $2.5 million decrease in income
from broker-dealer activities due to fewer transactions closed in 2013.
(cid:2) Non-interest expenses for 2014 were $378.3 million compared to $415.0 million and $354.9 million for 2013 and 2012,
respectively. The decrease of $36.8 million in 2014, as compared to 2013, was mainly due to a $21.9 million decrease in losses
on OREO operations, primarily due to a $16.4 million decrease in write-downs to the value of OREO properties, and a $9.5
million decrease in the FDIC deposit insurance premium expense reflecting, among other things, improved earnings trends, the
decrease in brokered deposits, a strengthened capital position and a decrease in the amount of leveraged commercial loans. In
addition, the favorable variance reflects the impact in 2013 of several non-recurring items, including: (i) professional service fees
of $6.9 million incurred in the bulk sales of assets, (ii) the $2.5 million loss contingency related to attorney’s fees awarded in
connection with the Lehman litigation, (iii) $1.7 million on costs associated with the common stock offering by certain of the
Corporation’s existing stockholders, (iv) $1.7 million on costs related to the conversion of the credit card processing platform,
and (v) $1.2 million associated with a terminated preferred stock exchange offer. These decreases were partially offset by a $4.6
million increase in employees’ compensation and benefits in 2014. Refer to “Non-Interest Expenses” below for additional
information.
The increase in non-interest expenses for 2013, as compared to 2012, was principally due to credit-related expenses including: (i)
a $17.4 million increase in net losses on OREO operations mainly due to a $16.7 million increase in write-downs to the value of
OREO properties, mainly income-producing commercial properties in both the Virgin Islands and Puerto Rico, and a $1.9 million
loss on the sale of certain OREO properties as part of the bulk sale of non-performing residential assets completed in the second
quarter of 2013, and (ii) increases of approximately $6.9 million in professional fees related to the bulk sales of assets and $2.6
million of professional fees related to attorneys’ loan collection fees, appraisals and other credit related fees. Other increases in
non-interest expenses in 2013 include: (i) an $8.6 million increase in credit and debit cards processing expenses, reflecting the
full-year impact of expenses associated with the credit card portfolio acquired in late May 2012 as well as $1.7 million on costs
related to the conversion of the credit card processing platform, (ii) a $9.2 million increase in fees related to the outsourcing of
technology services attributable to a multi-year technology outsourcing agreement executed by the Corporation at the beginning
of the second quarter of 2013, (iii) a $5.9 million charge related to the Puerto Rico national gross receipts tax, (iv) a $5.4 million
increase in employees’ compensation and benefits, (v) a $2.8 million increase in the amortization of intangible assets, mainly
related to the purchased credit card relationship intangible asset, and (vi) non-recurring expenses of $1.7 million on costs
associated with the common stock offering by certain of the Corporation’s existing stockholders, and $1.2 million associated with
a terminated preferred stock exchange offer. These increases were partially offset by a $3.6 million decrease in the deposit
insurance premium expense.
(cid:2) For 2014, the Corporation recorded an income tax benefit of $300.6 million, compared to income tax expense of $5.2 million and
$5.9 million for 2013 and 2012, respectively. The income tax benefit for 2014 primarily reflects the $302.9 million partial
reversal of FirstBank’s deferred tax assets valuation allowance. The decrease in 2013, as compared to 2012, was mainly related to
a $3.0 million income tax credit available to the Corporation, or 50% of the Puerto Rico national gross receipts tax liability, and a
$1.3 million benefit due to the increase in the deferred tax assets of profitable subsidiaries resulting from an increase in the Puerto
Rico statutory tax rates from 30% to 39%, partially offset by a $3.2 million increase in reserves for uncertain tax positions and
related accrued interest in 2013. Refer to “Income Taxes” below for additional information.
(cid:2) As of December 31, 2014, total assets were $12.7 billion, an increase of $70.9 million from December 31, 2013. The increase was
primarily related to the $302.9 million partial reversal of FirstBank’s deferred tax asset valuation allowance and a $140.4 million
increase in cash and cash equivalents. These increases were partially offset by a $309.3 million decline in total loans, net of
allowance, mainly reflecting large commercial and construction loans paid off, a decrease of $164.4 million in the outstanding
balances of direct and indirect credit facilities granted to or guaranteed by government entities, primarily in Puerto Rico, and a
$36.2 million decrease in the OREO inventory balance driven by sales and valuation adjustments. Refer to “Financial Condition
and Operating Data” below for additional information.
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(cid:2) As of December 31, 2014, total liabilities were $11.1 billion, a decrease of $385.0 million, from December 31, 2013. The
decrease was mainly related to a $305.1 million decrease in government deposits, mainly related to withdrawals by certain public
corporations and government agencies in Puerto Rico during the second quarter of 2014, and a $255.0 million decrease in
brokered CDs. These variances were partially offset by a $164.1 million increase in non-brokered deposits, excluding government
deposits, mainly due to increases in savings and retail CDs in Puerto Rico, and a $25.0 million increase related to a FHLB
advance entered into in the third quarter of 2014. Refer to the “Risk Management – Liquidity and Capital Adequacy” discussion
below for additional information about the Corporation’s funding sources.
(cid:2) As of December 31, 2014, the Corporation’s stockholders’ equity was $1.7 billion, an increase of $455.9 million from December
31, 2013. The increase was mainly driven by the net income of $392.3 million for 2014 and a $60.4 million increase in other
comprehensive income mainly attributable to an increase in the fair value of U.S. agency MBS and debt securities.
The Corporation’s Total Capital, Tier 1 Capital and Leverage ratios increased to 19.70%, 18.44% and 13.27%, respectively, from
17.06%, 15.78% and 11.71%, respectively, as of December 31, 2013. Meanwhile, FirstBank’s Total Capital, Tier 1 Capital and
Leverage ratios as of December 31, 2014 were 19.37%, 18.10% and 13.04%, respectively, as compared to 16.67%, 15.40% and
11.44%, respectively, as of December 31, 2013. In addition, the Corporation’s tangible common equity ratio increased to 12.51%
as of December 31, 2014, from 8.71% as of December 31, 2013, and the Tier 1 common equity to risk-weighted assets ratio
increased to 15.50% as of December 31, 2014 from 12.72% as of December 31, 2013. Refer to “Risk Management – Capital”
below for additional information including further information about these non-GAAP financial measures and recent regulatory
capital changes. Although all of the regulatory capital ratios exceeded the established “well capitalized” levels, as well as the
minimum capital ratios required by the FDIC Order, as of December 31, 2014, FirstBank cannot be treated as a “well-capitalized”
institution since it is still subject to the FDIC Order.
(cid:2) Total loan production, including purchases, refinancings and draws from existing revolving and non-revolving commitments, was
$3.2 billion for the year ended December 31, 2014, excluding the utilization activity on outstanding credit cards, compared to
$3.4 billion, for 2013. The decrease in loan production was mainly related to lower originations of consumer and residential
mortgage loans in Puerto Rico and lower volumes related to facilities of government entities in Puerto Rico.
(cid:2) Total non-performing loans, including non-performing loans held for sale, were $578.5 million as of December 31, 2014, an
increase of $28.2 million, or 5%, from December 31, 2013. This increase primarily reflects the inflow to non-performing of two
large commercial loans totaling $51.0 million. These two loans are participated loans determined impaired during 2014. In
addition, the non-performing residential mortgage loan portfolio increased by $19.3 million. These increases were partially offset
by a $29.5 million decrease in non-performing construction loans, mainly driven by charge-offs and the restoration to accrual
status of a $10.7 million loan that is current in payments and deemed collectible. Inflows of non-performing loans held for
investment in 2014 were $389.6 million, a decrease of $49.0 million, or 11%, compared to inflows of $438.5 million in 2013.
(cid:2) Total non-performing assets were $716.8 million as of December 31, 2014, a decrease of $8.6 million, or 1%, from December 31,
2013. The decrease was driven by a $36.2 million decrease in OREO, driven by sales of $65.7 million and valuation adjustments
of $19.0 million that more than offset additions of $48.5 million in 2014, and the aforementioned $29.5 million decrease in non-
performing construction loans. Foreclosures completed in 2014 that were transferred to the OREO inventory include the
collateral underlying a $21.1 million commercial mortgage loan. Given the prolonged recession and uncertainties in the
economic environment in Puerto Rico, the Corporation continued to face pressures related to its non-performing loans and
charge-off levels. Refer to “Risk Management - Non-accruing and Non-performing Assets” below for additional information.
(cid:2) Adversely classified commercial and construction loans, including non-performing loans held for sale, decreased by $65.6 million
to $612.2 million, or 10%, from December 31, 2013 driven by certain loans paid off in both Puerto Rico and the United States,
charge-offs and the upgrade of the $10.7 million construction loan that was restored to accrual status.
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CRITICAL ACCOUNTING POLICIES AND PRACTICES
The accounting principles of the Corporation and the methods of applying these principles conform to GAAP. The Corporation’s
critical accounting policies relate to: 1) the allowance for loan and lease losses; 2) other-than-temporary impairments (“OTTIs”); 3)
income taxes; 4) the classification and values of investment securities; 5) the valuation of financial instruments; 6) income recognition
on loans; 7) loans acquired, 8) loans held for sale, and 9) the equity method of accounting for investment in unconsolidated entity.
These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts
recorded for assets and liabilities and for contingent liabilities 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 require 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 considered adequate to absorb losses currently inherent
in the loan and lease portfolio. The Corporation does not maintain an allowance for held-for-sale loans or purchased credit-impaired
(“PCI”) loans that are performing in accordance with or better than expectations as of the date of acquisition, as the fair values of these
loans already reflects a credit component. The allowance for loan and lease losses provides for probable losses that have been
identified with specific valuation allowances for individually evaluated impaired loans and for probable losses believed to be inherent
in the loan portfolio that have not been specifically identified. The determination of the allowance for loan and lease losses requires
significant estimates, including the timing and amounts of expected future cash flows on impaired loans, consideration of current
economic conditions, and historical loss experience pertaining to the portfolios and pools of homogeneous loans, all of which may be
susceptible to change.
The Corporation evaluates the need for changes to the allowance by portfolio loan segments and classes of loans within certain of
those portfolio segments. The Corporation combines loans with similar credit risk characteristics into the following portfolio
segments: commercial mortgage, construction, commercial and industrial, residential mortgage, and consumer loans. Classes are
usually disaggregations of the portfolio segments. The classes within the residential mortgage segment are residential mortgages
guaranteed by the U.S. government and other loans. The classes within the consumer portfolio are auto, finance leases, and other
consumer loans. Other consumer loans mainly include unsecured personal loans, credit cards, home equity lines, lines of credits, and
marine financing. The classes within the construction loan portfolio are land loans, construction of commercial projects, and
construction of residential projects. The commercial mortgage and commercial and industrial segments are not further segmented into
classes. The adequacy of the allowance for loan and lease losses is based on judgments related to the credit quality of each portfolio
segment. These judgments consider ongoing evaluations of each portfolio segment, including such factors as the economic risks
associated with each loan class, the financial condition of specific borrowers, the level of delinquent loans, historical loss experience,
the value of any collateral and, where applicable, the existence of any guarantees or other documented support. In addition to the
general economic conditions and other factors described above, additional factors considered include the internal risk ratings assigned
to loans. An internal risk rating is assigned to each commercial loan at the time of approval and is subject to subsequent periodic
review by the Corporation's senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the
Corporation’s continued evaluation of its asset quality.
The allowance for loan and lease losses is increased through a provision for credit losses that is charged to earnings, based on the
quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries.
The allowance for loan and lease losses consists of specific reserves based upon valuations of loans considered to be impaired and
general reserves. A specific valuation allowance is established for individual impaired loans in the commercial mortgage,
construction, commercial and industrial, and residential mortgage loan portfolios, primarily when the collateral value of the loan (if
the impaired loan is determined to be collateral dependent) or the present value of the expected future cash flows discounted at the
loan’s effective rate is lower than the carrying amount of that loan. The specific valuation allowance is computed for impaired
commercial mortgage, construction, commercial and industrial, and real estate loans with individual principal balances of $1 million
or more, TDRs, as well as smaller residential mortgage loans and home equity lines of credit considered impaired based on their
delinquency and loan-to-value levels. When foreclosure is probable and for collateral dependent loans, the impairment measure is
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 are generally updated annually thereafter. In addition,
appraisals and/or broker price opinions are also obtained for residential mortgage loans based on specific characteristics such as
delinquency levels, age of the appraisal, and loan-to-value ratios. The excess of the recorded investment in a collateral dependent loan
over the resulting fair value of the collateral is charged-off when deemed uncollectible.
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For all other loans, which include small, homogeneous loans, such as auto loans, all classes in the consumer loan portfolio,
residential mortgages in amounts under $1 million and commercial and construction loans not considered impaired, the Corporation
maintains a general valuation allowance established through a process that begins with estimates of incurred losses based upon various
statistical analyses. The general reserve is primarily determined by applying loss factors according to the loan type and assigned risk
category (pass, special mention, and substandard not considered to be impaired; all doubtful loans are considered impaired).
The Corporation uses a roll-rate methodology to estimate losses on its consumer loan portfolio based on delinquencies and
considering credit bureau score bands. The Corporation tracks the historical portfolio performance to arrive at a weighted average
distribution in each subgroup of each delinquency bucket. Roll-to-loss rates (loss factors) are calculated by multiplying the roll rates
from each subgroup within the delinquency buckets forward through loss. Once roll rates are calculated, the resulting loss factor is
applied to the existing receivables in the applicable subgroups within the delinquency buckets and the end results are aggregated to
arrive at the required allowance level. The Corporation’s assessment also involves evaluating key qualitative and environmental
factors, which include credit and macroeconomic indicators such as unemployment, bankruptcy trends, recent market transactions, and
collateral values to account for current market conditions that are likely to cause estimated credit losses to differ from historical loss
experience. The Corporation analyzes the expected delinquency migration to determine the future volume of delinquencies.
The non-PCI portion of a credit card portfolio acquired in 2012 was recorded at the fair value on the acquisition date of $353.2
million, net of a discount of $18.2 million. The discount at acquisition was attributable to uncertainties in the cash flows of this
portfolio based on an estimation of inherent credit losses. As previously discussed, the discount recorded at acquisition was accreted
and recognized in interest income over the period in which substantially all of the inherent losses associated with the non-PCI loans at
the acquisition date were estimated to occur. Subsequent to acquisition, the Corporation evaluated its estimate of embedded losses on
a quarterly basis. The allowance for non-PCI loans acquired was determined considering the outstanding balance of the portfolio net
of any unaccreted discount. To the extent the required allowance exceeded the unaccreted discount, a provision was required. The
remaining discount on the credit card portfolio acquired in 2012 was fully acreeted into income during the first half of 2014. The
provision recorded during 2013 and 2014 relates to new purchases on these non-PCI credit card loans and to the allowance
methodology described above. The provision in 2013 and 2014 was not related to changes in expected loan losses assumed in the
accounting for the acquisition of the portfolio.
The cash flow analysis for each residential mortgage pool is performed at the individual loan level and then aggregated to the pool
level in determining the overall expected loss ratio. The model applies risk-adjusted prepayment curves, default curves, and severity
curves to each loan in the pool. For loan restructuring pools, the present value of expected future cash flows under new terms, at the
loan’s effective interest rate, is taken into consideration. Additionally, the default risk and prepayments related to loan restructurings
are based on, among other things, the historical experience of these loans. Loss severity is affected by the expected house price
scenario, which is based in part on recent house price trends. Default curves are used in the model to determine expected delinquency
levels. The risk-adjusted timing of liquidations and associated costs are used in the model, and are risk-adjusted for the geographic
area in which each property is located (Puerto Rico, Florida, or the Virgin Islands). For residential mortgage loans, the determination
of reserves includes the incorporation of updated loss factors applicable to loans expected to liquidate over the next twelve months,
considering the expected realization of similarly valued assets at disposition.
During the second quarter of 2014, the Corporation made certain enhancements to the general allowance estimation process for
commercial loans, which mainly consisted of the following:
Utilization of longer historical loss periods to better reflect the level of incurred losses in portfolio. Historical charge-off rates are
calculated by the Corporation on a quarterly basis by tracking cumulative charge-offs experienced over a two-year loss period on
loans according to their internal risk rating (referred to as “base rate” for the quarter). Prior to the second quarter enhancements, the
Corporation would use the base rate of the current quarter or the average of the last 4 quarters, if greater. During the second quarter of
2014, the Corporation eliminated the use of the “greater of” approach and adopted the utilization of the base rate average of the last 8
quarters. This change captures a longer historical period that helps mitigate period to period volatility in the loss rates.
Enhancements of the environmental factors adjustment. Prior to the second quarter of 2014 enhancements, these adjustments were
applied in the form of basis point additions to the loss ratio based on changes in credit and economic indicators observed in the most
recent periods. Beginning in the second quarter of 2014, the resulting factor derived from a set of risk-based ratings and weights
assigned to credit and economic indicators over a reasonable period is applied to a developed expected range of historical losses, in
order to adjust the base rates. These enhancements result in a framework that can be applied more consistently, by having a more
granular analysis that better captures trends in economic conditions and the impact on the Corporation’s portfolio.
In addition, the calculation of loss rates for asset classifications with limited or zero loss history was improved to consider these
loans’ migration experience.
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At the date of implementation, the Corporation performed a parallel computation of the general reserve for commercial loans. The
enhancements to the general allowance estimation process resulted in a net decrease to the allowance for loan losses of $4.8 million as
of the implementation date of May 31, 2014.
In the third quarter of 2014, similar enhancements to the environmental factors adjustment framework were applied to the consumer
loans portfolio. The framework was defined for secured and unsecured loans to consider the specific behaviors separately. With
respect to the historical charge-off rates, during the third quarter of 2014, the Corporation adopted the utilization of the base rate
calculated as the average of the net charge-off ratio for the 12-month period preceding the most recent four quarters. Previously, the
base rate was calculated as the average of the last two years’ annual net charge-off ratio. The effect of these enhancements on the
allowance for consumer loans was immaterial as of the implementation date of August 31, 2014.
Charge-off of Uncollectible Loans - Net charge-offs consist of the unpaid principal balances of loans held for investment that the
Corporation determines are uncollectible, net of recovered amounts. Charge-offs are recorded as a reduction to the allowance for loan
and lease losses and subsequent recoveries of previously charged off amounts are credited to the allowance for loan and lease losses.
Collateral dependent loans in the construction, commercial mortgage, and commercial and industrial loan portfolios are charged off to
their net realizable value (fair value of collateral, less estimated costs to sell) when loans are considered to be uncollectible. Within
the consumer loan portfolio, auto loans and finance leases are reserved once they are 120 days delinquent and are charged off to their
estimated net realizable value when collateral deficiency is deemed uncollectible (i.e., when foreclosure/repossession is probable) or
when the loan is 365 days past due. Within the other consumer loans class, closed-end loans are charged off when payments are
120 days in arrears, except small personal loans. Open-end (revolving credit) consumer loans, including credit card loans, and small
personal loans are charged off when payments are 180 days in arrears. On a quarterly basis, residential mortgage loans that are 180
days delinquent and have an original loan-to-value ratio that is higher than 60% are reviewed and charged-off, as needed, to the fair
value of the underlying collateral. Generally, all loans may be charged off or written down to the fair value of the collateral prior to the
policies described above if a loss-confirming event occurred. Loss confirming events include, but are not limited to, bankruptcy
(unsecured), continued delinquency, or receipt of an asset valuation indicating a collateral deficiency when the asset is the sole source
of repayment. The Corporation does not record charge-offs on PCI loans that are performing in accordance with or better than
expectations as of the date of acquisition, as the fair value of these loans already reflects a credit component. The Corporation records
charge-offs on PCI loans only if actual losses exceed estimated losses incorporated into the fair value recorded at acquisition and the
amount is deemed uncollectible.
Other-than-temporary impairments
On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic
circumstances indicating that a security with an unrealized loss has suffered OTTI. A security is considered impaired if the fair value
is less than its amortized cost basis.
The Corporation evaluates whether the impairment is other-than-temporary depending upon whether the portfolio consists of debt
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 debt securities 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 issuer’s ability to repay its bond obligations, the length of time and
the extent to which the fair value has been less than the amortized cost basis, and changes in the near-term prospects of the underlying
collateral, if applicable, such as changes in default rates, loss severity given default, and significant changes in prepayment
assumptions. The Corporation also takes into consideration the latest information available about the overall financial condition of an
issuer, credit ratings, recent legislation, government actions affecting the issuer’s industry, and actions taken by the issuer to deal with
the economic climate. OTTI must be recognized in earnings if the Corporation has the intent to sell the debt security or it is more
likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the
Corporation does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss
has occurred. An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present
value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an
OTTI, if any, is recorded as net impairment losses on debt securities in the statements of income (loss), while the remaining portion of
the impairment loss is recognized in OCI, net of taxes, provided the Corporation does not intend to sell the underlying debt security
and it is more likely than not that the Corporation will not have to sell the debt security prior to recovery. The previous amortized cost
basis less the OTTI recognized in earnings is the new amortized cost basis of the investment. The new amortized cost basis is not
adjusted for subsequent recoveries in fair value. However, for debt securities for which OTTI was recognized in earnings, the
difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income.
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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 issuer’s industry trends, the historical performance of the stock, credit ratings, as well as the
Corporation’s 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, it records an impairment 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 12 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 Corporation’s 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 limitations may result in the release of tax contingencies that are recognized as a reduction to the
Corporation’s 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.
Under the Puerto Rico Internal Revenue Code of 2011 as amended (the “2011 PR Code”), the Corporation and its subsidiaries are
treated as separate taxable entities and are not entitled to file consolidated tax return and, thus, the Corporation is not able to utilize
losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from an NOL, a
particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carryforward period.
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 Corporation’s net deferred tax asset 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 asset resulting in additional income
tax expense in the consolidated statements of income. Management evaluates its deferred tax asset 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 asset will not be realized.
Changes in the valuation allowance from period to period are included in the Corporation’s tax provision in the period of change.
In 2010, the Corporation established a valuation allowance for substantially all of the deferred tax assets of its banking subsidiary,
FirstBank, primarily due to the realization of significant losses driven by charges to the provision for loan losses, a three-year
cumulative loss position as of the end of year 2010, and uncertainty regarding the amount of future taxable income that the Bank could
forecast. As of December 31, 2014, based on the assessment of all positive and negative evidence, management concluded that it is
more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to realize
a significant portion of its deferred tax assets and, therefore, reversed $302.9 million of the valuation allowance. This conclusion was
based upon consideration of a number of factors including FirstBank’s (i) completion of a sixth consecutive quarter of profitability
and (ii) forecast of future profitability, under several potential scenarios, where the Corporation assigned more weight to its continued
profitability than to potential future growth which it is planning to achieve (see Note 24 to the Corporation’s audited financial
statements for the year ended December 31, 2014 included in Item 8 of this Form 10-K).
Income tax expense includes Puerto Rico and USVI income taxes as well as applicable United States (“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. and USVI income tax purposes and is generally subject to U.S. and USVI income
tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business
in those regions. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions
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and limitations. The 2011 PR Code provides a dividend received deduction of 100% on dividends received from “controlled”
subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.
Under the 2011 PR Code, First BanCorp. is subject to a maximum statutory tax rate of 39%. The 2011 PR Code also includes an
alternative minimum tax of 30% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax
requirements. Prior to the approval of Act No. 40 (“Act 40”), known as the “Tax Burden Adjustment and Redistribution Act,” which
amended the 2011 PR Code, First Bancorp.’s maximum statutory tax rate was 30% for the year ended December 31, 2012. One of
the main provisions of Act 40 that impacted financial institutions was the national gross receipts tax. The national gross receipts tax
for financial institutions is computed on the basis of 1% of gross income, net of allowable exclusions. Subject to certain limitations, a
financial institution is able to claim a credit of 0.5% of its gross income against its regular income tax or the alternative minimum tax
(“AMT”). The Corporation’s national gross receipts tax expense for the year ended December 31, 2014 amounted to $5.7 million
compared to $5.9 million recorded for 2013. This expense is included as part of “Taxes, other than income taxes” in the consolidated
statement of income (loss). In 2014, the Corporation recorded a $2.9 million benefit related to this credit as a reduction to the
provision for income taxes compared to a benefit of $3.0 million recorded in 2013. On December 22, 2014, the Governor of Puerto
Rico signed Act No. 238, which amended the 2011 PR Code. Act No. 238 clarifies that the national gross receipts tax will not be
applicable to taxable years starting after December 31, 2014.
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 an
International Banking Entity (“IBE”) of the Bank and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest
income and gain on sales is exempt from Puerto Rico and U.S. income taxation. The IBE 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 on the specific activities indentified in the IBE Act. An IBE that operates as a unit of a bank
pays income taxes at normal rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income.
The authoritative accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns.
Under this guidance, income tax benefits are recognized and measured based upon a two-step analysis: 1) a tax position must be more
likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the
largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit
recognized under this analysis and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (“UTB”).
As of December 31, 2014, the Corporation did not have UTBs recorded on its books. The years 2007 through 2009 were examined
by the IRS and disputed issues, primarily related to the disallowance of certain expenses, were taken to administrative appeals during
2011. As a result of a final settlement with the IRS Appeals office during 2014, the Corporation released a portion of its reserve for
uncertain tax positions resulting in a tax benefit of $1.8 million and paid $2.5 million to settle the tax liability resulting from the audit.
Such settlement did not have an impact on the effective tax rate.
Refer to Note 24 of the Corporation’s audited financial statements for the year ended December 31, 2013 included in Item 8 of this
Form 10-K for further information related to Income Taxes.
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, if any, 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 OCI (a component
of stockholders’ equity), and do not affect earnings until realized or are deemed to be other-than-temporarily impaired. Investments in
equity securities that do not have publicly or 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
Corporation’s 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.
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Valuation of financial instruments
The measurement of fair value is fundamental to the Corporation’s presentation of its 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 mainly to manage liquidity needs and interest rate risks. A significant part of the
Corporation’s total assets is reflected at fair value on the Corporation’s financial statements.
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:
Investment securities available for sale
The fair value of investment securities was the market value based on quoted market prices (as is the case with equity securities,
Treasury notes, and non callable U.S. Agency debt securities), when available (Level 1), or market prices for identical or comparable
assets (as is the case with MBS and callable U.S. agency debt) 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 (Level 2). 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, as is the
case with certain private label mortgage-backed securities held by the Corporation (Level 3).
Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States; the interest
rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted average coupon of the underlying collateral. The
market valuation 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 based on a nonrated security. The market
valuation is derived from a model that utilizes relevant assumptions such as the prepayment rate, default rate, and loss severity on a
loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis
according to collateral attributes of the underlying mortgage pool (i.e., loan term, current balance, note rate, rate adjustment type, rate
adjustment frequency, rate caps, and others) in combination with prepayment forecasts obtained from a commercially available
prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss
assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics
(loan-to-value, location, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, and other)
to provide an estimate of default and loss severity.
Derivative instruments
The fair value of most of the Corporation’s derivative instruments is based on observable market parameters and takes into
consideration the credit risk component of paying counterparties when appropriate, except when collateral is pledged. That is, on
interest rate swaps, the credit risk of both counterparties is included in the valuation; and, on options and caps, only the seller's credit
risk is considered. The derivative instruments, namely swaps and caps, were valued using a discounted cash flow approach using the
related LIBOR and swap rate for each cash flow. Derivatives include interest rate swaps used for protection against rising interest
rates. For these interest rate swaps, a credit component was not considered in the valuation since the Corporation has fully
collateralized with investment securities any mark-to-market loss with the counterparty and, if there were market gains, the
counterparty had to deliver collateral to the Corporation.
Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in
full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments in 2014, 2013 and 2012 was
immaterial.
Income Recognition on Loans
Loans that the Corporation has the ability and intent to hold for the foreseeable future are classified as held for investment. The
substantial majority of the Corporation’s loans are classified as held for investment. Loans are stated at the principal outstanding
balance, net of unearned interest, cumulative charge-offs, 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 that approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on
certain personal loans, auto loans and finance leases and discounts and premiums are recognized as income under a method that
approximates the interest method.
66
When a loan is paid off or sold, any unamortized net deferred fee (cost) is credited (charged) to income. Credit card loans are reported
at their outstanding unpaid principal balance plus uncollected billed interest and fees net of amounts deemed uncollectible. PCI loans
are reported net of any remaining purchase accounting adjustments. See “Loans acquired” below for the accounting policy for PCI
loans.
Non-Performing and Past-Due Loans – - Loans on which the recognition of interest income has been discontinued are designated
as non-performing. Loans are classified as non-performing when they are 90 days past due for interest and principal, with the
exception of residential mortgage loans guaranteed by the Federal Housing Administration (the “FHA”) or the Veterans
Administration (the “VA”) and credit cards. It is the Corporation’s policy to report delinquent mortgage loans insured by the FHA or
guaranteed by the VA as loans past due 90 days and still accruing as opposed to non-performing loans since the principal repayment is
insured. However, the Corporation discontinues the recognition of income for FHA/VA loans when such loans are over 18 months
delinquent. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), credit
card loans are generally charged off in the period in which the account becomes 180 days past due. Credit card loans continue to
accrue finance charges and fees until charged off at 180 days. Loans generally may be placed on non-performing status prior to when
required by the policies described above when the full and timely collection of interest or principal becomes uncertain (generally
based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any). When a loan is placed on non-
performing status, any accrued but uncollected interest income is reversed and charged against interest income and amortization of
any net deferred fees is suspended. Interest income on non-performing loans is recognized only to the extent it is received in cash.
However, when there is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce
the carrying value of such loans (i.e., the cost recovery method). Generally, the Corporation returns a loan to accrual status when all
delinquent interest and principal becomes current under the terms of the loan agreement or when the loan is well secured and in the
process of collection, and collectability of the remaining interest and principal is no longer doubtful. Loans that are past due 30 days or
more as to principal or interest are considered delinquent, with the exception of residential mortgage, commercial mortgage, and
construction loans, which are considered past due when the borrower is in arrears on two or more monthly payments.
Impaired Loans - A loan is considered impaired when, based upon current information and events, it is probable that the
Corporation will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the loan
agreement. Loans with insignificant delays or insignificant shortfalls in the amounts of payments expected to be collected are not
considered to be impaired. The Corporation measures impairment individually for those loans in the construction, commercial
mortgage, and commercial and industrial portfolios with a principal balance of $1 million or more and any loans that have been
modified in a troubled debt restructuring (“TDRs”). The Corporation also evaluates for impairment purposes certain residential
mortgage loans and home equity lines of credit with high delinquency and loan-to-value levels. Generally, consumer loans are not
individually evaluated for impairment on a regular basis except for impaired marine financing loans in amounts that exceed $1
million, home equity lines with high delinquency and loan-to-value levels and TDRs. Held-for-sale loans are not reported as impaired,
as these loans are recorded at the lower of cost or fair value.
The Corporation generally measures impairment and the related specific allowance for individually impaired loans based on the
difference between the recorded investment of the loan and the present value of the loans’ expected future cash flows, discounted at
the effective original interest rate of the loan at the time of modification, or the loan’s observable market price. If the loan is collateral
dependent, the Corporation measures impairment based upon the fair value of the underlying collateral, instead of discounted cash
flows, regardless of whether foreclosure is probable. Loans are identified as collateral dependent if the repayment is expected to be
provided solely by the underlying collateral, through liquidation or operation of the collateral.
When the fair value of the collateral is used to measure impairment or an impaired collateral-dependent loan and repayment or
satisfaction of the loan is dependent on the sale of the collateral, the fair value of the collateral is adjusted to consider estimated costs
to sell. If repayment is dependent only on the operation of the collateral, the fair value of the collateral is not adjusted for estimated
costs to sell. If the fair value of the loan is less than the recorded investment, the Corporation recognizes impairment by either a direct
write-down or establishing an allowance for the loan or by adjusting an allowance for the impaired loan. For an impaired loan that is
collateral dependent, charge-offs are taken in the period in which the loan, or portion of the loan, is deemed uncollectible, and any
portion of the loan not charged off is adversely credit risk rated at a level no worse than substandard.
A restructuring of a loan constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties,
grants a concession to the debtor that it would not otherwise consider. TDRs typically result from the Corporation’s loss mitigation
activities and residential mortgage loans modified in accordance with guidelines similar to those of the U.S. government’s Home
Affordable Modification Program, and could include rate reductions, principal forgiveness, term extensions, payment forbearance,
refinancing of any past-due amounts, including interest, escrow, and late charges and fees, and other actions intended to minimize the
economic loss and to avoid foreclosure or repossession of collateral.
67
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on
nonaccrual status until the borrower demonstrates a sustained period of performance (generally six consecutive months of payments,
inclusive of consecutive payments made prior to the modification), and there is evidence that such payments can and are likely to
continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are evaluated in
assessing whether the borrower can meet the new terms and may result in the loans being returned to accrual status at the time of the
restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the
loan remains classified as a nonaccrual loan. Refer to Note 7 for additional qualitative and quantitative information about TDRs.
In connection with commercial restructurings, the decision to maintain a loan that has been restructured on accrual status is based
on a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment under the modified
terms. The credit evaluation reflects consideration of the borrower’s future capacity and willingness to pay, which may include
evaluation of cash flow projections, consideration of the adequacy of collateral to cover all principal and interest, and trends indicating
improving profitability and collectibility of receivables. This evaluation also includes an evaluation of the borrower’s current
willingness to pay, which may include a review of past payment history, an evaluation of the borrower’s willingness to provide
information on a timely basis, and consideration of offers from the borrower to provide additional collateral or guarantor support.
The evaluation of mortgage and consumer loans for restructurings includes an evaluation of the client’s disposable income and
credit report, the value of the property, the loan to value relationship, and certain other client-specific factors that have impacted the
borrower’s ability to make timely principal and interest payments on the loan. In connection with retail restructurings, a
nonperforming loan will be returned to accrual status when current as to principal and interest, under revised terms, and upon
sustained historical repayment performance.
The Corporation removes loans from TDR classification, consistent with authoritative guidance that allows for a TDR to be
removed from this classification in years following the modification, only when the following two circumstances are met:
(i)
(ii)
The loan is in compliance with the terms of the restructuring agreement and, therefore, is not considered impaired under the
revised terms; and
The loan yields a market interest rate at the time of the restructuring. In other words, the loan was restructured with an
interest rate equal to or greater than what the Corporation would have been willing to accept at the time of the restructuring
for a new loan with comparable risk.
If both of the conditions are met, the loan can be removed from the TDR classification in calendar years after the year in which the
restructuring took place. However, the loan continues to be individually evaluated for impairment. Loans classified as TDRs,
including loans in trial payment periods (trial modifications), are considered impaired loans.
With respect to loan splits, generally, Note A of a loan split is restructured under market terms, and Note B is fully charged off. If
Note A is in compliance with the restructured terms in years following the restructuring, Note A will be removed from the TDR
classification.
Interest income on impaired loans is recognized based on the Corporation’s policy for recognizing interest on accrual and non-
accrual loans.
Loans Acquired
All purchased loans are recorded at fair value at the date of acquisition. Loans acquired with evidence of credit deterioration since
their origination and where it is probable at the date of acquisition that the Corporation will not collect all contractually required
principal and interest payments are considered PCI loans. Evidence of credit quality deterioration as of the purchase date may include
statistics such as past due and non-accrual status, and revised loan terms. Residential and consumer PCI loans have been aggregated
into pools based on common risk characteristics. Each pool is accounted for as a single asset with a single composite interest rate and
an aggregate expectation of cash flows. In accounting for PCI loans, the difference between contractually required payments and the
cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The nonaccretable difference, which is
neither accreted into income nor recorded on the consolidated statement of financial condition, reflects estimated future credit losses
expected to be incurred over the life of the pool of loans. The excess of cash flows expected to be collected over the estimated fair
value of PCI loans is referred to as the accretable yield. This amount is not recorded on the statement of financial condition, but is
accreted into interest income over the remaining life of the pool of loans, using the effective-yield method.
68
Subsequent to acquisition, the Corporation completes quarterly evaluations of expected cash flows. Decreases in expected cash flows
attributable to credit will generally result in an impairment charge to the provision for loan and lease losses and the establishment of
an allowance for loan and lease losses. Increases in expected cash flows will generally result in a reduction in any allowance for loan
and lease losses established subsequent to acquisition and an increase in the accretable yield. The adjusted accretable yield is
recognized in interest income over the remaining life of the pool of loans.
Resolutions of loans may include sales of loans to third parties, receipt of payments in settlement with the borrower, or foreclosure
of the collateral. The Corporation’s policy is to remove an individual loan from a pool based on comparing the amount received from
its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the
entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The
remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method
is addressed by the Corporation’s quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full,
there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at
resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would
otherwise be deemed TDRs.
Because the initial fair value of PCI loans recorded at acquisition includes an estimate of credit losses expected to be realized over
the remaining lives of the loans, the Corporation separately tracks and reports PCI loans and excludes these loans from its delinquency
and non-performing loan statistics.
For acquired loans that are not deemed impaired at acquisition, subsequent to acquisition the Corporation recognizes the difference
between the initial fair value at acquisition and the undiscounted expected cash flows in interest income over the period in which
substantially all of the inherent losses associated with the non-PCI loans at the acquisition date are estimated to occur. Thus, such
loans are accounted for consistently with other originated loans, potentially being classified as nonaccrual or impaired, as well as
being classified under the Corporation’s standard practice and procedures. In addition, these loans are considered in the determination
of the allowance for loan losses.
Loans held for sale
Loans that the Corporation intends to sell or that the Corporation does not have the ability and intent to hold for the foreseeable
future are classified as held-for-sale loans. Loans held for sale are stated at the lower-of-cost-or-market. Generally, the loans held-for-
sale portfolio consists of conforming residential mortgage loans that the Corporation intends to sell to the Government National
Mortgage Association (GNMA) and government sponsored entities (GSEs) such as the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Generally, residential mortgage loans held for sale are valued
on an aggregate portfolio basis and the value is primarily derived from quotations based on the mortgage-backed securities market.
The amount by which cost exceeds market value in the aggregate portfolio of loans held for sale, if any, is accounted for as a valuation
allowance with changes therein included in the determination of net income and reported as part of mortgage banking activities in the
consolidated statement of income (loss). Loan costs and fees are deferred at origination and are recognized in income at the time of
sale. The fair value of commercial mortgage and construction loans held for sale is primarily derived from external appraisals with
changes in the valuation allowance reported as part of other non-interest income in the consolidated statement of income (loss).
In certain circumstances, the Corporation transfers loans to/from held for sale or held for investment based on a change in strategy.
In particular, although no decision to sell any portion of its non-performing loan portfolio has been made, the Corporation continues to
evaluate options to further reduce non-performing loan levels. These options could include bulk loan sales. If such a change in holding
strategy is made, significant adjustments to the loans’ carrying values may be necessary. These loans are transferred to held for sale at
the lower of cost or fair value on the date of transfer and establish a new cost basis upon transfer. Write-downs of loans transferred
from held for investment to held for sale are recorded as charge-offs at the time of transfer.
Equity method for investments in unconsolidated entities
In connection with a sale of loans with a book value of $269.3 million to CPG/GS PR NPL, LLC (“CPG/GS”) completed on
February 16, 2011, the Bank received a 35% subordinated interest in CPG/GS, as further discussed in Note 13. The Corporation’s
investment in this unconsolidated entity was considered significant under Rule 3-09 of Regulation S-X for the year ended December
31, 2012. This rule looks to Rule 1-02(w) of Regulation S-X to determine the significance of the investee. The significance threshold
for Rule 3-09 is 20% of assets or income. The Corporation must provide full financial information for unconsolidated subsidiaries and
50%-or-less owned entities accounted for by the equity method if the entities are significant, for any fiscal year presented, under the
Rule 1-02(w) tests (investment or income tests) in Regulation S-X.
69
The Corporation accounts for its investment in CPG/GS under the equity method and includes the investment as part of investment
in unconsolidated entity in the consolidated statements of financial condition. When applying the equity method, the Corporation
follows the hypothetical liquidation book value (“HLBV”) method to determine its share of earnings or losses of the unconsolidated
entity. Under the HLBV method, the Corporation determines its share of earnings or losses by determining the difference between its
“claim on the entity’s book value” at the end of the period as compared to the beginning of the period. This claim is calculated as the
amount the Corporation would receive if the entity were to liquidate all of its assets at recorded amounts determined in accordance
with GAAP and distribute the resulting cash to the investors, according to their respective priorities as provided in the contractual
agreements.
The Bank reports its share of CPG/GS’s operating results on a one-quarter lag basis. In addition, as a result of using HLBV, the
difference between the Bank’s investment in CPG/GS and its claim on the book value of CPG/GS at the date of the investment, known
as the basis difference, is amortized over the estimated life of the investment. The loss recorded in 2014 reduced the carrying amount
of the Bank’s investment in CPG/GS to zero. No negative investment needs to be reported as the Bank has no legal obligation or
commitment to provide further financial support to this entity; thus, no further losses will be recorded on this investment. Any
potential increase in the carrying value of the investment in CPG/GS, under the HLBV method, would depend upon how better off the
Bank is at the end of the period than it was at the beginning of the period after the waterfall calculation performed to determine the
amount of gain allocated to the investors.
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 BanCorp.’s net interest income is subject to interest rate risk due to the repricing and maturity
mismatch of the Corporation’s assets and liabilities. Net interest income for the year ended December 31, 2014 was $518.1 million,
compared to $514.9 million and $461.7 million for 2013 and 2012, respectively. On a tax-equivalent basis and excluding the changes
in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value, net interest income for
the year ended December 31, 2014 was $535.0 million compared to $527.4 million and $466.6 million for 2013 and 2012,
respectively.
70
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
the volume of interest-related assets and liabilities have affected the Corporation’s net interest income. For each category of interest-
earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in
volume multiplied by prior period rates) and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume
variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their
respective percentage of the combined totals.
The net interest income is computed on an adjusted tax-equivalent basis and excluding: (1) the change in the fair value of derivative
instruments, and (2) unrealized gains or losses on liabilities measured at fair value. For the definition and reconciliation of this non-
GAAP measure, refer to discussions below.
Part I
Year Ended December 31,
2014
Average volume
2013
2012
Interest income(1) / expense
2013
2014
2012
Average rate(1)
2013
2012
2014
(Dollars in thousands)
Interest-earning assets:
Money market and other
short-term investments
Government obligations (2)
Mortgage-backed securities
Corporate bonds
FHLB stock
Equity securities
Total investments (3)
Residential mortgage loans
Construction loans
C&I and commercial
mortgage loans
Finance leases
Consumer loans
Total loans (4)(5)
Total interest-earning
assets
Interest-bearing liabilities:
Interest-bearing checking
accounts
Savings accounts
Certificates of deposit
Brokered CDs
Interest-bearing deposits
Other borrowed funds
FHLB advances
Total interest-bearing
liabilities (6)
Net interest income
Interest rate spread
Net interest margin
$
742,929 $
350,175
1,669,406
-
27,155
320
684,074 $
338,571
1,666,091
-
30,941
1,330
640,644 $
555,364
1,182,142
1,204
35,035
1,377
1,892 $
8,258
54,291
-
1,169
-
1,927 $
7,892
52,841
-
1,359
-
2,789,985
2,721,007
2,415,766
65,610
64,019
2,751,366
198,450
2,681,753
272,917
2,800,647
388,404
4,549,732
240,268
1,806,646
9,546,462
4,804,608
240,479
1,799,402
9,799,159
5,277,593
239,699
1,561,085
10,267,428
153,373
7,304
199,787
19,530
205,278
585,272
148,033
8,722
196,814
20,591
220,089
594,249
1,827
9,839
37,090
76
1,427
6
50,265
150,854
10,357
214,510
20,887
196,293
592,901
0.25%
2.36%
3.25%
0.00%
4.30%
0.00%
2.35%
5.57%
3.68%
0.28%
2.33%
3.17%
0.00%
4.39%
0.00%
2.35%
5.52%
3.20%
0.29%
1.77%
3.14%
6.31%
4.07%
0.44%
2.08%
5.39%
2.67%
4.39%
8.13%
11.36%
4.10%
8.56%
12.23%
4.06%
8.71%
12.57%
6.13%
6.06%
5.77%
$
12,336,447 $
12,520,166 $
12,683,194 $
650,882 $
658,268 $
643,166
5.28%
5.26%
5.07%
$
1,075,513 $
2,426,171
2,296,314
3,098,724
8,896,722
1,131,959
312,575
1,127,857 $
2,344,444
2,310,200
3,251,091
9,033,592
1,131,959
357,661
1,092,640 $
2,258,001
2,215,599
3,488,312
9,054,552
1,171,615
404,033
6,446 $
8,419 $
15,416
26,371
29,894
78,127
34,188
3,561
15,852
29,264
38,252
91,787
33,025
6,031
9,421
17,382
34,602
66,854
128,259
36,162
12,142
0.60%
0.64%
1.15%
0.96%
0.88%
3.02%
1.14%
0.75%
0.68%
1.27%
1.18%
1.02%
2.92%
1.69%
0.86%
0.77%
1.56%
1.92%
1.42%
3.09%
3.01%
$
10,341,256 $
10,523,212 $
10,630,200 $
115,876 $
130,843 $
176,563
1.12%
1.24%
1.66%
$
535,006 $
527,425 $
466,603
4.16%
4.34%
4.02%
4.21%
3.41%
3.68%
(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 (39.0% for
2014 and 2013; 30% for 2012) and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt
assets. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis.
Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivatives and unrealized
gains or losses on liabilities measured at fair value 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 on available-for-sale securities are excluded from the average volumes.
(4) Average loan balances include the average of non-performing loans.
(5) Interest income on loans includes $14.2 million, $13.8 million and $12.7 million for 2014, 2013 and 2012, respectively, of income from prepayment penalties and late fees related to the
Corporation’s loan portfolio.
(6) Unrealized gains and losses on liabilities measured at fair value are excluded from the average volumes.
71
Part II
Interest income on interest-earning
assets:
Money market and other
short-term investments
Government obligations
Mortgage-backed securities
Corporate bonds
FHLB stock
Equity securities
Total investments
Residential mortgage loans
Construction loans
C&I and commercial
mortgage loans
Finance leases
Consumer loans
Total loans
Total interest income
Interest expense on interest-bearing
liabilities:
Brokered CDs
Other interest-bearing deposits
Other borrowed funds
FHLB advances
Total interest expense
Change in net interest income
2014 Compared to 2013
Increase (decrease)
Due to:
2013 Compared to 2012
Increase (decrease)
Due to:
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
$
$
$
$
158 $
273
105
-
(163)
-
373
3,870
(2,560)
(193) $
93
1,345
-
(27)
-
1,218
1,470
1,142
(35) $
366
1,450
-
(190)
-
1,591
5,340
(1,418)
123 $
(4,447)
15,344
(76)
(173)
-
10,771
(6,484)
(3,385)
(23) $
2,500
407
-
105
(6)
2,983
3,663
1,750
100
(1,947)
15,751
(76)
(68)
(6)
13,754
(2,821)
(1,635)
(10,816)
(18)
855
(8,669)
(8,296) $
13,789
(1,043)
(15,666)
(308)
910 $
2,973
(1,061)
(14,811)
(8,977)
(7,386) $
(19,300)
67
29,558
456
11,227 $
1,604
(363)
(5,762)
892
3,875 $
(17,696)
(296)
23,796
1,348
15,102
(1,726) $
136
-
(691)
(2,281)
(6,015) $
(6,632) $
(5,438)
1,163
(1,779)
(12,686)
13,596 $
(8,358) $
(5,302)
1,163
(2,470)
(14,967)
7,581 $
(4,284) $
2,194
(1,198)
(1,267)
(4,555)
15,782 $
(24,318) $
(10,064)
(1,939)
(4,844)
(41,165)
45,040 $
(28,602)
(7,870)
(3,137)
(6,111)
(45,720)
60,822
Portions of the Corporation’s 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 sales of
investments held by the Corporation’s IBEs are tax-exempt under the Puerto Rico tax law (refer to the Income Taxes discussion below
for additional information). To facilitate the comparison of all interest data related to these assets, the interest income has been
converted to an adjusted tax 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 as adjusted for changes to enacted tax rates (39.0% for 2014 and 2013; 30.0% for
2012) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance
required by Puerto Rico tax law.
The presentation of net interest income excluding the effects of the changes in the fair value of the derivative instruments and
unrealized gains or losses on liabilities measured at fair value (“valuations”) provides additional information about the Corporation’s
net interest income and facilitates comparability and analysis. The changes in the fair value of the derivative instruments and
unrealized gains or losses on liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing
liabilities or interest-earning assets, respectively, or on interest payments exchanged with interest rate swap counterparties.
72
The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations and
the $2.5 million prepayment penalty collected on a commercial mortgage loan paid off in the fourth quarter of 2014, and net
interest income on an adjusted tax-equivalent basis. The table also reconciles net interest spread and net interest margin on a
GAAP basis to these items excluding valuations and the prepayment penalty, and on an adjusted tax-equivalent basis:
(Dollars in thousands)
Interest income - GAAP
Unrealized gain on derivative instruments
Interest income excluding valuations
Prepayment penalty income on a commercial mortgage loan
tied to an interest rate swap
Interest income excluding valuations and a $2.5 million
prepayment penalty collected
Tax-equivalent adjustment
Prepayment penalty collected on a commercial
mortgage loan
Interest income on a tax-equivalent basis excluding
valuations
Interest expense - GAAP
Unrealized gain on liabilities measured at fair value
Interest expense excluding valuations
Net interest income - GAAP
Net interest income excluding valuations and a $2.5 million
prepayment penalty income
Net interest income on a tax-equivalent basis
excluding valuations
Average Balances
Loans and leases
Total securities and other short-term investments
Average interest-earning assets
Average interest-bearing liabilities
Average Yield/Rate
Average yield on interest-earning assets - GAAP
Average rate on interest-bearing liabilities - GAAP
Net interest spread - GAAP
Net interest margin - GAAP
Average yield on interest-earning assets excluding valuations
and a $2.5 million prepayment penalty
Average rate on interest-bearing liabilities excluding valuations
Net interest spread excluding valuations and a $2.5 million
prepayment penalty
Net interest margin excluding valuations and a $2.5 million
prepayment penalty
Average yield on interest-earning assets on a tax-equivalent
basis and excluding valuations
Average rate on interest-bearing liabilities
excluding valuations
Net interest spread on a tax-equivalent basis and excluding
valuations
Net interest margin on a tax-equivalent basis and excluding
valuations
2014
Year Ended December 31,
2013
2012
633,949 $
(1,258)
632,691
(2,546)
630,145
18,191
2,546
650,882
115,876
-
115,876
518,073 $
645,788 $
(1,695)
644,093
637,777
(901)
636,876
-
-
644,093
14,175
636,876
6,290
-
-
658,268
130,843
-
130,843
514,945 $
643,166
176,072
491
176,563
461,705
514,269 $
513,250 $
460,313
535,006 $
527,425 $
466,603
9,546,462 $
2,789,985
12,336,447 $
10,341,256 $
9,799,159 $
2,721,007
12,520,166 $
10,267,428
2,415,766
12,683,194
10,523,212 $
10,630,200
$
$
$
$
$
$
$
5.14%
1.12%
4.02%
4.20%
5.11%
1.12%
3.99%
4.17%
5.28%
1.12%
4.16%
4.34%
5.16%
1.24%
3.92%
4.11%
5.14%
1.24%
3.90%
4.10%
5.26%
1.24%
4.02%
4.21%
5.03%
1.66%
3.37%
3.64%
5.02%
1.66%
3.36%
3.63%
5.07%
1.66%
3.41%
3.68%
73
Interest income on interest-earning assets primarily represents interest earned on loans held for investment and investment
securities.
Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, branch-based deposits,
repurchase agreements, advances from the FHLB and notes payable.
Unrealized gains or losses on derivatives represent changes in the fair value of derivatives, primarily interest rate swaps and caps
used for protection against rising interest rates.
Unrealized gains or losses on liabilities measured at fair value represent the change in the fair value of medium-term notes
elected to be measured at fair value, other than the accrual of interests. These medium-term notes were repaid in 2012.
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. As of
December 31, 2014, most of the interest rate swaps outstanding are used for protection against rising interest rates, although not
designated as hedges. Refer to Note 29 of the Corporation’s audited financial statements for the year ended December 31, 2014
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
market’s 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, the level of interest rates, and the expectations for rates in the future.
2014 compared to 2013
Net interest income for the year ended December 31, 2014 amounted to $518.1 million, an increase of $3.1 million, when
compared to $514.9 million in 2013. Net interest income for 2014 includes income from a prepayment penalty of $2.5 million
recorded in the fourth quarter on a commercial mortgage loan paid by the borrower to compensate for the economic loss sustained by
the Corporation in the early termination of an interest rate swap agreement that provided an economic hedge of the cash flows
associated with this loan. Such loss equals the mark-to-market unrealized losses recorded by the Corporation in prior periods for the
terminated interest rate swap. Net interest income, excluding valuations and the $2.5 million prepayment penalty, increased by $1.0
million to $514.3 million for 2014, as compared to 2013, and the related net interest margin increased by 7 basis points to 4.17%. The
increase in net interest income and margin was primarily driven by a reduction in the average cost of funds, improved deposit mix, and
the maturity of high-cost borrowings. In addition, net interest income and margin were favorably impacted by the acquisitions of
residential mortgage loans from another financial institution completed in 2014, partially offset by lower yields on consumer loans and
a decrease in the average volume of commercial and construction loans.
The Corporation reduced the average cost of funds as a result of lower rates paid on brokered CDs, savings, and interest-bearing
checking accounts. For the year ended December 31, 2014, the average cost of brokered CDs decreased by 22 basis points to 0.96%
compared to 2013, and the average balance of brokered CDs for 2014 decreased by $152.4 million, compared to 2013. These
reductions resulted in a decline of $8.4 million in interest expense for 2014, when compared to 2013. In 2014, the Corporation repaid
approximately $1.75 billion of maturing brokered CDs with an all-in cost of 0.81% and issued $1.5 billion of new brokered CDs with
an all-in cost of 0.79%.
The Corporation’s strategic focus remains to grow non-brokered deposits and improve the overall funding mix. For the year
ended December 31, 2014, the average rate paid on non-brokered deposits decreased by 10 basis points to 0.83% compared to the
same period in 2013. The average balance of non-brokered deposits for the year ended December 31, 2014 increased by $15.5 million
to $5.8 billion, compared to the same period in 2013. These variances resulted in a net decrease of $5.3 million in interest expense for
2014, when compared to 2013.
The decrease in the overall cost of funding also reflects maturities of some high-cost borrowings; in the latter part of 2013, the
Corporation repaid approximately $53.4 million of FHLB advances with an all-in cost of 4.94% and issued $25 million in the third
quarter of 2014 with an all-in cost of 1.79%. This represented a decrease of approximately $2.5 million in interest expense for 2014,
as compared to 2013, partially offset by contractual repricings of certain structured repurchase agreements totaling $200 million that
resulted in an increase of approximately $1.2 million in interest expense.
74
Net interest income and margin were also favorably impacted by an increase of $8.7 million in interest income attributable to
acquisitions of residential mortgage loans from another financial institution completed in 2014. Interest income on mortgage loans
acquired from Doral on May 30, 2014 was approximately $6.3 million higher than the interest income recorded in 2013 on Doral’s
previous commercial secured borrowings. Refer to “Provision and Allowance for Loan and Lease Losses” discussion below for
additional information about this transaction completed in the second quarter of 2014. In addition, interest income of $2.4 million was
recorded in 2014 in connection with a $192.6 million portfolio of performing residential mortgage loans purchased from Doral Bank
early in the fourth quarter.
The aforementioned variances were partially offset by lower yields on consumer loans, a decrease in the average volume of
commercial and construction loan portfolios, and lower yields on MBS investments.
The average yield of consumer loans (including finance leases) decreased to 10.98% for 2014, from 11.80% for 2013, for an
adverse impact of approximately $16.7 million in interest income. The decline in the average yield reflects both the impact of lower
rates on new loan originations given the current level of interest rates and the fact that the remaining discount related to the credit card
portfolio acquired in 2012 was fully accreted into income during the first half of 2014. The discount accretion included in interest
income in 2014 was $3.8 million compared to $9.6 million in 2013, a decrease of $5.8 million.
The decrease of $177.2 million in the average volume of commercial and construction loans, excluding the average volume of
Doral’s secured borrowings, partially offset by higher yields, resulted in a $1.6 million reduction in interest income attributable to
such portfolios.
In addition, net interest income and margin were adversely impacted by a 4 basis points reduction in the average yield of MBS
investments, or a decrease in interest income of approximately $0.7 million, mainly reflecting the gradual reinvestment of MBS
prepayments in lower-yielding investments given the low interest rate environment or the deposit of such prepayments in cash
balances maintained at the Federal Reserve Bank.
On an adjusted tax-equivalent basis, net interest income for the year ended December 31, 2014 increased $7.6 million to $535.0
million when compared to 2013. In addition to the facts discussed above, the increase for the 2014 period also includes an increase of
$4.0 million in the tax-equivalent adjustment.
2013 compared to 2012
Net interest income increased 11% to $514.9 million for 2013 from $461.7 million in 2012. The increase was primarily driven by
a reduction in the average cost of funds, a higher volume of MBS, and interest income contributed by the credit card portfolio acquired
in late May 2012.
The net interest margin excluding valuations improved by 47 basis points to 4.10% compared to 2012. The improvement in the
net interest margin was mainly derived from renewals of maturing brokered CDs at lower rates, improved deposit pricing, an
improved deposit mix, and funding cost reductions resulting from maturities of high-cost borrowings. The average cost and balance
of brokered CDs decreased by 74 basis points and $237.2 million, respectively, for the year ended December 31, 2013 compared to
2012. These reductions resulted in a decline of $28.6 million in interest expense. During 2013, the Corporation repaid $2.2 billion of
maturing brokered CDs with an all-in cost of 1.64%, and issued $2.0 billion of new brokered CDs with an all-in cost of 0.82%.
In addition, the Corporation reduced the average cost of funds by lowering the rates paid on certain of its savings, interest-bearing
checking accounts, and retail CDs. For the year ended December 31, 2013, the average rate paid on non-brokered deposits declined
by 17 basis points to 0.93% compared to 2012. This reduction in the average cost of non-brokered deposits resulted in a decrease of
approximately $10.1 million in interest expense. The average balance of non-brokered deposits for 2013 increased $216.3 million to
$5.8 billion compared to 2012. The Corporation also benefited from the maturities of some high-cost borrowings, including maturities
during 2013 of approximately $208.4 million of FHLB advances that carried an average cost of 3.92% and the full-year effect of the
repayments in the first half of 2012 of the $21 million medium-term notes (average rate of 5.65%) and the $100 million repurchase
agreement (rate of 4.38%), which, in the aggregate, contributed to a decrease of $9.2 million in interest expense.
Net interest income was also positively impacted by the increase in the average volume of investment securities. For the year
ended December 31, 2013, the average volume of investment securities and interest-bearing cash equivalents increased $305.2 million
to $2.7 billion compared to 2012. The higher volume contributed to an increase of $8.3 million in interest income compared to 2012.
The increase in volume resulted mainly from the purchase, during 2013, of approximately $682.9 million of 15-20 year U.S. agency
MBS with an average yield of 1.99%.
75
The aforementioned favorable items were partially offset by a $1.1 million decrease in interest income on loans, mainly due to a
$468.3 million decrease in the average volume of loans. The average volume of commercial and construction loans decreased by
$588.5 million, resulting in a decrease of approximately $20.5 million in interest income, driven by significant repayments of
commercial credit facilities, and the bulk sale of adversely classified loans completed in the first quarter of 2013. In addition, interest
income on the residential mortgage loan portfolio decreased by $4.1 million driven by higher inflows of loans to non-performing
status. These variances were partially offset by a $23.5 million increase in interest income on consumer loans, driven by an increase of
$18.7 million in the interest income contributed by the credit card loans portfolio, reflecting the full-year effect of this portfolio that
was acquired in late May 2012.
On an adjusted tax-equivalent basis, net interest income increased by $60.8 million, or 13%, for 2013 compared to 2012 mainly
due to reductions in the overall cost of funding, and a higher volume of investment securities, as discussed above. The increase for
2013 also includes an increase of $7.9 million in the tax-equivalent adjustment, compared to 2012.
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 trends in charge-offs and delinquencies, 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 Corporation’s control, including factors affecting the economies of Puerto Rico, the United
States, the U.S. Virgin Islands and the British Virgin Islands, may contribute to delinquencies and defaults, thus necessitating
additional reserves.
During 2014, the Corporation recorded a provision for loan and lease losses of $109.5 million, compared to $243.8 million in
2013 and $120.5 million in 2012. The provision for the year ended December 31, 2013 includes a charge of $132.0 million related to
the bulk sales of adversely classified and non-performing assets and the transfer of certain construction and commercial loans to held
for sale in the first half of 2013.
2014 compared to 2013
The adjusted provision for loan and lease losses, excluding the impact of the bulk sales of assets and transfer of certain
commercial loans to held for sale in 2013, decreased by $2.2 million in 2014, as compared to 2013, mainly related to higher recoveries
in the United States region, a decrease in the size of the construction and commercial portfolios, and an improved residential mortgage
loans portfolio composition following the sale of non-performing residential assets in 2013, partially offset by an increase in the
provision for consumer loans.
In terms of geography and categories, the Corporation recorded a provision for loan and lease losses of $137.6 million in Puerto
Rico for 2014 compared to $245.6 million for 2013. Excluding the impact of the bulk sales of assets and the transfer of loans to held
for sale in 2013, the adjusted provision for loan and lease losses in Puerto Rico increased by $12.6 million in 2014. The variance
reflects a $25.7 million increase in the provision for consumer loans mainly due to higher charge-offs and adjustments to account for
higher loss severity rates on the auto loan portfolio, partially offset by a decrease in the provision for credit card loans tied to the
decrease in size of this portfolio.
On May 30, 2014, FirstBank purchased from Doral all of its rights, title and interest in first and second mortgage loans having an
unpaid principal balance of approximately $241.7 million for an aggregate price of approximately $232.9 million. Doral had pledged
the mortgage loans to FirstBank as collateral for secured borrowings pursuant to a series of credit agreements between the parties
entered into in 2006. As consideration for the purchase of the mortgage loans, FirstBank credited approximately $232.9 million as full
satisfaction of the outstanding balance of the Doral secured borrowings plus interest owed to FirstBank. The estimated fair value of
the mortgage loans at acquisition was $226.0 million. This transaction resulted in a loss of $6.9 million derived from the difference
between the fair value of the mortgage loans acquired, $226.0 million, and the book value of the secured borrowings of $232.9
million. Approximately $5.5 million of the loss was part of the general allowance for loan losses established for commercial loans in
prior periods; thus, an additional charge to the provision of $1.4 million was recorded in 2014.
76
The aforementioned increases were partially offset by an $8.1 million reduction in the provision for residential mortgage loans
driven by an improved portfolio composition following the sale of non-performing residential assets in 2013 and a $6.5 million
decrease in the provision for the commercial and construction portfolio mainly related to certain recoveries of amounts previously
charged-off related to construction loans and updated appraisals on commercial mortgage loans.
In the United States, the Corporation continued to see improvements in terms of recoveries of amounts previously charged-off,
stability of collateral values and reductions in adversely classified assets. For the year ended December 31, 2014, the Corporation
recorded a negative provision of $27.7 million compared to a negative provision of $10.7 million for 2013. Higher negative provisions
in 2014 are primarily related to higher recoveries, releases related to updated appraisals, a lower level of adversely classified assets
related to the commercial and construction portfolios, and lower reserve requirements for residential mortgage loans evaluated for
impairment purposes. The following table sets forth a detail of the charge-offs and recoveries recorded in the Florida region for 2014
and 2013:
Year Ended
December 31,
2014
2013
(In thousands)
Charge-offs
Recoveries
Net recoveries (charge-offs)
$
$
(1,398) $
14,210
12,812 $
(9,857)
5,075
(4,782)
The Virgin Islands region recorded a negative provision for loan losses of $0.4 million in 2014 compared to a provision of $8.8
million in 2013. The decrease in the provision was mainly due to the portion of losses of the bulk sale of nonperforming residential
assets and the transfer of loans to held for sale in 2013 attributable to the Virgin Islands portfolio. Excluding the impact of the bulk
sales of non-performing residential assets and the transfer of loans to held for sale in 2013, the Corporation recorded a negative
provision of $2.6 million. The lower negative provision in 2014 primarily reflects the impact in 2013 of a $1.8 million recovery on the
sale of the underlying collateral of a construction project and an increase of $0.5 million in the provision for residential mortgage
loans.
Refer to “Credit Risk Management” below for an analysis of the allowance for loan and lease losses, nonperforming assets,
impaired loans and related information, including information about enhancements to the allowance for loan losses estimation process
implemented during the second quarter of 2014, and refer to “Financial Condition and Operating Analysis – Loan Portfolio” and under
“Risk Management — Credit Risk Management” below for additional information concerning the Corporation’s loan portfolio
exposure in the geographic areas where the Corporation does business.
2013 compared to 2012
The provision for loan and lease losses for 2013 of $243.8 million increased by $123.3 million compared to the provision
recorded for 2012. The increase in the provision was mainly related to the bulk sales of assets completed in 2013 that resulted in
charges to the provision of $126.8 million. Furthermore, the increase for 2013 also reflects a charge of $5.2 million to the provision
related to the transfer of certain non-performing commercial and construction loans to held for sale during the first quarter of 2013.
Excluding the impact of the bulk sales of assets and the transfer of loans to held for sale, the provision for loan and lease losses
for 2013 was $111.7 million, a decrease of $8.8 million compared to 2012. The decrease was mainly attributable to a reduction in
charges to specific reserves for commercial and construction loans commensurate with the decline in the level of impaired and
adversely classified loans, particularly higher charges in 2012 related to a construction loan in the Virgin Islands that was transferred
to held for sale in 2013. In addition, the decrease was attributable to lower provision requirements for the Puerto Rico residential
mortgage loan portfolio driven by lower charge-offs, an improved portfolio composition following the bulk sale of non-performing
residential assets, and the impact in 2012 of adjustments to loss factors that were reflective of market conditions, including
assumptions regarding loss severities that took into consideration qualitative and quantitative factors such as loan resolution and
liquidation strategies and average time for liquidation. The aforementioned decreases were partially offset by an increase in the
provision for consumer loans, mainly due to a higher general reserve for auto loans based on historical loss experience, and the overall
increase in the size of this portfolio, and an increase in the provision for the credit card loan portfolio that was acquired in late May
2012.
77
The bulk sale of approximately $217.7 million of adversely classified and non-performing assets, mainly commercial loans,
completed in the first quarter of 2013 resulted in charge-offs of approximately $98.5 million. In determining the historical loss rate
for the computation of the general reserve for commercial loans, the Corporation includes the portion of these charge-offs that was
related to the acceleration of previously reserved credit losses amounting to approximately $39.9 million. The Corporation considered
that the portion not deemed to be credit-related was not indicative of the ultimate losses that may have occurred had the assets been
resolved on an individual basis, over time and not in a steeply discounted bulk sale. A transaction, such as this one, entered into to
expedite the reduction of non-performing and adversely classified assets, can result in charge-offs that are not reflective of true credit-
related charge-off history since there is a component related to the discounted value realized on a bulk sale basis. Accordingly, the
Corporation concluded it is reasonable to exclude the component related to the discounted value from its historical charge-off analysis
used in estimating its allowance for loan losses.
In terms of geography and categories, in Puerto Rico, the Corporation recorded a provision of $245.6 million compared to $112.4
million in 2012. The increase primarily reflects a provision of $120.6 million recorded on the bulk sales of assets attributable to
Puerto Rico loans. Excluding the impact of the bulk sales of assets and the transfer of loans to held for sale, the provision for loan and
lease losses in Puerto Rico increased $12.6 million to $125 million compared to 2012. The higher provision was mainly related to an
increase of $21.3 million in the provision for consumer loans, reflecting higher general reserves on auto and boat loans based on
historical loss experience and the overall increase in the size of this portfolio and, to a lesser extent, an increase in the provision for the
non-PCI credit card loan portfolio acquired in late May 2012. This was partially offset by a decrease of $10.8 million in the provision
for residential mortgage loans driven by lower charge-offs, an improved portfolio composition following the bulk sale of non-
performing residential assets, and the impact in 2012 of adjustments to loss factors that were reflective of market conditions, including
assumptions regarding loss severities that took into consideration qualitative and quantitative factors such as loan resolution and
liquidation strategies and average time for liquidation.
With respect to the portfolio in the U.S., the Corporation recorded a negative provision of $10.7 million in 2013 compared to a
negative provision of $9.1 million in 2012. The variance mainly reflects a reduction in the amount of adversely classified commercial
loans and stability in collateral values. In addition, there was a recovery of $4.5 million related to a troubled debt restructured loan
paid-off in Florida.
The Virgin Islands region recorded a provision of $8.8 million in 2013 compared to $17.7 million in 2012. The provision in 2013
includes a charge of $5.2 million related to the bulk sale of non-performing residential assets attributable to Virgin Islands loans
completed in the second quarter of 2013, and a charge of $6.3 million related to a commercial construction loan relationship
transferred to held for sale in the first quarter of 2013. Excluding the impact of the bulk sale of non-performing residential assets and
the transfer of loans to held for sale attributable to Virgin Islands loans, the Corporation recorded a negative provision of $2.6 million,
or a $19.8 million reduction in the provision as compared to 2012. The decrease mainly reflects higher charges in 2012 related to the
loan relationship that was transferred to held for sale in 2013.
78
Non-Interest Income (Loss)
The following table presents the composition of non-interest income (loss):
Service charges on deposit accounts
Mortgage banking activities
Insurance income
Broker-dealer income
Other operating income
Non-interest income before net (loss) gain on investments,
equity in loss of unconsolidated entity, and write-off
of collateral pledged to Lehman
Proceeds from securities litigation settlement and other proceeds
Net gain on sale of investments
OTTI on equity securities
OTTI on debt securities
Net loss on investments
Impairment -collateral pledged to Lehman
Equity in loss of unconsolidated entity
Total
2014
2013
(In thousands)
2012
16,709 $
14,685
6,868
459
30,033
16,974 $
16,830
5,955
97
28,079
18,373
19,960
5,549
2,630
24,101
68,754
67,935
70,613
-
262
-
(388)
(126)
-
(7,280)
61,348 $
-
-
(42)
(117)
(159)
(66,574)
(16,691)
(15,489) $
36
-
-
(2,002)
(1,966)
-
(19,256)
49,391
$
$
Non-interest income primarily consists of service charges on deposit accounts; commissions derived from various banking,
securities and insurance activities; gains and losses on mortgage banking activities; interchange and other fees related to debit and
credit cards; equity in earnings (loss) of the unconsolidated entity; and net gains and losses on investments and impairments.
Service charges on deposit accounts include monthly fees, overdraft fees, cash management and other fees on deposit accounts.
Income from mortgage banking activities includes gains on sales and securitizations of loans, revenues earned for administering
residential mortgage loans originated by the Corporation and subsequently sold with servicing retained, and unrealized gains and
losses on forward contracts used to hedge the Corporation’s securitization pipeline. In addition, lower-of-cost-or-market valuation
adjustments to the Corporation’s residential mortgage loans held for sale portfolio and servicing rights portfolio, if any, are recorded
as part of mortgage banking activities.
Insurance income consists mainly of insurance commissions earned by the Corporation’s subsidiary, FirstBank Insurance Agency, Inc.
Broker-dealer income consists of commissions earned from the Corporation’s broker-dealer subsidiary activities, FirstBank Puerto
Rico Securities.
The other operating income category is composed of miscellaneous fees such as debit, credit card and point of sale (POS) interchange
fees.
The net gain (loss) on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation’s
investment policies as well as OTTI charges on the Corporation’s investment portfolio.
79
Equity in earnings (losses) of unconsolidated entity relates to FirstBank’s investment in CPG/GS, the entity that purchased $269
million of loans from FirstBank during the first quarter of 2011. The Bank holds a 35% subordinated ownership interest in CPG/GS.
The majority owner of CPG/GS is entitled to recover its initial investment and a priority return of 12% prior to any return paid to the
Bank. The adjustments of $7.3 million recorded in the first half of 2014 reduced to zero the book value of the Bank’s investment in
CPG/GS as of December 31, 2014. No negative investments needs to be reported as the Bank has no legal obligation or commitment
to provide further financial support to this entity; thus, no further losses will be recorded on this investment. Any potential increase in
the carrying value of the investment in CPG/GS, under the Hypothetical Liquidation Book Value method, would depend upon how
better off the Bank is at the end of the period than it was at the beginning of the period after the waterfall calculation performed to
determine the amount of gain allocated to the investors. Refer to Note 13 of the Corporation’s audited financial statements for the year
ended December 31, 2014 included in Item 8 of this Form 10-K for additional information about the Bank’s investment in CPG/GS.
2014 compared to 2013
Non-interest income for 2014 amounted to $61.3 million, compared to non-interest loss of $15.5 million for 2013. The non-
interest loss for 2013 includes the $66.6 million write-off of the collateral pledged to Lehman that was recorded in the second quarter
of 2013. Adjusted non-interest income, excluding the Lehman collateral write-off, increased $10.3 million primarily due to:
(cid:2) A $9.4 million decrease in equity in losses of unconsolidated entity, as the Corporation recorded equity in loss of $7.3 million
for 2014 compared to a loss of $16.7 million for 2013.
(cid:2) A $2.0 million positive variance in other operating income mainly due to the impact in 2013 of lower of cost or market
adjustments to commercial loans held for sale that resulted in a net charge of $1.5 million in 2013. These adjustments were
related to non-performing loans transferred at the beginning of year 2013, particularly a commercial mortgage loan in which
the Corporation received foreclosed real estate in partial satisfaction of a debt arrangement.
(cid:2) A $0.9 million increase in insurance commission income.
(cid:2) A $0.4 million increase related to underwriting fees on a bond issuance of the Puerto Rico government early in 2014.
(cid:2) A $0.3 million gain on the sale of a $4.6 million Puerto Rico government agency bond.
Partially offset by:
(cid:2) A $2.1 million decrease in revenues from mortgage banking activities driven by a $3.1 million decrease in net gains on sales
of loans as a result of a lower volume of sales and securitizations and a $0.8 million increase in expenses related to breaches
of representations and warranties on residential mortgage sales and compensatory fees imposed by government-sponsored
agencies. In addition, there was a $0.2 million decrease in servicing fees reflecting the expiration of the interim servicing on
loans included in the bulk sales of 2013. Loan sales and securitizations for 2014 of $337.2 million resulted in a realized gain
of $12.0 million, compared to sales and securitizations of $579.8 million and a related realized gain of $15.1 million recorded
in 2013. These variances were partially offset by the positive variance resulting from the impact in the first half of 2013 of a
$1.8 million lower of cost or market valuation charge on residential mortgage loans held for sale.
(cid:2) A $0.3 million decrease in service charges on deposit accounts primarily related to cash management and overdraft fees.
(cid:2) A $0.2 million increase in OTTI charges on debt and equity securities. The OTTI charge for both periods is mainly related to
credit losses associated with private label mortgage-backed securities held by the Corporation with an amortized cost of
$45.7 million as of December 31, 2014.
2013 compared to 2012
Non-interest loss for 2013 amounted to $15.5 million, including the $66.6 million write-off of the collateral pledged to Lehman,
compared to non-interest income of $49.4 million for 2012. Adjusted non-interest income, excluding the Lehman collateral write-off,
increased $1.7 million, primarily reflecting:
(cid:2) A $2.6 million decrease in losses on the Bank’s investment in the unconsolidated entity to which the Bank sold loans in 2011,
CPG/GS. Equity in loss of unconsolidated entity in 2013 amounted to $16.7 million compared to a loss of $19.3 million in
2012. The variance was mainly driven by results of operations, including changes in the fair value of loans receivable held by
80
CPG/GS where fair value is determined on a discounted cash flow basis. At valuation dates, key inputs and assumptions are
updated to reflect changes in the market, the performance of the underlying assets, and expectations of a market participant.
(cid:2) An aggregate increase of $4.6 million in merchant fees and ATM and POS interchange fees, recorded as part of “Other” in the
table above.
(cid:2) A $1.8 million decrease in OTTI charges on debt and equity securities.
(cid:2) A $0.8 million increase in loan fees, including unused fees on commitments, agent fees, and other non-deferrable fees on
commercial loans, included as part of “Other” in the table above.
(cid:2) A $0.4 million increase in insurance commission income.
Partially offset by:
(cid:2) A $3.1 million decrease in revenues from the mortgage banking business mainly due to lower profit margins on sales and
securitization of residential mortgage loans. Realized gains on sales and securitizations decreased by $3.3 million compared to
2012. In addition, a $1.8 million lower of cost or market valuation charge on residential mortgage loans held for sale was
recorded in 2013. These variances were partially offset by a $1.5 million increase in servicing fees, commensurate with a
higher servicing portfolio, and a favorable variance of approximately $0.9 million related to the decrease in the valuation
allowance of servicing assets.
(cid:2) A $2.5 million decrease in income from broker-dealer activities, mainly underwriting fees, due to fewer transactions closed in
2013.
(cid:2) Lower of cost or market adjustments to commercial loans held for sale that resulted in a net charge of $1.5 million in 2013.
This charge is included as part of “Other” in the table above.
Non-Interest Expenses
The following table presents the components of non-interest expenses:
Employees' compensation and benefits
Occupancy and equipment
Insurance and supervisory fees
Taxes, other than income taxes
Professional fees:
Collections, appraisals and other credit-related fees
Outsourcing technology services
Other professional fees
Credit and debit card processing expenses
Business promotion
Communications
Net loss on OREO and OREO operations
Loss contingency for attorneys' fees-Lehman litigation
Other
Total
2014
2013
2012
135,422 $
58,290
39,131
18,089
12,064
18,439
17,437
15,449
16,531
7,766
20,596
-
19,039
378,253 $
(In thousands)
130,815 $
60,746
48,470
18,109
12,659
14,144
22,641
12,909
15,977
7,401
42,512
2,500
26,145
415,028 $
125,329
60,927
52,596
13,473
8,126
4,945
15,266
6,005
14,093
7,085
25,116
-
21,922
354,883
$
$
81
2014 compared to 2013
Non-interest expenses decreased by $36.8 million to $378.3 million for the year ended December 31, 2014, compared to $415.0
million for 2013, primarily due to:
(cid:2) A $21.9 million decrease in the net loss on OREO and OREO operations mainly related to lower write-downs and losses on
the sale of OREO properties and, to a lesser extent, lower net operating expenses. Total write-downs and losses on sales
amounted to $14.9 million for 2014 compared to $33.9 million for 2013, a decrease of $19.0 million. This variance primarily
reflects a decrease of $16.4 million in market value adjustments and the impact in 2013 of a $1.9 million loss on the sale of
certain OREO properties as part of the bulk sale of non-performing residential assets. In addition, operating expenses
decreased by approximately $2.9 million primarily related to higher rental income and reductions in maintenance and repairs
consistent with the decrease in the inventory.
(cid:2) A $9.5 million decrease in the FDIC deposit insurance premium expense reflecting, among other things, improved earnings
trends, the decrease in brokered deposits, a strengthened capital position and a decrease in the amount of leveraged
commercial loans. This expense is included as part of “Insurance and supervisory fees” in the table above.
(cid:2) A $2.5 million decrease in occupancy and equipment mainly related to a decrease in the depreciation expense attributable to
assets fully depreciated, and a $0.5 million decrease in property taxes related to a tax debt settlement.
(cid:2) The $2.5 million loss contingency recorded in 2013 related to attorneys’ fees granted by the court to Barclays Capital in
connection with the denial of the Corporation’s Summary Judgment on its claim to recover assets pledged to Lehman, which
the Corporation has appealed.
(cid:2) A $1.7 million decrease in non-interest expenses associated with the secondary offering of the Corporation’s common stock
by certain of the existing stockholders that occurred in the third quarter of 2013, primarily included as part of “Other” in the
table above.
(cid:2) A $1.7 million decrease on costs associated with the conversion of the credit card processing platform in 2013, primarily
included as part of “Other” in 2013.
(cid:2) A $1.4 million decrease in professional fees. This variance reflects the impact of $6.9 million in professional fees related to
the bulk sales of assets completed during the first and second quarters of 2013 and the impact of $1.2 million in professional
fees associated with a terminated preferred stock exchange offer in the first quarter of 2013. These decreases were partially
offset by an increase of $4.3 million in professional services related to the outsourcing of technology services, mainly due to
services provided by FIS under a multi-year technology outsourcing agreement executed by the Corporation at the beginning
of the second quarter of 2013, $1.2 million of professional fees incurred in the two separate acquisitions of mortgage loans
from Doral in 2014, and a $0.9 million increase in legal, collection fees and other costs incurred in troubled loan resolution
efforts.
(cid:2) A $1.1 million decrease in the amortization of intangible assets, included as part of “Other” in the table above.
These decreases were partially offset by:
(cid:2) A $4.6 million increase in employees’ compensation and benefits due to salary merit increases in the first half of 2014, higher
stock-based compensation expenses and lower capitalized costs associated with loan originations.
(cid:2) A $2.5 million increase in credit and debit card processing fees attributable to the impact in the second quarter of 2013 of
$1.4 million of contractual discounts required by the previous interim servicing contract for the credit card portfolio
purchased in May 2012. The Corporation completed the conversion of the credit card platform in the third quarter of 2013.
82
2013 compared to 2012
Non-interest expense increased by $60.1 million to $415.0 million, principally attributable to credit-related expenses, including:
(cid:2) A $17.4 million increase in the net loss on OREO operations mainly related to higher write-downs to the value of OREO
properties, mainly commercial income-producing properties in both Puerto Rico and the Virgin Islands. Write-downs to
OREO properties in 2013 totaled $31.8 million compared to $15.1 million in 2012. In addition, a loss of $1.9 million was
recorded in 2013 in connection with the sale of certain OREO properties included as part of the bulk sale of residential non-
performing assets completed in the second quarter. An increase in the commercial OREO inventory also contributed to higher
expenses in 2013. Additions to the commercial OREO inventory in 2013 amounted to $68.5 million.
(cid:2) A $6.9 million increase in professional fees related to the bulk sales of assets in 2013, of which approximately $5.0 million
was included as part of “Other professional fees” and $1.9 million was included as part of “Collections, appraisals, and other
credit-related fees” in the table above.
(cid:2) A $2.6 million increase in professional fees related to attorneys’ loan collection fees, appraisals and other credit-related
expenses.
In addition, the increase was also attributable to:
(cid:2) A $6.9 million increase in credit and debit card processing expenses mainly related to the credit card loan portfolio acquired
in late May 2012.
(cid:2) A $1.7 million increase in costs related to the conversion of the credit card processing platform in 2013, most of them
included as part of “Other” in the table above.
(cid:2) A $9.2 million increase in fees for professional services related to the outsourcing of technology services, mainly due to
services provided by FIS under a multi-year technology outsourcing agreement executed by the Corporation at the beginning
of the second quarter of 2013. The Bank’s information technology (“IT”) operations were outsourced effective April 1, 2013.
Under the multi-year agreement the IT provider, FIS, assumed full operational responsibility for the Bank’s IT operations and
staff. The increases in professional fees attributable to this agreement were partially offset by savings in employees’
compensation and benefits expense related to employees transferred to the IT service provider and savings in software
maintenance costs.
(cid:2) A $1.2 million increase in professional fees related to expenses associated with a terminated preferred stock exchange offer,
included as part of “Other professional fees” in the table above.
(cid:2) A $4.6 million increase in taxes, other than income taxes, driven by charges of $5.9 million related to the Puerto Rico
national gross receipts tax implemented in 2013.
(cid:2) A $5.5 million increase in employees’ compensation and benefits due to the filling of vacant positions, including several
managerial and supervisory positions, certain non-periodic expenses such as lump sum and severance payments, salary merit
increases and higher stock-based compensation expenses. These increases were partially offset by savings of approximately
$5.1 million related to the transfer of employees to FIS, as described above.
(cid:2) A $2.5 million loss contingency related to attorneys’ fees granted by the court to Barclays Capital in connection with the
denial of the Corporation’s Summary Judgment on its claim to recover assets pledged to Lehman, which the Corporation has
appealed.
(cid:2) A $2.8 million increase in the amortization of intangible assets mainly related to the purchased credit card relationship
intangible asset recognized in connection with the credit card loan portfolio acquired in late May 2012, included as part of
“Other” in the table above.
(cid:2) A $1.7 million increase associated with the secondary offering of the Corporation’s common stock by certain of the existing
stockholders, which are primarily reflected in “Other” in the table above.
83
These increases were partially offset by a $3.6 million decrease in the deposit insurance premium expense. This charge is included as
part of “Insurance and supervisory fees” in the table above.
Income Taxes
Income tax expense includes Puerto Rico and USVI income taxes as well as applicable United States (“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. and USVI income tax purposes and is generally subject to U.S. and USVI income
tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business
in those regions. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions
and limitations.
Under the 2011 PR Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file a
consolidated tax return and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary.
Accordingly, in order to obtain a tax benefit from an NOL, a particular subsidiary must be able to demonstrate sufficient taxable
income within the applicable NOL carryforward period. The 2011 PR Code provides a dividend received deduction of 100% on
dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable
domestic corporations.
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 an
International Banking Entity (“IBE”) unit of the Bank and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose
interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. The IBE 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 on the specific activities indentified in the IBE Act. An IBE that operates as a unit of
a bank pays income taxes at normal rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income.
For additional information relating to income taxes, see Note 24 to the Corporation’s audited financial statements for the year
ended December 31, 2014 included in Item 8 of this Form 10-K, including the reconciliation of the statutory to the effective income
tax rate for 2014, 2013 and 2012.
2014 compared to 2013
For 2014, the Corporation recorded an income tax benefit of $300.6 million compared to an income tax expense of $5.2 million for
2013. The income tax benefit for 2014 primarily reflects the $302.9 million reduction to the valuation allowance related to FirstBank’s
deferred tax assets. In addition, the variance includes a net change of $3.7 million related to adjustments to the reserve for uncertain
tax positions, partially offset by the impact in 2013 of a net benefit of approximately $1.3 million related to the increase in the
deferred tax asset of profitable subsidiaries due to changes in statutory tax rates.
As a result of the partial reversal of FirstBank’s valuation allowance related to its deferred tax assets, the Corporation’s deferred tax
assets amounted to $313.0 million, as of December 31, 2014, net of the remaining valuation allowance of $204.6 million.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their
deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be
realized.
Management assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of
whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation of
positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available
to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income
exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In
estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account
statutory, judicial, and regulatory guidance.
84
In 2010, the Corporation established a valuation allowance for substantially all of the deferred tax assets of its banking subsidiary,
FirstBank, primarily due to the realization of significant losses driven by charges to the provision for loan losses, a three-year
cumulative loss position as of the end of year 2010, and uncertainty regarding the amount of future taxable income that the Bank could
forecast. As of December 31, 2014, based on the assessment of all positive and negative evidence, management concluded that it is
more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to realize
a significant portion of its deferred tax assets and, therefore, reversed $302.9 million of the valuation allowance. This conclusion is
based upon consideration of a number of factors including FirstBank’s (i) completion of a sixth consecutive quarter of profitability
and (ii) forecast of future profitability, under several potential scenarios, where the Corporation has assigned more weight to its
continued profitability than to potential future growth which it is planning to achieve. As mentioned before, the Corporation
maintained a valuation allowance of $204.6 million as of December 31, 2014 against the deferred tax asset. As more objective
information on the Bank’s planned growth and/or increased profitability becomes available, additional reversals of valuation
allowance may be necessary. The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation
allowance will be evaluated on a quarterly basis to determine if there are any significant events that would affect FirtsBank’s ability to
utilize these deferred tax assets. In addition, while GAAP equity significantly increased as a result of the partial release of the
aforementioned valuation allowance, the benefit on regulatory capital was limited to the amount of deferred tax assets that the
Corporation expects to realize within one year. Refer to Note 24 – Income Taxes in Item 8 of this form 10-K for detailed discussion on
the Corporation’s deferred tax assets and the respective valuation allowance analysis.
The authoritative accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns.
Under this guidance, income tax benefits are recognized and measured based upon a two-step analysis: 1) a tax position must be more
likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the
largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit
recognized under this analysis and the tax benefit claimed on a tax return is referred to as an UTB.
As of December 31, 2014, the Corporation did not have UTBs recorded on its books. The years 2007 through 2009 were examined
by the IRS and disputed issues, primarily related to the disallowance of certain expenses, were taken to administrative appeals during
2011. As a result of a final settlement with the IRS Appeals office during 2014, the Corporation released a portion of its reserve for
uncertain tax positions resulting in a tax benefit of $1.8 million and paid $2.5 million to settle the tax liability resulting from the audit.
Such settlement did not have an impact on the effective tax rate.
The Corporation’s liability for income taxes includes the estimate of interest not yet paid related to the settlement reached with the
IRS to close the tax years 2007 through 2009. The Corporation classifies all interest and penalties, if any, related to tax uncertainties
as income tax expense. As of December 31, 2014, the Corporation’s accrued interest that relates to the IRS examination amounted to
$1.4 million and there was no need to accrue for the payment of penalties. Audit periods remain open for review until the statute of
limitations has passed. The statute of limitations under the 2011 PR Code is 4 years; the statutes of limitations for Virgin Islands and
U.S. income tax purposes are each three years after a tax return is due or filed, whichever is later. The completion of an audit by the
taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the
Corporation’s liability for income taxes. Any such adjustment could be material to results of operations for any given quarterly or
annual period based, in part, upon the results of operations for the given period. For Virgin Islands and U.S. income tax purposes, all
tax years subsequent to 2010 remain open to examination. The 2012 tax year is currently under examination by the IRS. For Puerto
Rico purposes, all tax years subsequent to 2010 remain open to examination as the Puerto Rico Department of Treasury concluded its
examination of the 2010 tax year.
In 2013, the Puerto Rico Government approved Act No. 40, (“Act 40”), known as the “Tax Burden Adjustment and Redistribution
Act,” which amended the 2011 PR Code. One of the main provisions of Act 40 that impacted financial institutions was the national
gross receipts tax. The national gross receipts tax for financial institutions is computed on the basis of 1% of gross income, net of
allowable exclusions. Subject to certain limitations, a financial institution is able to claim a credit of 0.5% of its gross income against
its regular income tax or the AMT. The Corporation’s national gross receipts tax expense for the year ended December 31, 2014
amounted to $5.7 million compared to $5.9 million recorded for 2013. This expense is included as part of “Taxes, other than income
taxes” in the consolidated statement of income (loss). In 2014, the Corporation recorded a $2.9 million benefit related to this credit as
a reduction to the provision for income taxes compared to a benefit of $3.0 million recorded in 2013. On December 22, 2014, the
Governor of Puerto Rico signed Act No. 238, which amended the 2011 PR Code. Act No. 238 clarifies that the national gross receipts
tax will not be applicable to taxable years starting after December 31, 2014.
85
2013 compared to 2012
For 2013, the Corporation recorded an income tax expense of $5.2 million compared to an income tax expense of $5.9 million for
2012. The income tax expense for 2013 is mainly comprised of income tax expense of $3.2 million due to the principal and accrued
interest related to UTBs and the income tax expense of profitable subsidiaries, partially offset by the benefit of $1.3 million due to the
change in the statutory tax rate from 30% to 39% in 2013 and by the credit available for the gross national receipt tax of $3.0 million.
As of December 31, 2013, the deferred tax asset, net of a valuation allowance of $522.7 million, amounted to $7.6 million compared
to $4.9 million as of December 31, 2012. The main driver of the increased deferred tax asset was the credit available for the national
gross receipt tax together with the increase in the statutory applicable tax rate from 30% to 39% per Act 40 enacted during the second
quarter of 2013.
Recent Developments
On February 11, 2015, the Governor of Puerto Rico introduced a tax reform through House Bill 2329 (the “Bill”) to be known
upon enactment as the Puerto Rico Internal Revenue Code of 2015 (“2015 Code”). The proposed tax regime intends to simplify the
Puerto Rico taxation for individuals and corporations, as well as provide a relief in the income tax arena by reducing both corporate
and individual tax rates. To compensate for the reduction in income taxes, the Bill replaces the current Sales and Use Tax (“SUT”)
with a Value Added Tax (“VAT”), increasing the tax rate on consumption from 7% to 16%. Moreover, the VAT would have a broader
basis, as most of the products and services are expected to be taxable.
The Bill is proposing few changes to the taxation of corporations, including, among others, the following:
(cid:2) A flat corporate tax rate of 30%, instead of the gradual income tax rate of 39%.
(cid:2) Surtax and recapture are expected to be eliminated.
(cid:2) For taxable years commenced after December 31, 2014, taxpayers would have to depreciate assets using only the straight line
method. Moreover, those assets placed in service in prior periods would have to be depreciated using the straight line method
for their remaining useful lives based on their tax basis as of such year.
(cid:2) For AMT, the tax would be the higher of:
o 25% of the alternative minimum taxable income (“AMTI”) or
o 1.5% of purchases or transfers of inventory from related persons or Home Office (certain items would continue to be
subject to a reduced rate). No waiver would be available to further reduce the rate on this component.
(cid:2) All expenses for services rendered or allocated from related persons or Home Office not subject to income tax in Puerto Rico
will not be deductible in the determination of the AMTI.
(cid:2) Net capital gains would no longer be subject to a reduced rate since the Bill is proposing a 30% rate.
(cid:2) Dividend distributions to individuals, estates and trusts would be subject to a 30% tax.
(cid:2) Dividend distributions to foreign entities would remain subject to a 10% withholding tax at source.
While legislation for the new tax code has been introduced, it is too early to determine what changes will be made during the
legislative process. Legislative changes, particularly changes in tax laws, could have a material impact in our results of operations.
86
OPERATING SEGMENTS
Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the
Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s lines of
business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of
Puerto Rico. As of December 31, 2014, the Corporation had six reportable segments: Commercial and Corporate Banking; Consumer
(Retail) Banking; Mortgage Banking; Treasury and Investments; United States operations; and Virgin Islands operations.
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 Corporation’s 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 additional
information regarding First BanCorp’s reportable segments, please refer to Note 31, “Segment Information,” to the Corporation’s
audited financial statements for the year ended December 31, 2014 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 Corporation’s audited financial statements for the year ended December 31, 2014 included in
Item 8 of this Form 10-K. The Corporation evaluates the performance of the segments based on net interest income, 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. In 2014, 2013, and 2012, other
operating expenses not allocated to a particular segment amounted to $94.3 million, $94.1 million, and $87.3 million, respectively.
Expenses pertaining to corporate administrative functions that support the operating segment but are not specifically attributable to or
managed by any segment are not included in the reported financial results of the operating segments. The unallocated corporate
expenses include certain general and administrative expenses and related depreciation and amortization expenses.
The Treasury and Investment segment lends funds to the Consumer (Retail) Banking, Mortgage Banking and Commercial and
Corporate Banking segments to finance their lending activities and borrows from those segments and from the United States
Operations Segment. The Consumer (Retail) Banking and the United States Operations segment also lend funds to other segments.
The interest rates charged or credited by Treasury and Investment, the Consumer (Retail) Banking and the United States Operations
segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s
actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment.
Commercial and Corporate Banking
The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services across a broad spectrum
of industries ranging from small businesses to large corporate clients, including the public sector. FirstBank has developed expertise
in a wide variety of industries. The Commercial and Corporate Banking segment offers commercial loans, including commercial real
estate and construction loans, and floor plan financings, as well as other products, such as cash management and business management
services. This segment also includes the Corporation’s broker-dealer activities, which are primarily concentrated in municipal bond
underwriting and financial advisory services provided to government entities in Puerto Rico. A substantial portion of the commercial
and corporate banking portfolio is secured by the underlying value of the real estate collateral and the personal guarantees of the
borrowers. Since 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 a credit risk management infrastructure
designed to mitigate potential losses associated with commercial lending, including underwriting and loan review functions, sales of
loan participations and continuous monitoring of concentrations within portfolios.
The highlights of the Commercial and Corporate Banking segment’s financial results for the years ended December 31, 2014, 2013
and 2012 include the following:
(cid:2) Segment income before taxes for the year ended December 31, 2014 was $69.1 million compared to a loss of $5.0
million for 2013 and income of $81.0 million for 2012.
87
(cid:2) Net interest income for the year ended December 31, 2014 was $150.9 million compared to $157.7 million and $164.2
million for the years ended December 31, 2013 and 2012, respectively. The decrease in net interest income for 2014,
compared to 2013, was mainly related to a decrease of $446.6 million in the average balance of commercial and
construction loans in Puerto Rico. In addition, there was a $2.8 million reduction in interest income attributable to
commercial secured borrowings owed by Doral that were satisfied in 2014 with the acquisition of mortgage loans that
served as collateral for these borrowings. The decrease in net interest income for 2013, compared to 2012, was mainly
related to a decrease of $483.0 million in the average balance of commercial loans in Puerto Rico led by significant
repayments, the bulk sale of adversely classified assets completed in the first quarter of 2013 and foreclosures. Higher
inflows of loans to non-performing status in 2013, compared to 2012, also contributed to the decrease in net interest
income.
(cid:2) The provision for loan losses for 2014 was $40.1 million compared to $102.0 million and $42.9 million for 2013 and
2012, respectively. The provision for 2013 includes a charge of approximately $56.9 million related to the bulk sale of
adversely classified assets and the transfer of certain loans to held for sale. Excluding the effect of the bulk sale and the
transfer of loans to held for sale, the provision for this business segment decreased $5.0 million in 2014, mainly related
to reserve releases in connection with updated appraisals for commercial mortgage loans and certain recoveries of
amounts previously charged-off on construction loans. The increase in 2013, compared to 2012, reflects the charge of
approximately $56.9 million related to the bulk sale of adversely classified assets and the transfer of certain loans to held
for sale completed in the first quarter of 2013. Excluding the effect of the bulk sale and the transfer of loans to held for
sale, the provision for this business segment increased $2.2 million to $45.1 million mainly related to an increase in the
general reserve for construction loans. Refer to “Provision for Loan and Lease Losses” above and “Risk Management –
Allowance for Loan and Lease Losses and Non-performing Assets” below for additional information with respect to the
credit quality of the Corporation’s commercial and construction loan portfolio.
(cid:2) Total non-interest income for the year ended December 31, 2014 amounted to $5.2 million compared to $3.9 million and
$10.1 million for the years ended December 31, 2013 and 2012, respectively. The increase in 2014, compared to 2013,
was mainly related to the impact in 2013 of lower of cost or market adjustments to commercial loans held for sale that
resulted in a net charge of $2.0 million in 2013 and due to the $0.4 million increase related to underwriting fees on a
bond issuance of the Puerto Rico government early in 2014. The decrease in 2013, compared to 2012, was mainly
related to the $2.0 million lower of cost or market charge to commercial loans held for sale. These adjustments were
related to non-performing loans transferred to held for sale at the beginning of 2013, particularly a commercial mortgage
loan in which the Corporation received foreclosed real estate in partial satisfaction of a debt arrangement. In addition,
the income from broker-dealer activities, mainly underwriting fees, decreased by $2.5 million due to fewer transactions
closed in 2013, partially offset by higher non-deferrable loan fees, such as agent and unused fees on commitments.
(cid:2) Direct non-interest expenses for 2014 were $47.0 million, compared to $64.6 million in 2013, and $50.4 million in 2012.
The main variances for 2014 were related to an $8.2 million decrease in losses on OREO operations, the impact in 2013
of $3.9 million of professional service fees related to the bulk sale of adversely classified assets, and a $5.5 million
decrease in the portion of the FDIC deposit insurance premium allocated to this segment. The main variances for 2013
were related to a $11.0 million increase in write-downs to the value of commercial OREO properties in Puerto Rico, and
a $3.9 million increase in professional fees related to the bulk sale of adversely classified assets. In addition, there were
increases in employees’ compensation and benefits due to the filling of vacant positions, including several managerial
and supervisory positions, and non-periodic payments, including lump sum and severance payments, an increase in
expenses related to the Puerto Rico national gross receipts tax allocated to this business segment, and lower reserve
releases for unfunded loan commitments.
Consumer (Retail) Banking
The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted
mainly through FirstBank’s branch network and loan centers in Puerto Rico. Loans to consumers include auto, boat and personal
loans, credit cards and lines of credit. Deposit products include interest bearing and non-interest bearing checking and savings
accounts, Individual Retirement Accounts and retail CDs. Retail deposits gathered through each branch of FirstBank’s retail network
serve as one of the funding sources for the lending and investment activities.
88
Consumer lending has been mainly driven by auto loan originations. The Corporation follows a strategy of seeking to provide
outstanding service to selected auto dealers that provide the channel for the bulk of the Corporation’s auto loan originations.
Personal loans, credit cards, and, to a lesser extent, marine financing also contribute to interest income generated on consumer
lending. In 2012, the Corporation reentered the credit card business with the acquisition of an approximate $406 million portfolio of
FirstBank-branded credit cards from FIA (having a carrying value of $306.6 million as of December 31, 2014). Management plans to
continue to be active in the consumer loans market, applying the Corporation’s strict underwriting standards. Other activities included
in this segment are finance leases and insurance activities in Puerto Rico.
The highlights of the Consumer (Retail) Banking segment’s financial results for the years ended December 31, 2014, 2013 and
2012 include the following:
(cid:2) Segment income before taxes for the year ended December 31, 2014 was $42.2 million compared to $67.0 million and
$74.6 million for the years ended December 31, 2013 and 2012, respectively.
(cid:2) Net interest income for the year ended December 31, 2014 was $208.4 million compared to $204.8 million and $176.6
million for the years ended December 31, 2013 and 2012, respectively. The increase in 2014, compared to 2013, was
driven by an increase in revenues from the deployment of a higher core deposit base and the increase in medium-term
market interest rates in 2014, together with lower rates paid on core deposits. The increase in 2013, compared to 2012,
was driven by the full-year impact of the interest income contributed by the credit card portfolio acquired in late May
2012 and by lower rates paid on core deposits. The consumer loan portfolio is mainly composed of fixed-rate loans
financed with shorter-term borrowings, thus positively affected by lower deposit costs.
(cid:2) The provision for loan and lease losses for 2014 increased by $25.7 million to $79.9 million compared to 2013 and
increased by $21.3 million to $54.2 million when comparing 2013 with 2012. The increase in the provision for 2014,
compared to 2013, was mainly due to higher loss severity rates on the auto loan portfolio, partially offset by a decrease
in the provision for credit card loans tied to the decrease in the size of this portfolio. The increase in the provision for
2013, compared to 2012, reflects higher general reserves on auto and marine financings based on historical loss
experience and, to a lesser extent, an increase in the provision for the non-PCI credit card loan portfolio acquired in late
May 2012.
(cid:2) Non-interest income for the year ended December 31, 2014 was $40.0 million compared to $39.0 million and $33.4
million for the years ended December 31, 2013 and 2012, respectively. The increase in 2014 was mainly related to the
$0.9 million increase in insurance commission income. The increase in 2013, compared to 2012, was mainly related to
an aggregate increase of $3.9 million in merchant fees and ATM and POS interchange fees, and an increase of $0.4
million in income from the insurance agency activities.
(cid:2) Direct non-interest expenses for the year ended December 31, 2014 were $126.3 million compared to $122.6 million and
$102.4 million for the years ended December 31, 2013 and 2012, respectively. The increase for 2014, compared to 2013,
was primarily due to increases in credit and debit card processing expenses, employees’ compensation, professional
service fees, marketing, and expenses related to the credit card awards program, partially offset by the decrease in the
FDIC insurance assessment portion allocated to this segment and the decrease in the amortization of intangible assets.
The increase for 2013, compared to 2012, was primarily due to higher credit card processing expenses, including costs
related to the conversion of the credit card processing platform, and a higher amount of amortization of the purchased
credit card relationship intangible. In addition, there were increases in 2013 in fees for professional services mainly
related to consulting fees, as well as increases in employees’ compensation, marketing, and the charge related to the
Puerto Rico national gross receipts tax corresponding to this business segment.
Mortgage Banking
The Mortgage Banking segment conducts its operations mainly through FirstBank. The operation consists of the origination, sale
and servicing of a variety of residential mortgage loan products. Originations are sourced through different channels such as FirstBank
branches and mortgage bankers, and in association with new project developers. Effective as of 11:59 p.m. on December 31, 2014,
the operations conducted by First Mortgage as a separate subsidiary were merged with and into FirstBank. The mortgage banking
segment focuses on originating residential real estate loans, some of which conform to FHA, VA and RD standards. Loans originated
that meet FHA standards qualify for the FHA’s insurance program whereas loans that meet VA and RD standards are guaranteed by
their respective federal agencies.
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Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate
loans can be conforming or 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 those standards are referred to as non-conforming residential real
estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage
products to serve their financial needs through a faster and simpler process 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. The Corporation has commitment authority to issue GNMA mortgage-backed securities. Under this program, the
Corporation has been securitizing FHA/VA mortgage loans into the secondary market since 2009.
The highlights of the Mortgage Banking segment’s financial results for the years ended December 31, 2014, 2013 and 2012
include the following:
(cid:2) Segment income before taxes for the year ended December 31, 2014 was $35.1 million compared to a loss of $51.1
million for 2013 and a loss of $0.2 million for 2012.
(cid:2) Net interest income for the year ended December 31, 2014 was $78.6 million compared to $71.5 million and $61.3
million for the years ended December 31, 2013 and 2012, respectively. The increase in net interest income for 2014,
compared to 2013, was mainly related to the two separate acquisitions of mortgage loans from Doral completed in 2014.
The increase in net interest income for 2013, compared to 2012, was mainly related to the decrease in the average cost of
funding. The Mortgage Banking 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 lower interest rate
scenario. In addition, the lower cost of funding attributable to this business segment relates to the decrease in the
average volume of loans after the sale of non-performing loans in the second quarter of 2013.
(cid:2) The provision for loan and lease losses for 2014 was $17.6 million compared to $89.4 million and $36.6 million for the
years ended December 31, 2013 and 2012, respectively. The provision for 2013 includes a charge of approximately
$63.7 million related to the bulk sale of residential non-performing assets completed in 2013. Excluding the effect of the
bulk sale, the provision for this business segment decreased for 2014 by $8.1 million mainly due to the improved credit
quality following the bulk sale of non-performing residential assets and a decrease in net charge-offs. The increase in
2013, compared to 2012, reflects the $63.7 million charge related to the bulk sale of residential non-performing assets.
Excluding this effect, the provision for this business segment decreased $10.8 million in 2013 to $25.7 million. The
variance in the provision reflects lower charge-offs, improved credit quality following the bulk sale of non-performing
residential assets, and the impact in 2012 of adjustments to loss factors that were reflective of market conditions,
including assumptions regarding loss severities that took into consideration qualitative and quantitative factors such as
loan resolution and liquidation strategies and average time for liquidation.
(cid:2) Non-interest income for the year ended December 31, 2014 was $13.5 million compared to $15.8 million and $18.1
million for the years ended December 31, 2013 and 2012, respectively. The decrease in 2014, compared to 2013, was
mainly due to a lower volume of sales and securitization and charges related to breaches of representations and
warranties and compensatory fees imposed by government-sponsored entities. The decrease in 2013, compared to 2012,
was mainly due to lower profit margins on sales and securitizations of residential mortgage loans, partially offset by an
increase in servicing fees and a decrease in the valuation allowance of servicing assets.
(cid:2) Direct non-interest expenses in 2014 were $39.4 million compared to $48.9 million and $43.1 million for 2013 and 2012,
respectively. The decrease in 2014, compared to 2013, reflects, among other things, a $4.7 million decrease in losses on
OREO operations, the impact in 2013 of $5.0 million of expenses related to the bulk sale of non-performing residential
assets, and a $1.6 million decrease in the portion of the FDIC deposit insurance premium allocated to this segment. The
increase in 2013, compared to 2012, reflects expenses of approximately $5.0 million related to the bulk sale completed in
the second quarter of 2013 as well as higher attorneys’ loan collection fees and the charge related to the Puerto Rico
national gross receipts tax corresponding to this business segment.
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Treasury and Investments
The Treasury and Investments segment is responsible for the Corporation’s treasury and investment management functions. The
treasury function, which includes funding and liquidity management, sells funds to the Commercial and Corporate Banking segment,
the Mortgage Banking segment, and the Consumer (Retail) Banking segment to finance their respective lending activities and
purchases funds gathered by those segments and from the United States Operations segment. Funds not gathered by the different
business units are obtained by the Treasury function through wholesale channels, such as brokered deposits, advances from the FHLB,
and repurchase agreements with investment securities, among others.
The investment function is intended to implement a leverage strategy for the purposes of liquidity management, interest rate
management and earnings enhancement.
The interest rates charged or credited by Treasury and Investments are based on market rates.
The highlights of the Treasury and Investments segment’s financial results for the years ended December 31, 2014, 2013, and 2012
include the following:
(cid:2) Segment income before taxes for the year ended December 31, 2014 amounted to $1.1 million compared to a loss of
$58.5 million for 2013 and a loss of $12.8 million for 2012.
(cid:2) Net interest income for the year ended December 31, 2014 was $6.2 million compared to net interest income of $18.8
million and net interest loss of $4.9 million for the years ended December 31, 2013 and 2012, respectively. The decrease
in net interest income in 2014, compared to 2013, was mainly due to lower amounts loaned to other business segments.
The increase in net interest income in 2013, compared to 2012, was mainly related to both a decrease in the average cost
of funding, driven by the renewals of maturing brokered CDs at lower rates and the maturity of certain high-cost
borrowings, and an increase in the volume of MBS that was driven by purchases of approximately $682.9 million of 15-
20 year U.S. agency MBS in 2013.
(cid:2) Non-interest income for the year ended December 31, 2014 amounted to $0.3 million compared to losses of $66.6
million and $1.6 million for the years ended December 31, 2013 and 2012, respectively. The positive variance in 2014,
when compared to 2013, was mainly due to the impact in 2013 of the $66.6 million write-off of the collateral pledged to
Lehman and the $0.3 million gain on the sale of a $4.6 million Puerto Rico government agency bond. The higher loss in
2013, compared to 2012, was mainly due to the $66.6 million write-off of the collateral pledged to Lehman, partially
offset by lower OTTI charges to available-for-sale debt and equity securities.
(cid:2) Direct non-interest expenses for 2014 were $5.4 million compared to $10.6 million and $6.3 million for 2013 and 2012,
respectively. The variances in 2014 and 2013 were mainly attributable to the following charges in 2013: (i) the loss
contingency of $2.5 million related to attorneys’ fees granted by the court to the other party in connection with the denial
of the Corporation’s motion for Summary judgment on its claim to recover assets pledged to Lehman, which the
Corporation has appealed, (ii) expenses of $1.7 million related to the secondary offering of the Corporation’s common
stock by certain of the existing stockholders, and (iii) expenses of $1.2 million related to the terminated preferred stock
exchange offer.
United States Operations
The United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland.
FirstBank provides a wide range of banking services to individual and corporate customers primarily in southern Florida through its
ten branches. Our success in attracting core deposits in Florida has enabled us to become less dependent on brokered CDs. The United
States Operations segment offers an array of both retail and commercial banking products and services. Consumer banking products
include checking, savings and money market accounts, retail CDs, internet banking services, residential mortgages, home equity loans
and lines of credit, and automobile loans. Deposits gathered through FirstBank’s branches in the United States also serve as one of the
funding sources for the Corporation’s overall lending and investment activities.
The commercial banking services include checking, savings and money market accounts, CDs, internet banking services, cash
management services, remote data capture and automated clearing house, or ACH, transactions. Loan products include the traditional
C&I and commercial real estate products, such as lines of credit, term loans and construction loans.
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The highlights of the United States operations segment’s financial results for the years ended December 31, 2014, 2013, and 2012
include the following:
(cid:2) Segment income before taxes for the year ended December 31, 2014 was $40.8 million compared to $8.0 million and
$3.3 million for the years ended December 31, 2013 and 2012, respectively.
(cid:2) Net interest income for the year ended December 31, 2014 was $37.3 million compared to $24.5 million and $20.1
million for the years ended December 31, 2013 and 2012, respectively. The increase was primarily related to a $152.9
million increase in the average volume of loans, primarily commercial and residential mortgage loans, the reduction in
the average rate paid on deposits, and higher interest charges made to operating segments in Puerto Rico. The increase
in 2013, as compared to 2012, was mainly related to reductions in the average cost of funding and maturities of FHLB
advances.
(cid:2) During 2014, a negative provision of $27.7 million was recorded for this segment, compared to negative provisions of
$10.7 million and $9.1 million for 2013 and 2012, respectively. The higher negative provision in 2014, compared to
2013, was mainly related to a $9.1 million increase in recoveries of amounts previously charged-off, and releases related
to updated appraisals, a lower level of adversely classified assets related to the commercial and construction portfolios,
and lower reserve requirements for residential mortgage loans evaluated for impairment purposes. The higher negative
provision in 2013, compared to 2012, was mainly related to a reduction in the amount of adversely classified commercial
loans and stability in collateral values. In addition, there was a recovery of $4.5 million related to a troubled debt
restructured loan paid-off in 2013 in Florida. Refer to “Provision for Loan and Lease Losses” above and to “Risk
Management – Allowance for Loan and Lease Losses and Non-performing Assets” below for additional information
with respect to the credit quality of the loan portfolio in the United States.
(cid:2) Total non-interest income for the year ended December 31, 2014 amounted to $2.5 million compared to $1.3 million and
$1.8 million for the years ended December 31, 2013 and 2012, respectively. The increase in 2014, compared to 2013,
was mainly related to service charges on deposits, higher gains on sales of mortgage loans, and the impact in 2013 of a
$0.5 million loss related to valuation adjustments on fixed assets no longer used for operations after the consolidation of
certain branches in Florida. The decrease in 2013, compared to 2012, was mainly due to the aforementioned $0.5 million
loss on fixed assets.
(cid:2) Direct non-interest expenses in 2014 were $26.6 million compared to $28.6 million and $27.7 million for 2013 and 2012,
respectively. The decrease in 2014, compared to 2013, was mainly related to lower losses on OREO operations and
decreases in professional service fees and the amortization of the core deposit intangible related to this segment. The
increase in 2013, compared to 2012, reflects higher employees’ compensation, professional service fees and occupancy
expenses.
Virgin Islands Operations
The Virgin Islands Operations segment consists of all banking activities conducted by FirstBank in the U.S. and British Virgin
Islands, including retail and commercial banking services, with a total of twelve branches currently serving the islands in the USVI of
St. Thomas, St. Croix and St. John, and the islands in the BVI of Tortola and Virgin Gorda. The Virgin Islands Operations segment is
driven by its consumer, commercial lending and deposit-taking activities.
Loans to consumers include auto, boat, lines of credit, and personal and residential mortgage loans. Deposit products include
interest bearing and non-interest bearing checking and savings accounts, IRAs, and retail CDs. Retail deposits gathered through each
branch serve as the funding sources for the lending activities.
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The highlights of the Virgin Islands operations’ financial results for the years ended December 31, 2014, 2013 and 2012 include
the following:
(cid:2) Segment income before taxes for the year ended December 31, 2014 was $5.1 million compared to losses of $8.9 million
and $3.6 million for the years ended December 31, 2013 and 2012, respectively.
(cid:2) Net interest income for the year ended December 31, 2014 was $36.8 million compared to $37.7 million and $44.4
million for the years ended December 31, 2013 and 2012, respectively. The decrease in net interest income in 2014,
compared to 2013, was mainly related to a $14.7 million decrease in the average volume of loans, primarily residential
mortgage loans. The decrease in net interest income in 2013, compared to 2012, was mainly related to a $155.3 million
decrease in the average volume of loans.
(cid:2) During 2014, a negative provision of $0.4 million was recorded for this segment, compared to provisions of $8.8 million
and $17.1 million for 2013 and 2012, respectively. The provision in 2013 includes a charge of $5.2 million related to the
bulk sale of non-performing residential assets attributable to Virgin Islands loans completed in the second quarter of
2013 and a charge of $6.3 million related to a commercial construction loan relationship transferred to held for sale in
the first quarter of 2013. Excluding the impact of the bulk sale of non-performing residential assets and the transfer of
loans to held for sale attributable to Virgin Islands loans, the Corporation recorded a negative provision of $2.6 million
in 2013. The lower negative provision in 2014 reflects the impact in 2013 of a $1.8 million recovery on the sale of the
underlying collateral of a construction project and an increase of $0.5 million in the provision for residential mortgage
loans. The decrease in the adjusted provision for 2013, compared to 2012, mainly reflects higher charges in 2012 related
to the loan relationship that was transferred to held for sale in 2013.
(cid:2) Non-interest income for the year ended December 31, 2014 was $7.1 million, compared to $7.9 million and $6.9 million
for the years ended December 31, 2013 and 2012. The decrease in 2014, compared to 2013, was mainly related to a
lower sales volume of residential mortgage loans and a decrease in service charges on deposits. The increase in 2013,
compared to 2012, was mainly related to an increase in merchant, ATM and POS interchange fees.
(cid:2) Direct non-interest expenses for the year ended December 31, 2014 were $39.3 million compared to $45.7 million and
$37.8 million for the years ended December 31, 2013 and 2012, respectively. The increase in 2014, compared to 2013,
was mainly due to lower losses on OREO operations, primarily lower write-downs. The increase in 2013, compared to
2012, was mainly due to a $7.5 million increase in write-downs to OREO properties, primarily income-producing
commercial properties, and an increase in professional service fees.
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FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Financial Condition
The following table presents an average balance sheet of the Corporation for the following years:
ASSETS
Interest-earning assets:
Money market and other short-term investments
Government obligations
Mortgage-backed securities
Corporate bonds
FHLB stock
Equity securities
Total investments
Residential mortgage loans
Construction loans
Commercial loans
Finance leases
Consumer loans
Total loans
Total interest-earning assets
Total non-interest-earning assets (1)
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking accounts
Savings accounts
Certificates of deposit
Brokered CDs
Interest-bearing deposits
Other borrowed funds
FHLB advances
Total interest-bearing liabilities
Total non-interest-bearing liabilities
Total liabilities
Stockholders' equity:
Preferred stock
Common stockholders' equity
Stockholders' equity
Total liabilities and stockholders' equity
$
$
$
2014
December 31,
2013
(In thousands)
2012
742,929 $
350,175
1,669,406
-
27,155
320
2,789,985
2,751,366
198,450
4,549,732
240,268
1,806,646
9,546,462
12,336,447
310,998
12,647,445 $
684,074 $
338,571
1,666,091
-
30,941
1,330
2,721,007
2,681,753
272,917
4,804,608
240,479
1,799,402
9,799,159
12,520,166
292,295
12,812,461 $
640,644
555,364
1,182,142
1,204
35,035
1,377
2,415,766
2,800,647
388,404
5,277,593
239,699
1,561,085
10,267,428
12,683,194
283,180
12,966,374
1,075,513 $
2,426,171
2,296,314
3,098,724
8,896,722
1,131,959
312,575
10,341,256
1,009,484
11,350,740
1,127,857 $
2,344,444
2,310,200
3,251,091
9,033,592
1,131,959
357,661
10,523,212
962,199
11,485,411
1,092,640
2,258,001
2,215,599
3,488,312
9,054,552
1,171,615
404,033
10,630,200
878,881
11,509,081
46,576
1,250,129
1,296,705
12,647,445 $
63,047
1,264,003
1,327,050
12,812,461 $
63,047
1,394,246
1,457,293
12,966,374
$
_________
(1) Includes, among other things, the allowance for loan and lease losses and the valuation of available-for-sale investment securities.
94
The Corporation’s total average assets were $12.6 billion and $12.8 billion as of December 31, 2014 and 2013, respectively, a
decrease for 2014 of $165.0 million or 1.3% as compared to 2013. The reduction in total average assets was mainly due to a decrease
of $252.7 million in average loans primarily reflecting the repayment of large commercial and construction loans. This was partially
offset by an increase of $69.0 million in average investment securities and interest-bearing cash and cash equivalent assets, mainly
cash balances maintained at the Federal Reserve Bank.
The Corporation’s total average liabilities were $11.4 billion as of December 31, 2014, a decrease of $134.7 million compared to
December 31, 2013. The decrease in total average liabilities mainly resulted from the roll-off of maturing brokered CDs, withdrawals
of government deposits in Puerto Rico, and the maturity of certain FHLB advances.
Assets
Total assets were approximately $12.7 billion, an increase of $70.9 million from December 31, 2013. The increase was primarily
related to the $302.9 million partial reversal of FirstBank’s deferred tax asset valuation allowance and a $140.4 million increase in
cash and cash equivalents balance. These increases were partially offset by a $309.3 million decline in total loans, net of allowance,
mainly reflecting the repayment of large commercial and construction loans, a decrease of $164.4 million in the outstanding balances
of direct and indirect credit facilities granted to or guaranteed by government entities, primarily in Puerto Rico, and a $36.2 million
decrease in the OREO inventory balance driven by sales and valuation adjustments. There were four large commercial loans paid-off
in Puerto Rico totaling approximately $139.4 million and five commercial and construction loans paid off in the United States totaling
$45.2 million. Sales of loan participations and significant principal payments that reduced the risk exposure on commercial loans also
contributed to the decrease in total loans in 2014.
95
Loans Receivable, including Loans Held for Sale
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.
Residential mortgage loans (1)
Commercial loans:
Commercial mortgage loans (2)
Construction loans (2)
Commercial and Industrial
loans (2)(3)
Loans to local financial institutions
collateralized by real estate
mortgages (1)
Total commercial loans
Finance leases
Consumer loans
Total loans held for investment
Less:
Allowance for loan and lease losses
Total loans held for investment, net
Loans held for sale
2014
2013
2012
(In thousands)
2011
2010
$
3,011,187 $
2,549,008 $
2,747,217 $
2,873,785 $
3,417,417
1,665,787
123,480
1,823,608
168,713
1,883,798
361,875
1,565,411
427,863
1,670,161
700,579
2,479,437
2,788,250
2,793,157
3,856,695
3,861,545
-
4,268,704
232,126
1,750,419
9,262,436
240,072
5,020,643
245,323
1,821,196
9,636,170
255,390
5,294,220
236,926
1,775,751
10,054,114
273,821
6,123,790
247,003
1,314,814
10,559,392
290,219
6,522,504
282,904
1,432,611
11,655,436
(222,395)
9,040,041
76,956
(285,858)
9,350,312
75,969
(435,414)
9,618,700
85,394
(493,917)
10,065,475
15,822
(553,025)
11,102,411
300,766
Total loans, net
$
9,116,997 $
9,426,281 $
9,704,094 $ 10,081,297 $ 11,403,177
___________
(1) On May 30, 2014, FirstBank acquired from Doral mortgage loans, mainly residential mortgage loans, having an
unpaid principal balance of $241.7 million (estimated fair value at acquisition of $226.0 million) in full satisfaction of
secured borrowings with a book value of $232.9 million owed by Doral to FirstBank. In addition, on October 3, 2014,
FirstBank purchased from Doral $192.6 million in outstanding unpaid principal balance of performing residential
mortgage loans.
(2) During the second quarter of 2013, after a comprehensive review of substantially all of the loans in our commercial
portfolios, the classification of certain loans was revised to more accurately depict the nature of the underlying
loans. This reclassification resulted in a net increase of $269.0 million in commercial mortgage loans, since the
principal source of repayment for such loans is derived primarily from the operation of the underlying real estate,
with a corresponding decrease of $246.8 million in commercial and industrial loans and a $22.2 million decrease in
construction loans. The Corporation evaluated the impact of this reclassification on the provision for loan losses
and determined that the effect of this adjustment was not material to any previously reported results.
(3) As of December 31, 2014, includes $1.2 billion of commercial loans that are secured by real estate (owner-occupied
commercial loans secured by real estate) but are not dependent upon the real estate for repayment.
Lending Activities
As of December 31, 2014, the Corporation’s total loans, net of allowance, decreased by $309.3 million, when compared with the
balance as of December 31, 2013. The decrease mainly reflects a $164.4 million reduction in the outstanding balance of direct and
indirect credit facilities granted or guaranteed by government entities in Puerto Rico and the Virgin Islands, the repayment of three
commercial loans in Puerto Rico before their contractual maturity in an amount totaling $102.3 million, a $37.1 million adversely
classified C&I loan in Puerto Rico that was paid-off in the first quarter of 2014, a $16.2 million restructured commercial mortgage
loan paid-in full in the United States, for which a recovery of previously charged-off amounts of $4.1 million was recorded in the
second quarter of 2014, and three adversely classified construction loans paid off in the United States in an amount totaling $10.2
million. In addition, during 2014, the Corporation sold $53.0 million of commercial mortgage loan participations and the outstanding
balance of loans granted to CPG/GS decreased by $13.8 million.
96
As shown in the table above, the 2014 loans held for investment portfolio was comprised of commercial loans (46%), residential real
estate loans (33%), and consumer and finance leases (21%). Of the total gross loan portfolio held for investment of $9.3 billion as of
December 31, 2014, approximately 83% has credit risk concentration in Puerto Rico, 11% in the United States (mainly in the state of
Florida) and 6% in the Virgin Islands, as shown in the following table:
As of December 31, 2014
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial and Industrial loans
Total commercial loans
Finance leases
Consumer loans
Total loans held for investment
Loans held for sale
Total loans, gross
As of December 31, 2013
Puerto Rico
Virgin
Islands
United States
Total
$ 2,325,455 $
341,098 $
344,634 $ 3,011,187
(In thousands)
1,305,057
70,618
2,072,265
3,447,940
232,126
1,666,373
$ 7,671,894 $
34,972
$ 7,706,866 $
69,629
30,011
120,947
220,587
-
47,811
609,496 $
40,317
649,813 $
291,101
22,851
286,225
1,665,787
123,480
2,479,437
600,177
-
36,235
4,268,704
232,126
1,750,419
981,046 $ 9,262,436
76,956
982,713 $ 9,339,392
1,667
Puerto Rico
Virgin
Islands
United States
Total
(In thousands)
Residential mortgage loans
$ 1,906,982 $
348,816 $
293,210 $ 2,549,008
Commercial mortgage loans
Construction loans
Commercial and Industrial loans
Loans to local financial institutions collateralized
by real estate mortgages
Total commercial loans
Finance leases
Consumer loans
1,464,085
74,271
285,252
1,823,608
105,830
33,744
29,139
168,713
2,436,709
125,757
225,784
2,788,250
240,072
-
-
240,072
4,246,696
233,772
540,175
5,020,643
245,323
-
-
245,323
1,739,478
49,689
32,029
1,821,196
Total loans held for investment
$ 8,138,479 $
632,277 $
865,414 $ 9,636,170
Loans held for sale
Total loans, gross
35,394
40,575
-
75,969
$ 8,173,873 $
672,852 $
865,414 $ 9,712,139
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 mortgage loan purchases from mortgage bankers. The
Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from
existing customers as well as through referrals and direct solicitations.
97
The following table sets forth certain additional data (including loan production) related to the Corporation’s loan portfolio net of
the allowance for loan and lease losses as of the dates indicated:
2014
2013
For the Year Ended December 31,
2012
(In thousands)
2011
2010
Beginning balance as of January 1
Residential real estate loans originated
and purchased (1)
Construction loans originated and
purchased
C&I and commercial mortgage loans
originated and purchased
Finance leases originated
Consumer loans originated and purchased (2)
Total loans originated and
purchased
Sales and securitizations of loans
Repayments and prepayments
Other decreases (3)
$
9,426,281 $
9,704,094 $ 10,081,297 $ 11,403,177 $ 13,421,106
826,937
830,959
756,133
563,138
526,389
39,041
57,514
76,822
93,183
175,260
1,842,697
76,765
916,251
1,661,128
104,968
1,055,940
1,236,910
93,700
1,281,872
1,480,192
83,651
493,511
1,706,604
90,671
508,577
3,701,691
(394,736)
(3,488,207)
(128,032)
3,710,509
(968,626)
(2,801,685)
(218,011)
3,445,437
(468,463)
(3,049,722)
(304,455)
2,713,675
(1,175,463)
(2,422,071)
(438,021)
3,007,501
(529,413)
(3,704,221)
(791,796)
Net (decrease) increase
(309,284)
(277,813)
(377,203)
(1,321,880)
(2,017,929)
Ending balance as of December 31
$
9,116,997 $
9,426,281 $
9,704,094 $ 10,081,297 $ 11,403,177
(3.28)%
Percentage (decrease) increase
_____________
(1) For 2014, includes the purchase from Doral of $192.6 million in outstanding principal balance of performing residential
mortgage loans.
(2) For 2012, includes the initial carrying value of $368.9 million related to the credit card portfolio acquired from FIA and
$226.9 million of subsequent utilization activity on outstanding credit cards.
(3) Includes, among other things, the change in the allowance for loan and lease losses and cancellation of loans due to
the repossession of the collateral and loans repurchased.
(3.74)%
(2.86)%
(11.59)%
(15.04)%
Residential Real Estate Loans
As of December 31, 2014, the Corporation’s residential real estate loan portfolio held for investment increased by $462.2 million
as compared to the balance as of December 31, 2013, mainly reflecting the impact of mortgage loans acquired from Doral in the
second quarter of 2014 in full satisfaction of secured borrowings owed by such entity to FirstBank, and the purchase of $192.6 million
of performing residential mortgage loans from Doral in the fourth quarter of 2014. Mortgage loans acquired from Doral during the
second quarter of 2014 consists of mortgage loans, primarily residential mortgage loans, with an unpaid principal balance of $229.0
million, recorded at its estimated fair value at acquisition of $213.7 million (carrying value of $217.4 million as of December 31,
2014).
The remaining increase is mainly related to the origination of non-conforming loans in Puerto Rico during 2014 of approximately
$169.9 million, which are generally retained in our held for investment portfolio. These variances were partially offset by charge-offs,
foreclosures and principal repayments.
The majority of the Corporation’s outstanding balance of residential mortgage loans consists of fixed-rate, fully amortizing, full
documentation loans. In accordance with the Corporation’s underwriting guidelines, residential real estate loans are mostly fully
documented loans, and the Corporation is not actively involved in the origination of negative amortization loans. Refer to “Contractual
Obligations and Commitments” below for additional information about outstanding commitments to sell mortgage loans.
98
Residential real estate loan production and purchases, excluding the loans acquired from Doral, for the year ended December 31,
2014 decreased by $196.7 million, compared to 2013, and increased by $74.9 million for 2013 compared to 2012. The Corporation’s
strategy is to penetrate markets by providing customers with a variety of high quality mortgage products. FirstBank supplements its
internal direct originations through a strategic program to purchase ongoing residential mortgage loan production from mortgage
bankers in Puerto Rico. The volume of loan originations was adversely affected by a decrease in refinancing and the current economic
environment in Puerto Rico.
Commercial and Construction Loans
As of December 31, 2014, the Corporation’s commercial and construction loan portfolio held for investment decreased by $751.9
million, as compared to the balance as of December 31, 2013. The reduction primarily reflects the effect of the Doral transaction
completed in the second quarter as explained above, the impact of the repayment of certain large loans and charge-offs, including four
large commercial loans paid off in Puerto Rico in an amount totaling approximately $139.4 million, a $16.2 million restructured
commercial mortgage loan paid-in full in the United States, and the repayment of three adversely classified construction loans in the
United States in an amount totaling $10.2 million. In addition, the outstanding balance of direct and indirect credit facilities granted or
guaranteed by government entities in Puerto Rico and the Virgin Islands decreased by $164.4 million. During 2014, the Corporation
sold $53.0 million of commercial mortgage loan participations and the outstanding balance of loans granted to CPG/GS decreased by
$13.8 million, from $69.4 million as of December 31, 2013 to $55.6 million as of December 31, 2014.
These variances were partially offset by a $60.0 million increase in the C&I and commercial mortgage portfolio of the United
States. As part of the United States strategy, the Corporation has expanded its resources in the middle market and corporate areas in
light of lending growth opportunities in this sector. The Corporation’s commercial loans are primarily variable- and adjustable-rate
loans.
Total commercial and construction loans originated amounted to $1.9 billion for 2014, an increase of $163.1 million when
compared to originations during 2013. The increase was mainly related to disbursements on existing credit facilities. Government
loan originations for 2014 amounted to $424.2 million compared to $554.3 million for 2013.
As of December 31, 2014, the Corporation had $339.0 million of credit facilities granted to the Puerto Rico government, its
municipalities and public corporations, of which $308.0 million was outstanding, compared to $397.8 million outstanding as of
December 31, 2013. In addition, the outstanding balance of facilities granted to the government of the Virgin Islands amounted to
$57.7 million as of December 31, 2014, compared to $60.6 million as of December 31, 2013. Approximately $201.4 million of the
outstanding credit facilities consists of loans to municipalities in Puerto Rico. Municipal debt exposure is secured by ad valorem
taxation without limitation as to rate or amount on all taxable property within the boundaries of each municipality. The good faith,
credit, and unlimited taxing power of the applicable municipality have been pledged to the repayment of all outstanding bonds and
notes. Approximately $13.2 million consists of loans to units of the central government, and approximately $93.4 million consists of
loans to public corporations that generally receive revenues from the rates they charge for services or products, such as electric power
services, including a $75.0 million credit extended to the Puerto Rico Electric Power Authority (“PREPA”) for fuel purchases that
have priority over senior bonds and other debt. Major public corporations have varying degrees of independence from the central
government and many receive appropriations or other payments from Puerto Rico’s government general fund. Debt issued by the
central government can either carry the full faith, credit and taxing power of the Commonwealth of Puerto Rico or represent an
obligation that is subject to annual budget appropriations. In August 2014, PREPA entered into a forbearance agreement with a group
of banks, including FirstBank, to extend its maturing credit lines to March 31, 2015. As a result of the forbearance, this credit facility
was classified as a Troubled Debt Restructuring (“TDR”) loan during the third quarter of 2014. The loan has been maintained in
accrual status based on the estimated cash flow analyses performed on this non-collateral dependent loan, repayment prospects and
compliance with contractual terms.
Furthermore, the Corporation had $133.3 million outstanding as of December 31, 2014 in financing to the hotel industry in Puerto
Rico guaranteed by the Puerto Rico Tourism Development Fund (“TDF”), compared to $200.4 million as of December 31, 2013. The
TDF is a subsidiary of the Government Development Bank (“GDB”) that works with private-sector financial institutions to structure
financings for new hospitality projects.
The Corporation has significantly reduced its exposure to construction loans and current originations are mainly draws from
existing commitments, including construction facilities tied to financings to the hotel industry guaranteed by TDF. Construction loan
originations decreased by $24.3 million in 2014 to $32.7 million from $57.0 million in 2013.
99
The decrease in the construction loan portfolio held for investment was driven by charge-offs, the aforementioned adversely
classified loans paid off in Florida, and foreclosures.
The composition of the Corporation’s construction loan portfolio held for investment as of December 31, 2014 by category and
geographic location follows:
As of December 31, 2014
Loans for residential housing projects:
Mid-rise (1)
Single-family, detached
Total for residential housing projects
Construction loans to individuals secured by residential
properties
Loans for commercial projects
Bridge loans - commercial
Land loans - residential
Land loans - commercial
Total before net deferred fees and allowance for loan
losses
Net deferred cost (fees)
Total construction loan portfolio, gross
Allowance for loan losses
Total construction loan portfolio, net
___________
(1) Mid-rise relates to buildings of up to 7 stories.
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
$
7,858 $
15,835
23,693
1,465
8,534
-
22,249
14,362
$
70,303 $
315
70,618
(9,742)
4,164
-
4,164
2,476
4,386
13,189
5,914
-
30,129
(118)
30,011
(2,205)
$
- $
10,691
10,691
-
11,790
-
370
-
$
22,851 $
-
22,851
(875)
$
60,876 $
27,806
$
21,976 $
12,022
26,526
38,548
3,941
24,710
13,189
28,533
14,362
123,283
197
123,480
(12,822)
110,658
The following table presents further information on the Corporation’s construction portfolio as of and for the year
ended December 31, 2014:
(In thousands)
Total undisbursed funds under existing commitments
Construction loans held for investment in non-accrual status
Construction loans held for sale in non-accrual status
Net charge offs - Construction loans
Allowance for loan losses - Construction loans
Non-performing construction loans to total construction loans, including held for sale
Allowance for loan losses for construction loans to total construction loans held for investment
Net charge-offs to total average construction loans
_________
$
$
$
$
$
76,235
29,354
47,802
5,484
12,822
45.05 %
10.38 %
2.76 %
100
The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the
estimated selling price of the units:
Construction loan portfolio:
Under $300k
Over $600k (1)
________
(1) Mainly composed of two residential housing projects in Puerto Rico.
Consumer Loans and Finance Leases
(In thousands)
$
$
12,189
11,504
23,693
As of December 31, 2014, the Corporation’s consumer loan and finance lease portfolio decreased by $84.0 million, as compared to
the portfolio balance as of December 31, 2013. The decrease was mainly the result of charge-offs and repayments that exceeded the
volume of new originations. The auto and finance lease portfolio decreased by $64.7 million during 2014 reflecting an increased level
of charge-offs experienced and the reduced activity in new loan originations. Originations of auto loans (including finance leases) for
2014 amounted to $457.2 million, a decrease of $146.0 million, compared to $603.2 million for 2013. The decrease was mainly due
to decreased activity in new auto sales reflecting lower consumer confidence as a result of the prolonged economic recession in Puerto
Rico and demographic changes. The auto loan and finance lease portfolios in Puerto Rico amounted to $1.0 billion and $232.1
million, respectively, as of December 31, 2014. The remaining decrease in the consumer loan portfolio was primarily related to a $9.3
million decline in the credit card loan portfolio balance and an $8.4 million decrease in boat financings.
Investment Activities
As part of its liquidity, revenue diversification and interest rate risk strategies, First BanCorp. maintains an investment portfolio that
is classified as available for sale. The Corporation’s total available-for-sale investment securities portfolio as of December 31, 2014
amounted to $2.0 billion, a decrease of $12.6 million from December 31, 2013. During 2014, the Corporation completed purchases of
approximately $75 million of 10-15 year U.S. agency MBS (average yield of 2.46%) and approximately $81 million of U.S.
government and sponsored agencies debt securities (average yield of 1.58%).
Approximately 96% of the Corporation’s available-for-sale securities portfolio is invested in U.S. Government and Agency
debentures and fixed-rate U.S. government sponsored-agency MBS (mainly GNMA, FNMA and FHLMC fixed-rate securities).
As of December 31, 2014, the Corporation held approximately $61.2 million of Puerto Rico government and agencies bond
obligations, mainly bonds of the GDB and the Puerto Rico Building Authority, as part of its available-for-sale investment securities
portfolio, which were reflected at their aggregate fair value of $43.2 million. During the first half of 2014, the Corporation sold $4.6
million of Puerto Rico government agency bonds and received proceeds of $10 million from matured Puerto Rico government
securities. The fair value of the Puerto Rico government obligations held by the Corporation increased by approximately $1.7 million
during 2014.
On February 4, 2014, S&P downgraded the Commonwealth of Puerto Rico’s debt to BB+, one level below investment grade. S&P
also downgraded to levels below investment grade the credit rating of the GDB and other government entities. On February 7, 2014,
Moody’s downgraded the Commonwealth of Puerto Rico’s general obligation bonds and the credit rating of the GDB and other
government entities to Ba2, two notches below investment grade. Following the downgrades by S&P and Moody’s, Fitch became the
third agency to downgrade the Commonwealth of Puerto Rico debt to BB, two notches below investment grade. In July 2014, the
Puerto Rico debt was downgraded further into speculative grade by these credit agencies after the enactment of the Recovery Act that
provides a legislative framework for certain public corporations that are experiencing severe financial stress to address their financial
obstacles through an orderly statutory process that allows them to handle their debts. In February 2015, a federal judge ruled the
Recovery Act is pre-empted by the Federal Bankruptcy Court and therefore void. After this decision, S&P and Moody’s downgraded
Puerto Rico’s general obligation debt deeper into non-investment grade category. S&P now rates Puerto Rico’s general obligation
bonds at B, five notches below investment grade, Moody’s at Caa1, seven notches below investment grade, and Fitch at BB-, three
notches below investment grade.
101
The issuers of Puerto Rico government and agencies bonds held by the Corporation have not defaulted, and the contractual
payments on these securities have been made as scheduled. The Corporation has the ability and intent to hold these securities until a
recovery of the fair value occurs, and it is not more likely than not that the Corporation will be required to sell the securities prior to
such recovery. It is uncertain how the financial markets may react to any potential further rating downgrade of Puerto Rico’s debt.
However, further deterioration in the fiscal situation could adversely affect the value of Puerto Rico’s government obligations. The
Corporation will continue to closely monitor Puerto Rico’s political and economic status and evaluate the portfolio for any declines in
value that could be considered other-than-temporary.
The following table presents the carrying value of investments as of December 31, 2014 and 2013:
2014
2013
(In thousands)
Money market investments
$
16,961
$
201,369
Investment securities available for sale, at fair value:
U.S. government and agencies obligations
Puerto Rico government obligations
Mortgage-backed securities
Equity securities
Total investment securities available for sale, at fair value
Other equity securities, including $25.5 million and $28.4
million of FHLB stock as of December 31, 2014 and
2013, respectively
Total money market and investment securities
340,614
43,222
1,581,830
-
1,965,666
256,994
51,330
1,669,925
33
1,978,282
25,752
2,008,379
28,691
$ 2,208,342
$
Mortgage-backed securities as of December 31, 2014 and 2013 consisted of:
Available-for-sale:
FHLMC certificates
GNMA certificates
FNMA certificates
Collateralized mortgage obligations issued or
guaranteed by FHLMC
Other mortgage pass-through certificates
2014
2013
(In thousands)
$
$
315,794
377,448
854,940
322,187
445,008
861,783
-
33,648
81
40,866
Total mortgage-backed securities
$ 1,581,830
$
1,669,925
102
The carrying values of investment securities classified as available for sale as of December 31, 2014 by
contractual maturity (excluding mortgage-backed securities and equity securities) are shown below:
Carrying
Amount
Weighted
average yield %
(In thousands)
U.S. government and agencies obligations
Due within one year
Due after one year through five years
Due after five years through ten years
Puerto Rico government obligations
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$
7,499
256,712
76,403
340,614
27,408
887
14,927
43,222
383,836
Mortgage-backed securities
Total investment securities available for sale
1,581,830
$
1,965,666
0.11
1.22
1.72
1.31
4.49
5.20
5.83
4.95
1.86
2.66
2.49
Net interest income of future periods could be affected by prepayments of mortgage-backed securities. Acceleration in the
prepayments of mortgage-backed securities would lower yields on these securities, as the amortization of premiums paid upon
acquisition of these securities would accelerate. Conversely, acceleration of the prepayments of mortgage-backed securities would
increase yields on securities purchased at a discount, as the amortization of the discount would accelerate. These risks are directly
linked to future period market interest rate fluctuations. Also, net interest income in future periods might be affected by the
Corporation’s investment in callable securities. As of December 31, 2014, the Corporation has approximately $108.4 million in debt
securities (U.S. Agencies and Puerto Rico government securities) with embedded calls and with an average yield of 1.62%. Refer to
“Risk Management” below for further analysis of the effects of changing interest rates on the Corporation’s net interest income and of
the interest rate risk management strategies followed by the Corporation. Also refer to Note 4 to the accompanying audited
consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding the Corporation’s
investment portfolio.
103
Investment Securities and Loans Receivable Maturities
The following table presents the maturities or repricings of the loan and investment portfolio as of December 31, 2014:
2-5 Years
Over 5 Years
One Year
or Less
Fixed
Interest
Rates
Variable
Interest
Rates
Fixed
Interest
Rates
Variable
Interest
Rates
Total
(In thousands)
$
16,961 $
33,536
33,251
83,748
- $
4,381
284,120
288,501
- $
-
-
-
- $
1,543,913
92,217
1,636,130
- $
-
-
-
16,961
1,581,830
409,588
2,008,379
Investments:
Money market investments
Mortgage-backed securities
Other securities (1)
Total investments
-
329,586
619,051
2,084,865
Loans: (2) (3)
Residential mortgage
C&I and commercial
mortgage
Construction
Finance leases
Consumer
Total loans
Total earning assets
_________
(1) Equity securities and loans having no stated scheduled repayment date and no stated maturity were included under the "one year or
less category."
(2) Scheduled repayments were reported in the maturity category in which the payment is due and variable rates were reported based on the
next repricing date.
(3) Non-accruing loans were included under the "one year or less category."
144,051
2,982
1,838
42,787
2,276,523
3,912,653 $
3,418,866
155,981
76,092
580,078
4,850,068
4,933,816 $
432,793
12,319
154,196
1,127,554
2,056,448
2,344,949 $
156,353
-
-
-
156,353
156,353 $
$
-
3,033,502
-
-
-
-
-
- $
4,152,063
171,282
232,126
1,750,419
9,339,392
11,347,771
Goodwill and other intangible assets
The Corporation evaluates goodwill for impairment on an annual basis, generally during the fourth quarter, or more often if events
or circumstances indicate there may be impairment. The Corporation evaluated goodwill for impairment as of October 1, 2014.
Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date
the goodwill is initially recorded. Once goodwill has been assigned to a reporting unit, it no longer retains its association with a
particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support
the value of the goodwill. The Corporation’s goodwill is related to the acquisition of FirstBank Florida in 2005.
The Corporation bypassed the qualitative assessment in 2014 and proceeded directly to perform the first step of the two-step
goodwill impairment test. The first step (“Step 1”) involves a comparison of the estimated fair value of the reporting unit to its
carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not
considered impaired. If the carrying value exceeds the estimated fair value, there is an indication of potential impairment and the
second step is performed to measure the amount of the impairment.
The second step (“Step 2”), if necessary, involves calculating an implied fair value of the goodwill for each reporting unit for which
the Step 1 indicated a potential impairment. The implied fair value of goodwill is determined in a manner similar to the calculation of
the amount of goodwill in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as
determined in the Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles as if
the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of
goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds
the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the
carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of
goodwill impairment losses is not permitted.
104
In determining the fair value of a reporting unit, which is based on the nature of the business and the reporting unit’s current and
expected financial performance, the Corporation uses a combination of methods, including market price multiples of comparable
companies, as well as a discounted cash flow analysis (“DCF”). The Corporation evaluates the results obtained under each valuation
methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and
appropriate under the circumstances.
The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these
evaluations include:
•
•
•
•
a selection of comparable publicly traded companies, based on size, performance, and asset quality;
the discount rate applied to future earnings, based on an estimate of the cost of equity;
the potential future earnings of the reporting unit; and
the market growth and new business assumptions.
For purposes of the market comparable approach, valuation was determined based on market multiples for comparable companies
and market participant assumptions applied to the reporting unit to derive an implied value of equity.
For purposes of the DCF analysis approach, the valuation is based on estimated future cash flows. The financial projections used in
the DCF analysis for the reporting unit are based on the most recent available data. The growth assumptions included in these
projections are based on management’s expectations of the reporting unit’s financial prospects as well as particular plans for the entity
(i.e., restructuring plans). The cost of equity was estimated using the capital asset pricing model using comparable companies, an
equity risk premium, the rate of return of a “riskless” asset, a size premium based on the size of the reporting unit, and a company
specific premium. The resulting discount rate was analyzed in terms of reasonability given current market conditions.
The Step 1 evaluation of goodwill allocated to the Florida reporting unit, which is one level below the United States business
segment, under both valuation approaches (market and DCF) indicated that the fair value of the unit was above the carrying amount of
its equity book value as of the valuation date (October 1), which meant that Step 2 was not undertaken. Based on the analysis under
both the income and market approaches, the estimated fair value of the reporting units exceeds the carrying amount of the unit,
including goodwill, at the evaluation date.
The Corporation engaged a third-party valuator to assist management in the annual evaluation of the Florida unit’s goodwill as of
the October 1 valuation date. In reaching its conclusion on impairment, management discussed with the valuator the methodologies,
assumptions, and results supporting the relevant values for the goodwill and determined that they were reasonable.
The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regards to the fair
value of reporting units. Actual values may differ significantly from these estimates. Such differences could result in future
impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the profitability of the
reporting unit where goodwill is recorded.
Goodwill was not impaired as of December 31, 2014 or 2013, nor was any goodwill written off during 2014, 2013, and 2012.
Other Intangibles
Core deposit intangibles are amortized over their estimated lives, generally on a straight-line basis, and are reviewed periodically
for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
In connection with the acquisition of a FirstBank-branded credit card loan portfolio in 2012, the Corporation recognized at
acquisition a purchased credit card relationship intangible of $24.5 million ($16.4 million and $19.8 million as of December 31, 2014
and 2013, respectively), which is being amortized on an accelerated basis based on the estimated attrition rate of the purchased credit
card accounts, which reflects the pattern in which the economic benefits of the intangible asset are consumed. These benefits are
consumed as the revenue stream generated by the cardholder relationship is realized.
The Corporation performed impairment tests for the years ended December 31, 2014, 2013, and 2012 and determined that no
impairment was needed to be recognized for other intangible assets.
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RISK MANAGEMENT
General
Risks are inherent in virtually all aspects of the Corporation’s 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
Corporation’s risk-taking activities are consistent with the Corporation’s 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 BanCorp.’s business is subject to nine 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) reputational risk, (8) model risk, and (9) capital
risk. First BanCorp. has adopted policies and procedures designed to identify and manage the risks to which the Corporation is exposed.
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
its short-term liquidity demands such as from deposit redemptions or loan commitments. Refer to “—Liquidity and Capital Adequacy”
below for further details.
Interest Rate Risk
Interest rate risk is the risk to earnings or capital arising from adverse movements in interest rates, refer to “—Interest Rate Risk
Management” 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”
below for further details.
Credit Risk
Credit risk is the risk to earnings or capital arising from a borrower’s or a counterparty’s failure to meet the terms of a contract
with the Corporation or otherwise to perform as agreed. Refer to “—Credit Risk Management” below for further details.
Operational Risk
Operational risk is the risk to earnings or capital arising from problems with the delivery of services or products. This risk is a
function of internal controls, information systems, employee integrity and operating processes. It also includes risks associated with
the Corporation’s preparedness for the occurrence of an unforeseen event. This risk is inherent across all functions, products and
services of the Corporation. Refer to “—Operational Risk” below for further details.
Legal and Regulatory Risk
Legal and regulatory risk is the risk to earnings and capital arising from the Corporation’s failure to comply with laws or
regulations that can adversely affect the Corporation’s reputation and/or increase its exposure to litigation or penalties.
Reputational Risk
Reputational risk is the risk to earnings and capital arising from any adverse impact on the Corporation’s market value, capital or
earnings of negative public opinion, whether true or not. This risk affects the Corporation’s ability to establish new relationships or
services, or to continue servicing existing relationships.
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Model Risk
Model Risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. The
use of models exposes the Corporation to some level of model risk. Model errors can contribute to incorrect valuations and lead to
operational errors, inappropriate business decisions or incorrect financial entries. Model risk can be reduced substantially through
rigorous model identification and validation.
Capital Risk
Capital risk is the risk that the Corporation may lose value on its capital or has an inadequate Capital Plan, which results in
insufficient capital resources to:
• Meet minimum regulatory requirements or as required as part of the Consent Order. The Corporation’s authority to
operate as a bank is dependent upon the maintenance of adequate capital resources;
•
•
Support its credit rating. A weaker credit rating would increase the Corporation’s cost of funds; or
Support its growth and strategic options.
Risk Governance
The following discussion highlights the roles and responsibilities of the key participants in the Corporation’s risk management
framework:
Board of Directors
The Board of Directors oversees the Corporation’s overall risk governance program with the assistance of the Board Committees
discussed below.
Risk Committee
The Risk Committee of the Corporation is appointed by the Board of Directors of the Corporation to assist the Board in fulfilling its
responsibility to oversee management regarding the Corporation’s management of its company-wide risk management framework.
The Committee’s role is one of oversight, recognizing that management is responsible for designing, implementing and maintaining
an effective risk management framework.
Asset/Liability Committee
The Asset/Liability Committee of the Corporation is appointed by the Board of Directors to assist the Board of Directors in its
oversight of the Corporation’s policies related to asset and liability management relating to funds management, investment
management, liquidity, interest rate risk management, and the use of derivatives. In doing so, the Committee’s primary functions
involve:
• The establishment of a process to enable the identification, assessment, and management of risks that could affect the
Corporation’s assets and liabilities management;
• The identification of the Corporation’s risk tolerance levels for yield maximization relating to its assets and liabilities
management; and
• The evaluation of the adequacy, effectiveness and compliance with the Corporation’s risk management process relating to the
Corporation’s assets and liabilities management, including management’s role in that process.
107
Credit Committee
The Credit Committee of the Board of Directors is appointed by the Board of Directors to assist the Board of Directors in its
oversight of the Corporation’s policies related to all matters of the Corporation’s lending function, hereafter “Credit Management.”
The purpose of the Committee is to review the quality of the Corporation’s credit portfolio and the trends affecting that portfolio; to
oversee the effectiveness and administration of credit-related policies; to approve those loans as required by the lending authorities
approved by the Board; and to report to the Board regarding Credit Management.
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 Corporation’s financial reporting to any governmental or regulatory body, stockholders,
other users of the Corporation’s financial reports and the public;
• The performance of the Corporation’s internal audit function;
• The Corporation’s internal control over financial reporting and disclosure controls and procedures;
• The qualifications, engagement, compensation, independence and performance of the Corporation’s independent auditors,
their conduct of the annual audit of the Corporation’s financial statements, and their engagement to provide any other
services;
• The Corporation’s legal and regulatory compliance;
• The application of the Corporation’s related person transaction policy as established by the Board of Directors;
• The application of the Corporation’s 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 Corporation’s annual proxy statement by the
rules of the SEC.
In performing this function, the Audit Committee is assisted by the Chief Risk Officer (“CRO”) and the Executive Risk
Management Committee, and other members of senior management.
Compliance Committee
The Compliance Committee of the Corporation is appointed by the Board of Directors to assist the Board of the Corporation and
the Bank in fulfilling its responsibility to ensure that the Corporation and the Bank comply with the provisions of the FDIC Order
entered into with the FDIC and the OCIF and the Written Agreement entered into with the FED. Once the Regulatory Agreements are
terminated by the FDIC, OCIF and the FED, the Committee will cease to exist.
Executive Risk Management Committee
The Executive Risk Management Committee is responsible for exercising oversight of information regarding FirstBanCorp’s
enterprise risk management framework, including the significant policies, procedures, and practices employed to manage the
identified risk categories, credit risk, operational risk, legal and regulatory risk, reputational risk, model risk, and capital risk. In
carrying out its oversight responsibilities, each Committee member is entitled to rely on the integrity and expertise of those people
providing information to the Committee and on the accuracy and completeness of such information, absent actual knowledge of
inaccuracy.
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Regional Risk Management Committee
This management committee is appointed by the Chief Risk Officer of the Corporation to assist the Corporation in overseeing, and
receiving information regarding the Corporation’s policies, procedures and related practices relating to the Corporation’s identified
risks in the regions of Puerto Rico, Florida and the USVI and BVI. In so doing, the Regional Committee’s primary general functions
involve:
• The evaluation of different risks within the Regions to identify any gaps and the implementation of any necessary controls to
close such gap;
• The establishment of a process to enable the recognition, assessment, and management of the risks that could affect the
Regions; and
• The responsibility to ensure that the Executive Risk Management Committee receives appropriate information about the
Corporation’s indentified risks within the Regions.
Other Management Committees
As part of its governance framework, the Corporation has various additional 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) Management’s 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”
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 Corporation’s compliance with
the Bank Secrecy Act.
(4) Credit Committees (Credit Management Committee and Delinquency 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) OREO assets, and (5) the bank’s watch list and non-performing loans.
(5) Vendor Management Committee – oversees policies, procedures and related practices related to the Corporation’s vendor
management efforts. The Vendor Management Committee’s primary functions involve the establishment of a process and
procedures to enable the recognition, assessment, management and monitoring of vendor management risks.
(6) The Community Reinvestment Act Executive Committee – is responsible for oversight, monitoring and reporting of the
Corporation’s compliance with CRA regulatory requirements. The Bank is committed to develop programs and products that
increase access to credit and create a positive impact on low and moderate income individuals and communities.
(7) Anti-Fraud Committee – oversees the Corporation’s policies, procedures and related practices relating to the Corporation’s
anti-fraud measures.
109
Officers
As part of its governance framework, the following officers play a key role in the Corporation’s risk management process:
1) Chief Executive Officer is responsible for the overall risk governance structure of the Corporation.
2) Chief Risk Officer is responsible for the oversight of the risk management of the organization as well as risk governance
processes. The CRO, with the collaboration of the Enterprise Risk Management and Operational Risk Director monitors key
risks and manages the operational risk program.
3) Credit Risk Officer, Chief Lending Officer and other senior executives are responsible for managing and executing the
Corporation’s credit risk program.
4) Chief Financial Officer, together with the Corporation’s Treasurer, manages the Corporation’s interest rate and market and
liquidity risk programs and, together with the Corporation’s 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 in the review of the Corporation’s internal control over financial
reporting.
5) Chief Accounting Officer is responsible for the development and implementation of the Corporation’s 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.
6) Strategic and Capital Planning Officer is responsible for the development of the Corporation’s strategic and business plan, by
coordinating and collaborating with the executive team and all corporate bodies concerned with the strategic and business
planning process. The Strategic and Capital Planning Director is also responsible for developing and executing a strategy for
stress testing modeling framework.
7) Model Risk Officer is responsible for driving the identification, assessment, measurement, mitigation and monitoring of
model risk.
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 Corporation’s risk functions and work in partnership with the CRO and CFO to ensure alignment
with sound risk management practices and expedite the implementation of the enterprise risk management framework and policies.
Liquidity Risk and Capital Adequacy, Interest Rate Risk, Credit Risk, and Operational, Legal and Regulatory Risk
Management
The following discussion highlights First BanCorp.’s adopted policies and procedures for liquidity risk and capital adequacy,
interest rate risk, credit risk, and operational, 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 for liquidity and
accommodate fluctuations in asset and liability levels due to changes in the Corporation’s 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 non-banking subsidiaries. The second is the liquidity of the banking subsidiary. As of December 31, 2014,
FirstBank could not pay any dividend to the parent company except upon receipt of prior approval by the New York FED and the
Federal Reserve Board because of the Regulatory Agreements.
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The Asset and Liability Committee of the Board of Directors is responsible for establishing the Corporation’s liquidity policy as
well as approving operating and contingency procedures, and monitoring liquidity on an ongoing basis. The Management’s
Investment and Asset Liability Committee (“MIALCO”), using measures of liquidity developed by management, which involve the
use of several assumptions, reviews the Corporation’s 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 Risk Officer, the Retail Financial Services
Director, the Risk Manager of the Treasury and Investments Division, the Financial Analysis and Asset/Liability Director and the
Treasurer. The Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and
strategy, monitoring liquidity availability on a daily basis and reviewing liquidity measures on a weekly basis. The Treasury and
Investments Accounting and Operations area of the Comptroller’s Department is responsible for calculating the liquidity
measurements used by the Treasury and Investment Division to review the Corporation’s liquidity position on a monthly basis; the
Financial Analysis and Asset/Liability Director estimates the liquidity gap for longer periods.
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 the continued development of customer-
based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to
liquidate certain assets when, and if, requirements warrant.
The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s 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 funds 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. Under 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 the current funding position of the Corporation and the
Bank, thereby ensuring the ability of the Corporation and the Bank to honor its respective commitments, and establishing liquidity
triggers monitored by the MIALCO in order to maintain the ordinary funding of the banking business. Four different scenarios are
defined in the contingency funding plan: local market event, credit rating downgrade, an economic cycle downturn event, and a
concentration event. They are reviewed and approved annually by the Board of Directors’ Asset and Liability Committee.
The Corporation manages its liquidity in a proactive manner, and maintains a sound liquidity position. Multiple measures are utilized to
monitor the Corporation’s liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. As of December 31,
2014, the estimated core liquidity reserve (which includes cash and free liquid assets) was $1.5 billion or 11.69% of total assets, compared
to $1.35 billion or 10.7% of total assets as of December 31, 2013. The basic liquidity ratio (which adds available secured lines of credit to
the core liquidity) was approximately 15.6% of total assets, compared to 14.35% of total assets as of December 31, 2013. As of December
31, 2014, the Corporation had $487.6 million available for additional credit from the FHLB NY. Unpledged liquid securities as of
December 31, 2014 mainly consisted of fixed-rate MBS and U.S. agency debentures amounting to approximately $697.6 million. 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 liquidity measure. The increased liquidity was primarily due to the deposit in cash balances with the Federal Reserve
Bank generating interest income of 0.25% of certain amounts received from prepayments of MBS investments and the repayment of
certain large commercial loans paid-off. As of December 31, 2014, the holding company had $36.5 million of cash and cash
equivalents. Cash and cash equivalents at the Bank level as of December 31, 2014 were approximately $789.3 million. The Bank has
$2.9 billion in brokered CDs as of December 31, 2014, of which approximately $1.8 billion mature over the next twelve months.
Liquidity at the Bank level is highly dependent on bank deposits, which fund 75.0% of the Bank’s assets (or 52.2% excluding
brokered CDs). The Corporation has continued to issue brokered CDs pursuant to temporary approvals received from the FDIC to
renew or roll over brokered CDs up to certain amounts through March 31, 2015.
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 Corporation’s liquidity from market disruptions. The principal
sources of short-term funds are deposits, including brokered CDs, securities sold under agreements to repurchase, and lines of credit
with the FHLB.
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The Asset Liability Committee of the Board of Directors reviews credit availability on a regular basis. The Corporation has also
securitized and sold mortgage loans as a supplementary source of funding. Long-term funding has also been obtained in the past
through the issuance of notes and, to a lesser extent, long-term brokered CDs. The cost of these different alternatives, among other
things, is taken into consideration.
The Corporation has continued reducing the amounts of outstanding brokered CDs. The reduction in brokered CDs is consistent
with the requirements of the FDIC Order that preclude the issuance of brokered CDs without FDIC approval and require a plan to
reduce the amount of brokered CDs. As of December 31, 2014, brokered CDs decreased $255.0 million from December 31, 2013, to
$2.9 billion. At the same time as the Corporation focuses on reducing its reliance on brokered deposits, it is seeking to add core
deposits. During 2014, the Corporation increased non-brokered deposits, excluding government deposits, by $164.1 million.
The Corporation continues to have the support of creditors, including counterparties to repurchase agreements, the FHLB, and other
agents such as wholesale funding brokers. While liquidity is an ongoing challenge for all financial institutions, management believes
that the Corporation’s available borrowing capacity and efforts to grow retail deposits will be adequate to provide the necessary
funding for the Corporation’s business plans in the foreseeable future.
The Corporation's principal sources of funding are:
Deposits
The following table presents the composition of total deposits:
Weighted Average
Cost as of
December 31, 2014
2014
As of December 31,
2013
(In thousands)
2012
0.69%
$
2,450,484 $
2,334,831 $
2,295,766
0.56%
0.94%
0.82%
1,054,136
5,078,709
8,583,329
900,616
1,167,480
5,526,401
9,028,712
851,212
1,108,053
5,623,340
9,027,159
837,387
$
9,483,945 $
9,879,924 $
9,864,546
$
$
8,896,722 $
9,033,592 $
9,054,552
876,460 $
855,231 $
770,278
0.88%
1.02%
1.42%
Savings accounts
Interest-bearing checking
accounts
Certificates of deposit
Interest-bearing deposits
Non-interest-bearing deposits
Total
Interest-bearing deposits:
Average balance outstanding
Non-interest-bearing deposits:
Average balance outstanding
Weighted average rate during
the period on interest-
bearing deposits
Brokered CDs – A large portion of the Corporation’s funding has been retail brokered CDs issued by FirstBank. Total brokered CDs
decreased by $255.0 million to $2.9 billion as of December 31, 2014. Because of the FDIC Order, FirstBank cannot replace maturing
brokered CDs without the prior approval of the FDIC. Since the issuance of the FDIC Order, the FDIC has granted the Bank
temporary waivers, allowing it to continue accessing the brokered deposit market in specified amounts. The most recent waiver is
effective through March 31, 2015. The Bank will request approvals for future periods. The Corporation used proceeds from
repayments of loans and investments to pay down maturing borrowings, including brokered CDs. Also, the Corporation successfully
implemented its core deposit growth strategy that resulted in an increase of $164.1 million in non-brokered deposits, excluding
government deposits, during 2014.
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The average remaining term to maturity of the retail brokered CDs outstanding as of December 31, 2014 is approximately 1.0
years.
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 CD market is very competitive and liquid,
and has enabled the Corporation to obtain substantial amounts of funding in short periods of time. This strategy has enhanced the
Corporation’s liquidity position, since brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster
compared to regular retail deposits. During 2014, the Corporation issued $1.5 billion in brokered CDs with an average cost of 0.79%
to renew maturing brokered CDs. Management believes it will continue to obtain waivers from the restrictions on the issuance of
brokered CDs under the FDIC Order to meet its obligations and execute its business plans.
The following table presents a maturity summary of brokered and retail CDs with denominations of $100,000 or
higher as of December 31, 2014:
Three months or less
Over three months to six months
Over six months to one year
Over one year
Total
Total
(In thousands)
$
$
648,845
577,475
1,506,709
1,539,963
4,272,992
Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $2.9 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 and are therefore insured by the FDIC. Certificates of deposit with denominations of $100,000 or higher also include $2.4
million of deposits through the Certificate of Deposit Account Registry Service.
Government deposits - As of December 31, 2014, the Corporation had $227.4 million of public sector deposits in Puerto Rico ($208.1
million in transactional accounts and $19.3 million in time deposits) compared to $546.5 million as of December 31, 2013.
Approximately 54% came from municipalities in Puerto Rico and 46% came from public corporations and the central government.
In 2014, Act 24-2014 was approved by the Puerto Rico Legislature, seeking to further strengthen the liquidity of the GDB and the
GDB’s direction of public funds. Among other measures, Act 24-2014 grants the GDB the ability to exercise additional oversight of
certain public funds deposited at private financial institutions and grants the GDB the legal authority, subject to an entity’s ability to
request waivers under certain specified circumstances, to require such public funds (other than funds of the Legislative Branch, the
Judicial Branch, the University of Puerto Rico, governmental pension plans, municipalities and certain other independent agencies) to
be deposited at the GDB, which is expected to result in a more efficient management of public resources in an effort to maximize
liquidity and efficient use of public resources. The GDB expected to capture a portion of public funds deposited in private financial
institutions. As anticipated, certain public corporations and agencies withdrew from FirstBank approximately $341.6 million during
the second quarter of 2014. The Corporation will continue to focus on transactional accounts and to seek to obtain deposits from
entities excluded from Act 24-2014.
In addition, as of December 31, 2014, the Corporation had $173.3 million of government deposits in the Virgin Islands, compared
to $159.3 million as of December 31, 2013.
Retail deposits – The Corporation’s deposit products also include regular savings accounts, demand deposit accounts, money market
accounts and retail CDs. Total deposits, excluding brokered CDs and government deposits, increased by $164.1 million to $6.2 billion
during 2014, reflecting increases in core-deposit products such as savings, retail CDs, as well as non-interest bearing deposits
primarily in Puerto Rico and the Virgin Islands. Refer to Note 14 in the Corporation’s audited financial statements for the year ended
December 31, 2014 included in Item 8 of this Form 10-K for further details.
Refer to “Net Interest Income” above for information about average balances of interest-bearing deposits, and the average interest rates
paid on deposits for the years ended December 31, 2014, 2013 and 2012.
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Borrowings
As of December 31, 2014, total borrowings amounted to $1.46 billion as compared to $1.43 billion and $1.64 billion as of
December 31, 2013 and 2012, respectively.
The following table presents the composition of total borrowings as of the dates indicated:
Securities sold under agreements
to repurchase
Advances from FHLB
Other borrowings
Total (1)
Weighted average rate during
the period
Weighted Average
Rate as of
December 31, 2014
As of December 31,
2014
2013
2012
(Dollars in thousands)
3.24% $
1.17%
2.86%
$
900,000 $
325,000
231,959
1,456,959 $
900,000 $
300,000
231,959
1,431,959 $
900,000
508,440
231,959
1,640,399
2.72%
2.62%
3.07%
(1) Includes borrowings of $732.0 million as of December 31, 2014 that have variable interest rates or have maturities
within a year.
Securities sold under agreements to repurchase - The Corporation’s investment portfolio is funded in part with repurchase
agreements. The Corporation’s outstanding securities sold under repurchase agreements amounted to $900 million as of December 31,
2014 and 2013. One of the Corporation’s strategies has been the use of structured repurchase agreements and long-term repurchase
agreements to reduce liquidity risk and manage exposure to interest rate risk by lengthening the final maturities of its liabilities while
keeping funding costs at reasonable levels. All of the $900 million of repurchase agreements outstanding as of December 31, 2014
consisted of structured repurchase agreements. In addition to these repurchase agreements, the Corporation has been able to maintain
access to credit by using cost-effective sources such as FHLB advances. Refer to Note 15 in the Corporation’s audited financial
statements for the period ended December 31, 2014 included in Item 8 of this Form 10-K for further details about repurchase
agreements outstanding by counterparty and maturities.
In July 2014, a $100 million structured repurchase agreement that carried a floating rate converted to a fixed rate resulting in an
increase of approximately $0.8 million in interest expense for 2014. Another similar $100 million structured repurchase agreement
flipped to a fixed rate in October 2014 and resulted in a quarterly increase in interest expense of approximately $0.5 million.
In the first quarter of 2015, the Corporation restructured $400 million of its repurchase agreements. Of those, $200 million were
restructured by extending the contractual maturity and changing from a fixed interest rate to a variable rate; and simultaneously the
Corporation entered into $200 million of reverse repurchase agreements with the same counterparty under a master netting
arrangement that provides for a right of setoff that meets the conditions of ASC 210-20-45-11. These repurchase agreements and
reverse repurchase agreements will be presented net on the consolidated statement of financial condition in 2015. In addition, in the
first quarter of 2015, the Corporation restructured an additional $200 million of its repurchase agreements with another counterparty,
by extending the contractual maturity and reducing the interest rate in these agreements.
Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash
or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines
due to changes in interest rates, a liquidity crisis or any other factor, the Corporation is 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 has not experienced significant margin calls from counterparties arising
from credit-quality-related write-downs in valuations and, as of December 31, 2014, it had only $0.2 million of cash equivalent
instruments deposited in connection with collateralized interest rate swap agreements.
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Advances from the FHLB – The Bank 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 qualifying mortgages and/or investments as collateral for
advances taken. As of December 31, 2014 and 2013, the outstanding balance of FHLB advances was $325.0 million and $300.0
million, respectively. The Corporation entered into a 4-year FHLB advance of $25 million with a rate of 1.79% in the third quarter of
2014. As of December 31, 2014, the Corporation had $487.6 million available for additional credit on FHLB lines of credit.
Though currently not in use, other potential sources of short-term funding for the Corporation include commercial paper and federal
funds purchased. Furthermore, in previous years the Corporation entered 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. No assurance can be given that these sources of liquidity will be available in the future and, if available, will
be on comparable terms.
In 2004, FBP Statutory Trust I, a statutory trust that is wholly owned by the Corporation and not consolidated in the Corporation’s
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 Corporation’s 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
Corporation’s 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 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
Corporation’s Junior Subordinated Deferrable Debentures.
The trust-preferred debentures are presented in the Corporation’s consolidated statement of financial condition as Other
Borrowings. 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 June 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior
Subordinated Debentures may be shortened (such 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
applicable rules and regulations. The Collins Amendment of the Dodd-Frank Act eliminated certain trust-preferred securities from
Tier 1 Capital. Bank Holding Companies such as the Corporation must fully phase out these instruments from Tier I capital by January
1, 2016, however they may remain in Tier 2 capital until the instruments are redeemed or mature. As of December 31, 2014, the
Corporation had $225 million in trust preferred securities that are subject to the phase-out from Tier 1 Capital under the Basel III Final
Rule.
With respect to the outstanding subordinated debentures, the Corporation has elected to defer the interest payments that were due in
quarterly periods since March 2012. The aggregate amount of payments deferred and accrued approximates $21.9 million as of
December 31, 2014. Under the indentures, we have the right, from time to time, and without causing an event of default, to defer
payments of interest on the subordinated debentures by extending the interest payment period at any time and from time to time during
the term of the subordinated debentures for up to twenty consecutive quarterly periods. Future interest payments are subject to Federal
Reserve approval.
The Corporation’s principal uses of funds are the origination of loans and the repayment of maturing deposits and borrowings. The
ratio of residential real estate loans to total loans has increased over time. Commensurate with the increase in its mortgage banking
activities, the Corporation has also invested in technology and personnel to enhance the Corporation’s secondary mortgage market
capabilities.
The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed,
from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly
liquid in large part because of the sale of mortgages through guarantee programs of the FHA, VA, HUD, FNMA and FHLMC. The
Corporation obtained commitment authority to issue GNMA mortgage-backed securities from GNMA, and, under this program, the
Corporation completed the securitization of approximately $198.7 million of FHA/VA mortgage loans into GNMA MBS during 2014.
Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary mortgage market.
115
Impact of Credit Ratings on Access to Liquidity
The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. The
Corporation’s current credit ratings and any further downgrades in credit ratings can hinder the Corporation’s access to new forms of
external funding and/or cause external funding to be more expensive, which could in turn adversely affect results of operations. Also,
changes in credit ratings may further affect the fair value of unsecured derivatives that consider the Corporation’s own credit risk as
part of the valuation.
The Corporation does not have any outstanding debt or derivative agreements that would be affected by credit downgrades.
Furthermore, given our non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit
ratings, the liquidity of the Corporation so far has not been affected in any material way by downgrades. The Corporation’s ability to
access new non-deposit sources of funding, however, could be adversely affected by credit downgrades.
The Corporation’s credit as a long-term issuer is currently rated B+ by S&P and B- by Fitch. At the FirstBank subsidiary level,
long-term issuer ratings are currently B3 by Moody’s, six notches below their definition of investment grade; B+ by S&P, four
notches below their definition of investment grade, and B- by Fitch, six notches below their definition of investment grade.
Cash Flows
Cash and cash equivalents were $796.1 million as of December 31, 2014, an increase of $140.4 million when compared to the
balance as of December 31, 2013, while as of December 31, 2013 the total balance of cash and cash equivalents amounted to $655.7
million, a decrease of $291.2 million from December 31, 2012. The following discussion highlights the major activities and
transactions that affected the Corporation’s cash flows during 2014 and 2013.
Cash Flows from Operating Activities
First BanCorp.’s 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 Corporation’s ability to generate cash
through short- and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs.
For 2014 and 2013, net cash provided by operating activities was $264.4 million and $341.7 million, respectively. Net cash
generated from operating activities was higher than net income reported largely as a result of adjustments for operating items such as
the provision for loan and lease losses, depreciation and amortization, proceeds from sales of loans held for sale, and impairments.
Cash Flows from Investing Activities
The Corporation’s investing activities primarily relate to originating loans to be held for investment and purchasing, selling and
repayments of available-for-sale investment securities. For the year ended December 31, 2014, net cash provided by investing
activities was $254.7 million, primarily reflecting principal repayments on loans held for investment and available-for-sale investment
securities.
For the year ended December 31, 2013, net cash used in investing activities was $431.5 million, primarily reflecting purchases of
investment securities.
Cash Flows from Financing Activities
The Corporation’s 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. For the year ended
December 31, 2014, net cash used in financing activities was $378.6 million, mainly due to the reduction in brokered CDs and deposit
withdrawals by certain government entities and public corporations in Puerto Rico.
During 2013, net cash used in financing activities was $201.4 million, mainly due to repayments of maturing FHLB advances and
brokered CDs.
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Capital
As of December 31, 2014, the Corporation's stockholders' equity was $1.7 billion, an increase of $455.9 million from December
31, 2013. The increase was mainly driven by the net income of $392.3 million for 2014, including the $302.9 million partial reversal
of FirstBank’s deferred tax asset valuation allowance, and a $60.4 million increase in other comprehensive income mainly attributable
to an increase in the fair value of U.S. agency MBS and debt securities. As a result of the Written Agreement with the New York
FED, currently neither First BanCorp., nor FirstBank, is permitted to pay dividends on securities without prior approval.
Although all of the regulatory capital ratios of the Bank exceeded the established “well capitalized” levels, as well as the
minimum capital ratios required by the FDIC Order, as of December 31, 2014, FirstBank cannot be treated as a “well capitalized”
institution since it is still subject to the FDIC Order. Set forth below are First BanCorp.’s, and FirstBank’s regulatory capital ratios as
of December 31, 2014 and December 31, 2013, based on existing established guidelines.
First
BanCorp.
FirstBank
To be well
capitalized
Consent Order
Requirements over time
Banking Subsidiary
As of December 31, 2014
Total capital (Total capital to risk-weighted assets)
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)
Leverage ratio
19.70%
18.44%
13.27%
19.37%
18.10%
13.04%
10.00%
6.00%
5.00%
As of December 31, 2013
Total capital (Total capital to risk-weighted assets)
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)
Leverage ratio
17.06%
15.78%
11.71%
16.67%
15.40%
11.44%
10.00%
6.00%
5.00%
12.00%
10.00%
8.00%
12.00%
10.00%
8.00%
The increase in capital ratios was primarily related to earnings recorded in 2014 and a reduction in risk-weighted assets mainly
related to the decrease in commercial and construction loans. The partial reversal of FirstBank’s deferred tax asset valuation allowance
benefited net income and stockholders’ equity but had a lesser impact on our regulatory capital ratios as the majority of the deferred
tax asset balances is disallowed for regulatory capital purposes.
In July 2013, U.S. banking regulators approved a revised regulatory capital framework for U.S. banking organizations (the “Basel
III rules”) that is based on international regulatory capital requirements adopted by the Basel Committee on Banking Supervision over
the past several years. The Basel III rules introduce new minimum capital ratios and capital conservation buffer requirements, change
the composition of regulatory capital, require a number of new adjustments to and deductions from regulatory capital, and introduce a
new “Standardized Approach” for the calculation of risk-weighted assets that will replace the risk-weighting requirements under the
current U.S. regulatory capital rules. The new minimum regulatory capital requirements and the Standardized Approach for the
calculation of risk-weighted assets became effective for the Corporation and FirstBank on January 1, 2015. The capital conservation
buffer requirements, and the regulatory capital adjustments and deductions under the Basel III rules will be phased-in over several
years ending on December 31, 2018.
The Basel III rules introduce a new and separate ratio of Common Equity Tier 1 capital (“CET1”) to risk-weighted assets. CET1, a
narrower subcomponent of total Tier 1 capital, generally consists of common stock and related surplus, retained earnings, accumulated
other comprehensive income (“AOCI”), and qualifying minority interests. Certain banking organizations, however, including the
Corporation and FirstBank, will be allowed to make a one-time permanent election in early 2015 to exclude AOCI items. The
Corporation and FirstBank expect to make this election in order to avoid significant variations in the level of capital depending upon
the impact of interest rate fluctuations on the fair value of the securities portfolio. In addition, the Basel III rules also will require the
Corporation to maintain an additional CET1 capital conservation buffer of 2.5%. Under the rules, the Corporation will be required to
maintain (i) a minimum CET1 to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a
required minimum CET1 ratio of at least 7% upon full implementation, (ii) a minimum ratio of total Tier 1 capital to risk-weighted
assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5% upon
full implementation, (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5%
capital conservation buffer, resulting in a required minimum total capital ratio of 10.5% upon full implementation, and (iv) a required
minimum leverage ratio of 4% (as contrasted to the legacy 3% requirement), calculated as the ratio of Tier 1 capital to average on-
balance sheet (non-risk adjusted) assets. The new basis minimum risk-based and leverage capital requirements were effective for the
Corporation on January 1, 2015. The phase-in of the capital conversation buffer will begin on January 1, 2016 with a first year
117
requirement of 0.625% of additional CET1, which will be progressively increased over a four-year period, increasing by that same
percentage amount on each subsequent January 1 until it reaches the fully-phased in 2.5% CET1 requirement on January 1, 2019.
In addition, the Basel III rules require a number of new deductions from and adjustments to CET1, including deductions from
CET1 for mortgage servicing rights, and deferred tax assets dependent upon future taxable income; these adjustments generally will
be phased in over a four-year period beginning on January 1, 2015. In the case of mortgage servicing assets and deferred tax assets
attributable to temporary differences, among others, these items would be required to be deducted to the extent that any one such
category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
In addition, the Federal Reserve Board’s Basel III rules will require that certain non-qualifying capital instruments, including
cumulative preferred stock and trust preferred securities (“TRuPs”), be excluded from Tier 1 capital. In general, banking
organizations such as the Corporation and the Bank, that are not advanced approaches banks, must begin to phase out TRuPs from
Tier 1 capital on January 1, 2015. The Corporation will be allowed to include 25% of the $225 million outstanding qualifying TRuPs
as Tier 1 capital in 2015 and the TRuPs must be fully phased out from Tier 1 capital by January 1, 2016. However, the Corporation’s
TRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.
The Basel III rules also revise the “prompt corrective action” (“PCA”) regulations that apply to depository institutions, including
FirstBank, pursuant to Section 38 of the Federal Deposit Insurance Act by (i) introducing a separate CET1 ratio requirement for each
PCA capital category (other than critically undercapitalized) with the required CET1 ratio being 6.5% for well-capitalized status; (ii)
increasing the minimum Tier 1 capital ratio requirement for each PCA capital category with the minimum Tier 1 capital ratio for well-
capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that allows a bank with a
composite supervisory rating of 1 to have a 3% leverage ratio and still be adequately capitalized and maintaining the minimum
leverage ratio for well-capitalized status at 5%. The Basel III rules do not change the total risk-based capital requirement (10% for
well-capitalized status) for any PCA capital category. The new PCA requirements became effective on January 1, 2015.
Under the legacy Federal Reserve Board risk based capital requirements, a bank holding company’s assets are adjusted to take into
account different characteristics, with the categories generally ranging from 0% (requiring no additional capital) for assets such as
cash to 100% assets, including commercial mortgage loans, commercial and industrial loans, and consumer loans. Off-balance sheet
items also are adjusted to take into account certain risk characteristics. The Basel III rules supersede this framework and establish a
“standardized approach” for risk-weightings that expands the risk-weighting categories from the four major risk-weighting categories
under the current regulatory capital rules (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of categories,
depending on the nature of the assets. In a number of cases, the Standardized Approach will result in higher risk weights for a variety
of asset categories. Specific changes to the risk-weightings of assets under the current regulatory capital rules include, among other
things: (i) applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition,
development and construction loans, (ii) assigning a 150% risk weight to exposures that are 90 days past due (other than qualifying
residential mortgage exposures, which remain at an assigned risk-weighting of 100%), and (iii) establishing a 20% credit conversion
factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, in
contrast to the 0% risk-weighting under the prior rules.
The Corporation’s estimated pro-forma CET1 ratio, Tier 1 capital ratio, total capital ratio, and the leverage ratio under the Basel III
rules, giving effect as of December 31, 2014 to all the provisions that will be phased-in between January 1, 2015 and January 2019,
was 15.1%, 15.5%, 19.2%, and 11.7%, respectively. These ratios would exceed the fully phased in minimum capital ratios under Basel
III. Pro-forma CET1 ratio, Tier 1 capital ratio, total capital ratio, and the leverage ratio, giving effect as of December 31, 2014 to the
transitional provisions applicable for year 2015, was 16.3%, 16.3%, 19.5%, and 12.2%, respectively.
The Corporation, as an institution with more than $10 billion but less than $50 billion of total consolidated assets, is subject to
certain requirements established by the Dodd-Frank Act, including those related to capital stress testing. The Dodd-Frank Act stress
testing requirements are implemented through the Federal Reserve’s Comprehensive Capital Analysis and Review program (CCAR),
and by the Office of the Comptroller of the Currency (OCC) through their Dodd-Frank Act Stress Testing program (DFAST).
Consistent with requirements of these programs, the Corporation’s first annual company-run stress test should be submitted to
regulators no later than March 31, 2015. Public disclosure of the results for the severely adverse economic scenario is expected to be
made during the second quarter of 2015 on the Corporation’s website.
The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by the financial
community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles,
and purchased credit card relationship intangible assets. Tangible assets are total assets less goodwill, core deposit intangibles, and
purchased credit card relationship intangible assets. Refer to “Basis of Presentation” below for additional information.
118
The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets for the years ended
December 31, 2014 and 2013, respectively:
(In thousands, except ratios and per share information)
Total equity - GAAP
Preferred equity
Goodwill
Purchased credit card relationship
Core deposit intangible
Tangible common equity
Total assets - GAAP
Goodwill
Purchased credit card relationship
Core deposit intangible
Tangible assets
Common shares outstanding
Tangible common equity ratio
Tangible book value per common share
December 31,
2014
December 31,
2013
$
$
$
$
$
1,671,743
(36,104)
(28,098)
(16,389)
(5,420)
1,585,732
12,727,835
(28,098)
(16,389)
(5,420)
12,677,928
212,985
$
$
$
$
12.51%
$
7.45
1,215,858
(63,047)
(28,098)
(19,787)
(6,981)
1,097,945
12,656,925
(28,098)
(19,787)
(6,981)
12,602,059
207,069
8.71%
5.30
The Tier 1 common equity to risk-weighted assets ratio is calculated by dividing (a) Tier 1 capital less capital other than common
stock, including qualifying perpetual preferred stock and qualifying trust preferred securities, by (b) risk-weighted assets, which assets
are calculated in accordance with applicable bank regulatory requirements. The Tier 1 common equity ratio is not required by GAAP.
Management is currently monitoring this ratio, along with the other ratios discussed above, in evaluating the Corporation’s capital
levels and believes that, at this time, the ratio may continue to be of interest to investors.
The following table reconciles stockholders' equity (GAAP) to Tier 1 common equity based on current applicable bank regulatory
requirements (known as "Basel I"):
(In thousands)
Total equity - GAAP
Qualifying preferred stock
Unrealized loss on available-for-sale securities (1)
Disallowed deferred tax assets (2)
Goodwill
Core deposit intangible
Other disallowed assets
Tier 1 common equity
Total risk-weighted assets
Tier 1 common equity to risk-weighted assets ratio
December 31,
2014
December 31,
2013
$
$
$
1,671,743 $
(36,104)
18,351
(245,151)
(28,098)
(5,420)
(422)
1,374,899 $
1,215,858
(63,047)
78,734
-
(28,098)
(6,981)
(23)
1,196,443
8,871,532 $
9,405,798
15.50%
12.72%
(1) Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with
readily determinable fair values, in accordance with regulatory risk-based capital guidelines. In addition, in calculating Tier 1 capital, institutions are required to
deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax.
(2) Approximately $69 million of the Corporation's deferred tax assets as of December 31, 2014 was included without limitation in regulatory capital pursuant to
the risk-based capital guidelines in effect as of such date (Basel I), while approximately $245 million of such assets as of December 31, 2014 exceeded the
limitation imposed by these guidelines and as "disallowed deferred tax assets" were deducted in arriving at Tier 1 Capital. According to such regulatory capital
guidelines, the deferred tax assets that are dependent upon future taxable income are limited for inclusion in Tier 1 capital to the lesser of: (1) the amount of such
deferred tax asset that the entity expects to realize within one year of the calendar quarter-end date, based on its projected future taxable income for that year, or (ii)
10% of the amount of the entity's Tier 1 capital. Approximately $1 million of the Corporation's other net deferred tax liabilities as of December 31, 2014 represents
primarily the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the
amount of net deferred tax assets subject to limitation under the guidelines.
119
The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be
transferred to legal surplus until such surplus equals the total of paid-in capital on common and preferred stock. Amounts transferred
to the legal surplus account from the retained earnings account are not available for distribution to the stockholders without the prior
consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law 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 the Bank cannot pay dividends until it can replenish the reserve fund to an amount of at least 20% of the original capital
contributed. During 2014, $40.0 million was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part
of retained earnings in the Corporation’s statement of financial condition, amounted $40.0 million as of December 31, 2014 (2013 -
$0).
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 from the full contract or notional amount of the transaction. These
transactions are designed to (1) meet the financial needs of customers, (2) manage the Corporation’s credit, market or liquidity risks,
(3) diversify the Corporation’s 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 processes 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, 2014, commitments to extend credit and commercial and financial standby letters of credit amounted to
approximately $1.1 billion (including $642.3 million pertaining to credit card loans) and $42.3 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
Corporation does not enter into interest rate lock agreements with prospective borrowers in connection with mortgage banking
activities.
Contractual Obligations and Commitments
The following table presents a detail of the maturities of the Corporation’s contractual obligations and commitments, which
consist of CDs, long-term contractual debt obligations, commitments to sell mortgage loans and commitments to extend credit:
Contractual obligations:
Certificates of deposit
Securities sold under agreements to
repurchase (1)
Advances from FHLB
Other borrowings
Operating leases
Other contractual obligations
Total contractual obligations
Commitments to sell mortgage loans
Standby letters of credit
Commitments to extend credit:
Lines of credit
Letters of credit
Construction undisbursed funds
Total commercial commitments
Contractual Obligations and Commitments
As of December 31, 2014
Total
Less than 1 year
1-3 years
(In thousands)
3-5 years
After 5 years
$
5,078,709 $
3,232,146 $ 1,631,334 $
178,973 $
36,256
900,000
325,000
231,959
67,959
128,419
6,732,046 $
-
-
-
8,683
33,911
700,000
300,000
-
15,358
51,699
3,274,740 $ 2,698,391 $
200,000
25,000
-
12,680
30,252
446,905 $
-
-
231,959
31,238
12,557
312,010
129,369
3,791
1,066,009
38,555
76,235
1,180,799
$
$
$
$
$
(1) Approximately $400 million of the securities sold under agreements to repurchase scheduled to mature within 2-3 years were restructured in the first quarter of 2015 and
extended to mature on several dates in 2022.
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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 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 the 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. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit
facility at any time and without cause.
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 of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk, and MIALCO
meetings focus on, among other things, current and expected conditions in world financial markets, competition and prevailing rates in
the local deposit market, liquidity, securities market values, recent or proposed changes to the investment portfolio, alternative funding
sources and related 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 Corporation’s overall strategies and
objectives.
On a quarterly basis, the Corporation performs a consolidated net interest income simulation analysis to estimate the potential
change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time
horizon, assuming upward and downward yield curve shifts. The rate scenarios considered in these simulations reflect gradual upward
and downward interest rate movements of 200 basis points 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 dynamic balance sheet based on recent patterns and current strategies.
The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing structure 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, deposit decay and other factors, which
may be important in projecting net interest income.
The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement.
The starting point of the projections generally corresponds to the actual values on the balance sheet on the date of the simulations.
These simulations are highly complex, and are based on many assumptions that are intended to reflect the general behavior of the
balance sheet components over the period in question. It is unlikely that actual events will match these assumptions in all cases. For
this reason, the results of these forward-looking computations are only approximations of the true sensitivity of net interest income to
changes in market interest rates. Several benchmark and market rate curves were used in the modeling process, primarily the
LIBOR/SWAP curve, Prime, Treasury, FHLB rates, brokered CDs rates, repurchase agreements rates and the mortgage commitment
rate of 30 years.
The 12-month net interest income is forecasted assuming the December 31, 2014 interest rate curves remain constant. Then net
interest income is estimated under rising and falling rates scenarios. For rising rate scenarios, a gradual (ramp) parallel upward shift of
the yield curves is assumed during the first twelve months (the “+200 ramp” scenario). Conversely, for the falling rate scenarios, a
gradual (ramp) parallel downward shift of the yield curves is assumed during the first twelve months (the “-200 ramp” scenario).
However, given the current low levels of interest rates, a full downward shift of 200 bps would represent an unrealistic scenario.
Therefore, under the falling rate scenario, rates move downward up to 200 basis points, but without reaching zero. The resulting
scenario shows interest rates close to zero in most cases, reflecting a flattening yield curve instead of a parallel downward scenario.
The Libor/Swap curve for December 31, 2014, as compared to December 2013, reflected a slight reduction in the short-term
horizon, between one to twelve months, with a decrease of 6 basis points, while market rates increased by 17 basis points in the
medium term, that is, between 2 to 5 years. In the long term, that is, over a 5-year-time horizon, market rates decreased by 89 basis
points. The Treasury curve increased by 2 basis points in the short-term and increased by 20 basis points in the medium-term horizon
as compared to December 2013 end of month levels. The long-term horizon decreased by 109 basis points, as compared to December
2013 end of month levels.
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The following table presents the results of the simulations as of December 31, 2014 and December 31, 2013. Consistent with prior
years, these exclude non-cash changes in the fair value of derivatives and liabilities measured at fair value:
December 31, 2014
Net Interest Income Risk
(Projected for the next 12 months)
December 31, 2013
Net Interest Income Risk
(Projected for the next 12 months)
(Dollars in millions)
Change
% Change
Static Simulation
Growing Balance Sheet
% Change
Change
Static Simulation
Change
% Change
+ 200 bps ramp
- 200 bps ramp
$
$
9.6
(8.2)
1.88 % $
(1.60) % $
9.8
(9.3)
1.90 % $
(1.80) % $
14.6
(10.6)
2.76 % $
(2.00) % $
Growing Balance Sheet
% Change
Change
2.23 %
(1.99) %
12.1
(10.8)
The Corporation continues to manage its balance sheet structure to control the overall interest rate risk. Among the major drivers
behind the slight reduction in interest income sensitivity to interest rate shifts are an increase of $140.4 million in cash and cash
equivalents, primarily interest-earning cash balances at the Federal Reserve Bank, an increase of $462.2 million in residential
mortgage loans held for investment that was offset by a decrease in commercial and construction loans of approximately $751.9
million. The liabilities side was affected mainly by a reduction of $255.0 million in brokered CDs during the year 2014.
Taking into consideration the above-mentioned facts for modeling purposes, the net interest income for the next twelve months
under a non-static or growing balance sheet scenario, is estimated to increase by $9.8 million in the rising rate scenario when
compared against the Corporation’s flat or unchanged interest rate forecast scenario. Under the falling rate, non-static scenario, the net
interest income is estimated to decrease by $9.3 million.
Derivatives
First BanCorp. uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in
interest rates beyond management’s control.
The following summarizes major strategies, including derivative activities, used by the Corporation in managing interest rate risk:
Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a
contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for
protection from rising interest rates.
Interest rate swaps - Interest rate swap agreements generally involve the exchange of fixed-and-floating-rate interest payment
obligations without the exchange of the underlying notional principal amount. As of December 31, 2014, most of the interest rate
swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising from changes in
fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense
depending on whether an asset or liability is being economically hedged.
Forward Contracts - Forward contracts are sales of to-be-announced (“TBA”) mortgage-backed securities that will settle over the
standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no
net settlement provision and no market mechanism to facilitate net settlement and provide for delivery of a security within the time
generally established by regulations or conventions in the market-place or exchange in which the transaction is being executed. The
forward sales are considered derivative instruments that need to be marked-to-market. These securities are used to hedge the
FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains (losses) are recognized as
part of mortgage banking activities in the consolidated statement of income (loss).
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 (Loss),
refer to Note 29 in the Corporation’s audited financial statements for the year ended December 31, 2014 included in Item 8 of this
Form 10-K.
122
The following tables summarize the fair value changes in the Corporation’s derivatives as well as the sources of the fair values:
Liability Derivatives
Year Ended
Asset Derivatives
Year Ended
(In thousands)
December 31, 2014
December 31, 2014
Fair value of contracts outstanding at the beginning
of the year
Realized loss on contracts terminated during the year
Changes in fair value during the year
Fair value of contracts outstanding as of
December 31, 2013
$
$
$
394
-
(355)
39
$
(4,023)
2,546
1,290
(187)
Sources of Fair Value
(In thousands)
As of December 31, 2014
Pricing from observable market inputs -
Asset Derivatives
Pricing from observable market inputs -
Liability Derivatives
Payment Due by Period
Maturity
Less Than
One Year
Maturity
1-3 Years
Maturity
3-5 Years
Maturity in
Excess of 5
Years
Total Fair
Value
$
$
33 $
6 $
- $
- $
39
(181)
(148) $
(6)
- $
-
- $
-
- $
(187)
(148)
Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market
value of derivative instruments is largely a function of the financial market’s 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 level of interest rates, as well as expectations for rates in the future.
As of December 31, 2014 and 2013, all of the derivative instruments held by the Corporation were considered undesignated
economic hedges.
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. All of the
Corporation’s 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.
Refer to Note 29 of the Corporation’s audited financial statements for the year ended December 31, 2014 included in Item 8 of this
Form 10-K for additional information regarding the fair value determination of derivative instruments.
123
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 counterparty’s 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 Corporation’s derivative credit risk exposure, refer to “—Interest Rate Risk Management” above.
The Corporation manages its credit risk through its credit policy, underwriting, independent loan review and quality control procedures,
statistical analysis, comprehensive financial analysis, and established management committees. The Corporation also employs proactive
collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible for mitigating
defaults and minimizing losses upon default within each region and for each business segment. In the case of the C&I, commercial
mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-
performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the
resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or
adversely classified status. The SAG utilizes relationship officers, collection specialists and attorneys. In the case of residential
construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary.
The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate
U.S. agency 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 the full faith and credit of the U.S. government.
Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Lending Officer and
other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives.
These goals and objectives are documented in the Corporation’s Credit Policy.
Allowance for Loan and Lease Losses and Non-performing Assets
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents the estimate of the level of reserves appropriate to absorb inherent credit losses.
The amount of the allowance was determined by empirical analysis and judgments regarding the quality of each individual loan
portfolio. All known relevant internal and external factors that affected loan collectability were considered, including analyses of
historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. For
example, factors affecting the economies of Puerto Rico, Florida (USA), the US Virgin Islands and the British Virgin Islands may
contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. Such factors are subject to regular
review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. The process
includes judgments and quantitative elements that may be subject to significant change. There is no certainty that the allowance will
be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions,
or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from our estimates, the
credit quality of our customer base materially decreases, the risk profile of a market, industry, or group of customers changes
materially, or the allowance is determined to not be adequate, additional provisions for credit losses could be required, which could
adversely affect our business, financial condition, liquidity, capital, and results of operations in future periods.
The allowance for loan and lease losses provides for probable losses that have been identified with specific valuation allowances for
individually evaluated impaired loans and probable losses believed to be inherent in the loan portfolio that have not been specifically
identified. An internal risk rating is assigned to each business loan at the time of approval and is subject to subsequent periodic
reviews by the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of
the Corporation’s continued evaluation of its asset quality.
124
The ratio of allowance for loan losses to total loans held for investment decreased to 2.40% as of December 31, 2014 from 2.97%
as of December 31, 2013, primarily due to charge-offs on certain collateral-dependent commercial loans that did not require additional
reserves, updated appraisals, and reserve releases on non-performing and adversely classified construction and commercial loans paid
off. In addition, the reserve required for the non-impaired mortgage loans acquired from Doral was lower than the portion of the
general reserve for commercial loans related to the secured borrowings, and the purchased credit impaired loans acquired from Doral,
with an estimated fair value at acquisition of $102.8 million, required no allowance as of December 31, 2014. The allowance to total
loans for each of the Corporation’s categories of loans changed as follows: the allowance to total loans for the C&I portfolio decreased
from 2.82% as of December 31, 2013 to 2.57% at December 31, 2014; the allowance to total loans for the commercial mortgage
portfolio decreased from 4.01% at December 31, 2013 to 3.06% at December 31, 2014; the allowance to total loans for the
construction loan portfolio decreased from 21.23% at December 31, 2013 to 10.38% at December 31, 2014; the allowance to total
loans for the residential mortgage portfolio decreased from 1.30% at December 31, 2013 to 0.91% at December 31, 2014; and the
allowance to total consumer loans and finance leases increased from 2.83% as of December 31, 2013 to 3.41% as of December 31,
2014 primarily due to higher loss rates impacted by charge-offs trends and higher loss severity rates for auto loans.
Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is
located in Puerto Rico, the U.S. and British Virgin Islands or the U.S. mainland (mainly in the state of Florida), the performance of the
Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and
conditions within each specific area’s real estate market. The real estate market in Puerto Rico experienced readjustments in value
over the last few years driven by the loss of income due to higher unemployment, reduced demand and general adverse economic
conditions. The Corporation sets adequate loan-to-value ratios upon original approval following its regulatory and credit policy
standards. The real estate market for the U.S. Virgin Islands has declined mostly due to reduced business activity in the region,
partially related to the closing in 2012 of the Hovensa refinery in St Croix. In Florida, we operate mostly in Miami, where home prices
have improved, mostly driven by a higher demand from foreign investors, and a decrease in distressed property sales. As discussed
under “Provision for Loan and Lease Losses” above, the Corporation experienced in 2014 a significant increase in recoveries of
amounts previously charged-off in the Florida region related to commercial mortgage and construction portfolios.
As shown in the following table, the allowance for loan and lease losses amounted to $222.4 million as of December 31, 2014, or
2.40% of total loans compared with $285.9 million, or 2.97% of total loans, as of December 31, 2013. Refer to “Provision for Loan and
Lease Losses” above for additional information.
125
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,
2014
2013
2012
2011
2010
Allowance for loan and lease losses,
beginning of year
Provision (release) for loan and lease losses:
Residential mortgage (1)
Commercial mortgage (2) (3)
Commercial and Industrial (2) (4)
Construction (2) (5)
Consumer and finance leases
Total provision for loan and lease losses (6)
Charge-offs:
Residential mortgage (7)
Commercial mortgage (8)
Commercial and Industrial (9)
Construction (10)
Consumer and finance leases
Total charge offs (11)
Recoveries:
Residential mortgage
Commercial mortgage
Commercial and Industrial
Construction
Consumer and finance leases
Total recoveries
Net charge-offs
Allowance for loan and lease losses, end
of year
(Dollars in thousands)
$
285,858 $
435,414 $
493,917 $
553,025 $
528,120
17,487
(7,076)
36,681
(17,508)
79,946
109,530
92,755
38,048
43,608
15,461
53,879
243,751
36,531
(778)
38,773
10,955
35,018
120,499
45,339
54,513
78,711
40,174
17,612
236,349
(24,345)
(25,807)
(61,935)
(11,533)
(76,696)
(200,316)
(129,164)
(67,457)
(109,849)
(43,323)
(63,108)
(412,901)
(37,944)
(21,779)
(49,521)
(45,008)
(43,735)
(197,987)
(39,826)
(51,207)
(69,783)
(103,131)
(45,478)
(309,425)
1,049
10,639
3,680
6,049
5,906
27,323
(172,993)
1,165
4,855
4,636
2,076
6,862
19,594
(393,307)
1,089
810
3,605
4,267
9,214
18,985
(179,002)
835
90
2,921
2,371
7,751
13,968
(295,457)
93,883
119,815
68,336
300,997
51,556
634,587
(62,839)
(82,708)
(99,724)
(313,511)
(64,219)
(623,001)
121
1,288
1,251
358
10,301
13,319
(609,682)
$
222,395 $
285,858 $
435,414 $
493,917 $
553,025
1.74%
4.33%
1.81%
2.40%
2.97%
4.01%
Allowance for loan and lease losses to year end total
loans held for investment
Net charge-offs to average loans outstanding during
the year
Net charge-offs, excluding charge-offs related to the
acquisition of mortgage loans from Doral, bulk
loan sales and loans transferred to held for
sale, to average loans outstanding
during the year
Provision for loan and lease losses to net charge-offs
during the year
Provision for loan and lease losses to net charge-offs
during the year, excluding impact of the
acquisition of mortgage loans from Doral,
bulk loan sales and the transfer of loans
to held for sale
_________
(1) Includes a provision totaling $68.8 million associated with the bulk loan sales in 2013.
(2) During the second quarter of 2013, after a comprehensive review of substantially all of the loans in our commercial portfolios, the
classification of certain loans was revised to more accurately depict the nature of the underlying loans. This reclassification resulted
in a net increase of $269.0 million and $10.7 million in commercial mortgage loans and related allowance, respectively, since the
principal source of repayment of such loans is derived from the operation of the underlying real estate, with a corresponding decrease
of $246.8 million and $9.4 million in commercial and industrial loans and related allowance, respectively, and a $22.2 million and $1.3
million decrease in construction loans and related allowance, respectively.
1.68%
0.69x
0.62x
1.74%
0.63x
0.65x
1.74%
0.67x
0.67x
126
4.68%
4.74%
2.68%
4.76%
2.68%
3.60%
0.80x
1.04x
0.80x
1.20x
(3) Includes a provision totaling $28.7 million associated with the bulk loan sales and the transfer of loans to held for sale in 2013, and a
provision of $11.3 million associated with loans transferred to held for sale in 2010.
(4) Includes a provision totaling $1.4 million associated with the acquisition of mortgage loans from Doral in 2014, a provision of $20.8
million associated with the bulk loan sales in 2013, and a provision of $8.6 million associated with loans transferred to held for sale in 2010.
(5) Includes a provision totaling $13.6 million associated with the bulk loan sales in 2013 and a provision of $83.0 million associated with
loans transferred to held for sale in 2010.
(6) Includes a provision of $1.4 million associated with the acquisition of mortgage loans from Doral in 2014, a provision of $132.0 million
associated with the bulk loan sales and the transfer of loans to held for sale in 2013, and a provision of $102.9 million associated with
loans transferred to held for sale in 2010.
(7) Includes charge-offs totaling $99.0 million associated with the bulk loan sales in 2013.
(8) Includes charge-offs totaling $54.6 million associated with the bulk loan sales and the transfer of loans to held for sale in 2013 and
charge-offs of $29.5 million associated with loans transferred to held for sale in 2010.
(9) Includes charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from Doral in 2014, charge-offs of $44.7
million associated with the bulk loan sales in 2013, and charge-offs of $8.6 million associated with loans transferred to held for sale in 2010.
(10) Includes charge-offs totaling $34.2 million associated with the bulk loan sales and the transfer of loans to held for sale in 2013, and
charge-offs of $127.0 million associated with loans transferred to held for sale in 2010.
(11) Includes charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from Doral in 2014, charge-offs of $232.4 million
associated with the bulk loan sales and the transfer of loans to held for sale in 2013, and charge-offs of $165.1 million the associated with loans
transferred to held for sale in 2010.
The following table sets forth information concerning the allocation of the Corporation’s allowance for loan and lease losses by
loan category and the percentage of loan balances in each category to the total of such loans as of December 31 of the years indicated:
2014
2013
2012
2011
2010
Percent
of loans
in each
category
to total
loans
Amount
Amount
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Residential mortgage
$
27,301
33% $
33,110
27% $
68,354
27% $
68,678
27% $
62,330
29%
(Dollars in thousands)
Commercial mortgage
loans
Construction loans
Commercial and
Industrial loans
(including loans to
local financial
institutions prior
to 2014)
Consumer loans and
finance leases
50,894
12,822
18%
1%
73,138
35,814
19%
2%
97,692
61,600
19%
4%
108,992
91,386
15%
4%
105,596
151,972
14%
6%
63,721
27%
85,295
31%
146,900
30%
164,490
39%
152,641
36%
67,657
21%
58,501
21%
60,868
20%
60,371
15%
80,486
15%
$ 222,395
100% $ 285,858
100% $ 435,414
100% $ 493,917
100% $ 553,025
100%
127
The following table sets forth information concerning the composition of the Corporation's allowance for loan and lease losses as
of December 31, 2014 and 2013 by loan category and by whether the allowance and related provisions were calculated individually
or through a general valuation allowance:
As of December 31, 2014
(Dollars in thousands)
Impaired loans without specific reserves:
Principal balance of loans, net of charge-offs
Impaired loans with specific reserves:
Principal balance of loans, net of charge-offs
Allowance for loan and lease losses
Allowance for loan and lease losses to
principal balance
PCI loans:
Carrying value of PCI loans
Allowance for PCI loans
Allowance for PCI loans to carrying value
Loans with general allowance:
Principal balance of loans
Allowance for loan and lease losses
Allowance for loan and lease losses to
principal balance
Total loans held for investment:
Principal balance of loans
Allowance for loan and lease losses
Allowance for loan and lease losses to
principal balance (1)
(Dollars in thousands)
As of December 31, 2013
Impaired loans without specific reserves:
Principal balance of loans, net of charge-offs
Impaired loans with specific reserves:
Principal balance of loans, net of charge-offs
Allowance for loan and lease losses
Allowance for loan and lease losses to
principal balance
PCI loans:
Carrying value pf PCI loans
Allowance for PCI loans
Allowance for PCI loans to carrying value
Loans with general allowance:
Principal balance of loans
Allowance for loan and lease losses
Allowance for loan and lease losses to
principal balance
Total loans held for investment:
Principal balance of loans
Allowance for loan and lease losses
Allowance for loan and lease losses to
principal balance (1)
Residential
Mortgage Loans
Commercial
Mortgage Loans
C&I Loans
Construction
Loans
Consumer and
Finance Leases
Total
$
74,177 $
109,271 $
41,131 $
10,455 $
3,778 $
238,812
350,067
10,854
101,467
14,289
195,240
21,314
29,012
2,577
30,809
6,171
706,595
55,205
3.10 %
14.08 %
10.92 %
8.88 %
20.03 %
7.81 %
98,494
-
-
3,393
-
-
-
-
-
-
-
-
717
-
-
102,604
-
-
2,488,449
16,447
1,451,656
36,605
2,243,066
42,407
84,013
10,245
1,947,241
61,486
8,214,425
167,190
0.66 %
2.52 %
1.89 %
12.19 %
3.16 %
2.04 %
$
3,011,187 $
27,301
1,665,787 $
50,894
2,479,437 $
63,721
123,480 $
12,822
1,982,545 $
67,657
9,262,436
222,395
0.91 %
3.06 %
2.57 %
10.38 %
3.41 %
2.40 %
Residential
Mortgage Loans
Commercial
Mortgage Loans
C&I Loans
Construction
Loans
Consumer and
Finance Leases
Total
$
220,428 $
69,484 $
32,418 $
15,120 $
4,035 $
341,485
190,566
18,125
149,888
32,189
154,686
26,686
57,597
22,144
24,890
3,457
577,627
102,601
9.51 %
21.48 %
17.25 %
38.45 %
13.89 %
17.76 %
-
-
-
-
-
-
-
-
-
-
-
-
4,791
-
-
4,791
-
-
2,138,014
14,985
1,604,236
40,949
2,841,218
58,609
95,996
13,670
2,032,803
55,044
8,712,267
183,257
0.70 %
2.55 %
2.06 %
14.24 %
2.71 %
2.10 %
$
2,549,008 $
33,110
1,823,608 $
73,138
3,028,322 $
85,295
168,713 $
35,814
2,066,519 $
58,501
9,636,170
285,858
1.30 %
4.01 %
2.82 %
21.23 %
2.83 %
2.97 %
(1) Loans used in the denominator include PCI loans of $102.6 million and $4.8 million as of December 31, 2014 and 2013, respectively.
However, the Corporation separately tracks and reports PCI loans and excludes these loans from non-performing loans,
impaired loans, TDRs and non-performing assets statistics.
128
The following tables show the activity for impaired loans held for investment and the related specific
reserve during 2014 and 2013:
Impaired Loans:
Balance at beginning of year
Loans determined impaired during the year
Charge-offs
Loans sold, net of charge-offs
Loans transferred to held for sale
Increases to impaired loans - additional disbursements
Foreclosures
Loans no longer considered impaired
Paid in full or partial payments
Balance at end of year
Specific Reserve:
Balance at beginning of year
Provision for loan losses
Net charge-offs
Balance at end of year
Non-performing Loans and Non-performing Assets
2014
2013
(In thousands)
$
919,112
306,390
(106,154)
(4,500)
-
5,028
(40,582)
(22,333)
(111,554)
$ 1,465,294
280,860
(307,428)
(201,409)
(145,415)
6,624
(45,094)
(49,299)
(85,021)
$
945,407
$
919,112
2014
2013
(In thousands)
$
102,601
58,758
(106,154)
$
221,749
188,280
(307,428)
$
55,205
$
102,601
Total non-performing assets consist of non-performing loans (generally loans held for investment or loans held for sale on which
the recognition of interest income has been discontinued when the loan became 90 days past due or earlier if the full and timely
collection of interest or principal is uncertain), foreclosed real estate and other repossessed properties, as well as non-performing
investment securities. When a loan is placed in non-performing status, any interest previously recognized and not collected is reversed
and charged against interest income.
Non-performing Loans Policy
Residential Real Estate Loans — The Corporation classifies real estate loans in non-performing status when interest and principal
have not been received for a period of 90 days or more.
Commercial and Construction Loans — The Corporation places commercial loans (including commercial real estate and
construction loans) in non-performing status when interest and principal have not been received for a period of 90 days or more or
when collection of all of the principal or interest is not expected due to deterioration in the financial condition of the borrower.
Finance Leases — Finance leases are classified in non-performing status when interest and principal have not been received for a
period of 90 days or more.
Consumer Loans — Consumer loans are classified in non-performing status when interest and principal have not been received for
a period of 90 days or more. Credit card loans continue to accrue finance charges and fees until charged-off at 180 days delinquent.
129
PCI Loans — PCI loans were recorded at fair value at acquisition. Since the initial fair value of these loans included an estimate of
credit losses expected to be realized over the remaining lives of the loans, the subsequent accounting for PCI loans differs from the
accounting for non-PCI loans. The Corporation, therefore, separately tracks and reports PCI loans and excludes these from its non-
performing loans, impaired loans, TDRs, and non-performing assets statistics.
Cash payments received on certain loans that are impaired and collateral dependent are recognized when collected in accordance
with the contractual terms of the loans. The principal portion of the payment is used to reduce the principal balance of the loan,
whereas the interest portion is recognized on a cash basis (when collected). However, when management believes that the ultimate
collectability of principal is in doubt, the interest portion is applied to principal. The risk exposure of this portfolio is diversified as to
individual borrowers and industries, among other factors. In addition, a large portion is secured with real estate collateral.
Other Real Estate Owned
OREO acquired in settlement of loans is carried at the lower of cost (carrying value of the loan) or fair value less estimated costs to
sell off the real estate. Appraisals are obtained periodically, generally, on an annual basis.
Other Repossessed Property
The other repossessed property category generally includes repossessed boats and autos acquired in settlement of loans.
Repossessed boats and autos are recorded at the lower of cost or estimated fair value.
Other Non-Performing Assets
In the past, this category mainly consisted of assets pledged to Lehman at their book value. During the second quarter of 2013, the
Corporation recorded a non-cash charge of $66.6 million associated with the carrying value of the pledged securities and related
accrued interest ($64.5 million book value and $2.1 million accrued interest).
Past-Due Loans 90 days and still accruing
These are accruing loans that are contractually delinquent 90 days or more. These past-due loans are either current as to interest but
delinquent as to the payment of principal or are insured or guaranteed under applicable FHA and VA programs. Past due loans 90
days and still accruing also includes PCI loans with individual delinquencies over 90 days, primarily related to mortgage loans
acquired from Doral in 2014.
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on
nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six
months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or
significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may
result in the loans being returned to accrual status at the time of the restructuring or after a shorter performance period. If the
borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan.
130
The following table presents non-performing assets as of the dates indicated:
Non-performing loans held for investment:
Residential mortgage
Commercial mortgage
Commercial and industrial
Construction
Finance leases
Consumer
Total non-performing loans held for
investment
OREO
Other repossessed property
Other assets (1)
Total non-performing assets,
excluding loans held for sale
Non-performing loans held for sale
Total non-performing assets,
including loans held for
sale (2)(3)
2014
2013
2012
(Dollars in thousands)
2011
2010
$
$
180,707
148,473
122,547
29,354
5,245
37,570
$
161,441
120,107
114,833
58,866
3,082
37,220
313,626 $
214,780
230,090
178,190
3,182
35,693
$
338,208
240,414
270,171
250,022
3,485
36,062
392,134
217,165
317,243
263,056
3,935
45,456
523,896
495,549
975,561
1,138,362
1,238,989
124,003
14,229
-
662,128
54,641
160,193
14,865
-
670,607
54,801
185,764
10,107
64,543
114,292
15,392
64,543
84,897
14,023
64,543
1,235,975
2,243
1,332,589
4,764
1,402,452
159,321
$
716,769
$
725,408
$
1,238,218
$
1,337,353
$
1,561,773
130,816 $
10.19 %
10.78 %
493,917 $
43.39 %
$
$
162,887
42.45 %
$
5.63 %
9.70 %
435,414 $
5.66 %
222,395 $
142,012 $
9.45 %
5.14 %
285,858 $
120,082 $
5.73 %
Past due loans 90 days and still
accruing (4) (5)
Non-performing assets to total assets
Non-performing loans held for
investment to total loans held for
investment
Allowance for loan and lease losses
Allowance to total non-performing
loans held for investment
Allowance to total non-performing
loans held for investment,
excluding residential real estate
loans
_________
(1) Collateral pledged to Lehman.
(2) Purchased credit impaired loans accounted for under ASC 310-30 of $102.6 million and $4.8 million as of December 31, 2014 and December 31,
2013, respectively, are excluded and not considered non-performing due to the application of the accretion method, under which these loans
will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
(3) Non-performing assets exclude $494.6 million and $425.4 million of TDR loans that are in compliance with the modified terms and in accrual
status as of December 31, 2014 and 2013, respectively.
(4) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past due loans 90 days
and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $40.4 million of residential
mortgage loans insured by the FHA or guaranteed by the VA, which are over 18 months delinquent, that are no longer accruing interest as of
December 31, 2014.
(5) Amount includes purchased credit impaired loans with individual delinquencies over 90 days and still accruing with a carrying value as of
December 31, 2014 of approximately $15.7 million, primarily related to loans acquired from Doral in 2014.
57.69 %
85.56 %
64.80 %
44.63 %
65.78 %
61.73 %
144,113
10.02 %
10.63 %
553,025
44.64 %
65.30 %
131
The following table shows non-performing assets by geographic segment:
Puerto Rico:
Non-performing loans held for investment:
Residential mortgage
Commercial mortgage
Commercial and industrial
Construction
Finance leases
Consumer
Total non-performing loans held for investment
OREO
Other repossessed property
Other Assets
Total non-performing assets, excluding loans
held for sale
Non-performing loans held for sale
Total non-performing assets, including loans
held for sale (1)
Past-due loans 90 days and still accruing (2)
Virgin Islands:
Non-performing loans held for investment:
Residential mortgage
Commercial mortgage
Commercial and industrial
Construction
Consumer
Total non-performing loans held for investment
OREO
Other repossessed property
Total non-performing assets, excluding loans
held for sale
Non-performing loans held for sale
Total non-performing assets, including loans
held for sale
Past-due loans 90 days and still accruing
United States:
Non-performing loans held for investment:
Residential mortgage
Commercial mortgage
Commercial and industrial
Construction
Consumer
Total non-performing loans held for investment
OREO
Other repossessed property
Total non-performing assets
$
$
$
$
$
$
$
$
$
2014
2013
2012
2011
2010
(Dollars in thousands)
$
156,361
121,879
116,301
24,526
5,245
35,286
459,598
111,041
14,150
-
584,789
14,636
139,771 $
101,255
109,224
43,522
3,082
34,660
431,514
123,851
14,806
-
281,086 $
172,534
215,985
99,383
3,182
32,529
804,699
145,683
10,070
64,543
297,595 $
170,949
261,189
137,478
3,485
34,888
905,584
85,788
15,283
64,543
570,171
14,796
1,024,995
2,243
1,071,198
4,764
330,737
177,617
307,608
196,948
3,935
43,241
1,060,086
67,488
13,839
64,543
1,205,956
159,321
599,425
154,375
$
$
584,967
$
1,027,238
$
1,075,962
$
1,365,277
118,097 $
137,288 $
118,888 $
142,756
$
15,483
11,770
6,246
4,064
887
38,450
6,967
22
8,439 $
6,827
5,609
11,214
514
32,603
14,894
5
18,054 $
11,232
12,905
72,648
804
115,643
24,260
17
11,470 $
12,851
7,276
110,594
518
142,709
7,200
67
45,439
40,005
$
47,502
40,005
$
139,920
-
$
149,976
-
$
85,444
$
87,507
$
139,920
$
149,976
$
5,281
$
1,985 $
4,068 $
11,204 $
8,863
14,824
-
764
1,397
25,848
5,995
57
31,900
$
$
13,231 $
12,025
-
4,130
2,046
31,432
21,448
54
52,934
$
14,486 $
31,014
1,200
6,159
2,360
55,219
15,821
20
71,060
$
29,143 $
56,614
1,706
1,950
656
90,069
21,304
42
111,415
$
9,655
7,868
6,078
16,473
927
41,001
2,899
108
44,008
-
44,008
1,358
51,742
31,680
3,557
49,635
1,288
137,902
14,510
76
152,488
-
Past-due loans 90 days and still accruing
________
(1) Purchased credit impaired loans accounted for under ASC 310-30 of $102.6 million and $4.8 million as of December 31, 2014 and December 31, 2013,
respectively, are excluded and not considered non-performing due to the application of the accretion method, under which these loans will accrete
interest income over the remaining life of the loans using estimated cash flow analysis.
(2) Amount includes purchased credit impaired loans with individual delinquencies over 90 days and still accruing with a carrying value as of
December 31, 2014 of approximately $15.7 million, primarily related to loans acquired from Doral in 2014.
656 $
- $
3,231
$
$
724 $
132
Total non-performing loans, including non-performing loans held for sale, were $578.5 million as of December 31, 2014. This
represents an increase of $28.2 million, or 5.1%, from $550.4 million as of December 31, 2013. The increase was primarily reflected
in the non-performing commercial mortgage and C&I loan portfolios, driven by the inflow of two large commercial relationships
totaling $51.0 million, and a $19.3 million increase in non-performing residential mortgage loans.
Non-performing commercial mortgage loans, including non-performing commercial mortgage loans held for sale, increased by
$28.2 million, or 22%, from December 31, 2013. The increase was primarily driven by the inflow of one large relationship amounting
to $29.8 million in Puerto Rico, a participated loan determined to be impaired during 2014. The inflow of this collateral dependent
loan did not require an increase in the related specific reserve. In addition, there were inflows of two loans in Florida totaling $2.4
million. These increases were partially offset by charge-offs, including charge-offs of $19.7 million on three commercial mortgage
relationships in Puerto Rico. Nonperforming commercial mortgage loans increased by $20.5 million, $2.8 million, and $4.9 million in
Puerto Rico, the United States, and the Virgin Islands, respectively, from December 31, 2013 levels. Total inflows of non-performing
commercial mortgage loans of $90.2 million during 2014 decreased by $22.5 million compared to $112.7 million for 2013.
Non-performing C&I loans increased by $7.7 million compared to December 31, 2013, driven by the inflow of a $21.2 million
loan in Puerto Rico, and inflows of eight relationships individually in excess of $2 million totaling $41.8 million, also in Puerto Rico.
This was partially offset by charge-offs and principal repayments, including charge-offs amounting to $39.7 million related to eleven
relationships in Puerto Rico and a $4.3 million loan brought current. Total inflows of non-performing C&I loans increased to $95.1
million during 2014 compared to inflows of $49.7 million for the same period in 2013.
Non-performing construction loans, including non-performing construction loans held for sale, decreased by $29.5 million, or
28%, from December 31, 2013, primarily reflecting charge-offs of $11.1 million, the restoration to accrual status of a $10.7 million
loan in Puerto Rico that is current in payments and deemed collectible, two loans paid off in the United States totaling $4.1 million, a
$1.7 million loan transferred to the OREO portfolio in the Virgin Islands, and a loan of $1.0 million paid off in Puerto Rico. The
inflows of non-performing construction loans of $2.8 million during 2014 decreased compared to inflows of $18.0 million for 2013.
The following tables present the activity of commercial and construction non-performing loans held for investment:
Commercial
Mortgage
Commercial &
Industrial
(In thousands)
Construction
Year ended December 31, 2014
Beginning balance
Plus:
Additions to non-performing
Less:
Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status/loan collections
Reclassification
Sales, net of charge-offs
Ending balance
$
120,107 $
114,833 $
90,153
95,110
(22,984)
(24,947)
(10,391)
1,035
(4,500)
148,473 $
(7,344)
(46,786)
(32,231)
(1,035)
-
122,547 $
$
58,866
2,833
(3,086)
(11,147)
(18,112)
-
-
29,354
133
Year ended December 31, 2013
Beginning balance
Plus:
Additions to non-performing
Less:
Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status/loan collections
Reclassification
Transfer to loans held for sale, net of charge-offs
Non-performing loans sold
Ending balance
Commercial
Mortgage
Commercial &
Industrial
(In thousands)
Construction
$
214,780 $
230,090 $
178,190
112,709
49,719
18,050
(14,023)
(23,896)
(24,884)
(2,816)
(90,709)
(51,054)
120,107 $
(11,415)
(35,148)
(34,977)
1,844
-
(85,280)
114,833 $
(1,180)
(30,813)
(8,288)
(309)
(55,273)
(41,511)
58,866
$
The following table presents the activity of commercial and construction non-performing loans held for sale:
Year ended December 31, 2014
Beginning balance
Collections
Ending balance
Commercial
Mortgage
Commercial &
Industrial
(In thousands)
Construction
$
$
6,999 $
(160)
6,839 $
- $
-
- $
47,802
-
47,802
Year ended December 31, 2013
Beginning balance
Plus:
Transfer from held for investment, net of
charges off
Less:
Non-performing loans transferred to OREO
Loan collections
Lower of cost or market adjustment
Non-performing loans sold
Ending balance
Commercial
Mortgage
Commercial &
Industrial
(In thousands)
Construction
$
1,065 $
1,178 $
-
90,709
-
(41,330)
(695)
(1,165)
(41,585)
6,999 $
-
-
-
(1,178)
- $
55,273
-
(7,133)
(338)
-
47,802
$
134
Total non-performing commercial and construction loans, including non-performing loans held for sale, with a book value of
$355.0 million as of December 31, 2014 are being carried at 58% of unpaid principal balance, net of reserves and accumulated charge-
offs.
Non-performing residential mortgage loans increased by $19.3 million, or 12%, from December 31, 2013. The increase was
mainly driven by inflows of $128.1 million during 2014, partially offset by loans brought current, foreclosures, and charge-offs. The
inflows of non-performing residential mortgage loans of $128.1 million during 2014 decreased compared to inflows of $190.0 million
for 2013. Approximately $74.2 million, or 41% of total non-performing residential mortgage loans, have been written down to their
net realizable value and no specific reserve was allocated.
The following table presents the activity of residential non-performing loans held for investment in 2014:
Year ended
December 31, 2014
$
Beginning balance
Plus:
Additions to non-performing
Less:
Non-performing loans transferred to REO
Non-performing loans charged-off
Loans returned to accrual status/loan collections
$
Ending balance
161,441
128,063
(9,095)
(17,965)
(81,737)
180,707
Most of the loans included in the bulk sale of nonperforming residential assets that was completed in the second quarter of 2013
were at a late stage of the foreclosure process; thus, foreclosures and charge-offs that in the past offset the inflows of loans to non-
performing status significantly decreased since the completion of the bulk sale.
The following table presents the activity of residential non-performing loans held for investment in 2013:
First six-months ended Last six-months ended
Year ended
June 30, 2013
December 31, 2013
December 31, 2013
$
Beginning balance
Plus:
Additions to non-performing
Less:
Non-performing loans transferred to REO
Non-performing loans charged-off
Loans returned to accrual status/loan collections
Reclassification
Non-performing loans sold
Ending balance
$
(In thousands)
313,626 $
133,937 $
313,626
101,404
88,547
189,951
(24,946)
(9,628)
(46,758)
1,281
(201,042)
133,937 $
(4,143)
(9,211)
(47,689)
-
-
161,441 $
(29,089)
(18,839)
(94,447)
1,281
(201,042)
161,441
The amount of non-performing consumer loans, including finance leases, increased by $2.5 million during 2014. The inflows of
non-performing consumer loans of $73.4 million increased by $5.3 million compared to inflows of $68.1 million for 2013.
135
As of December 31, 2014, approximately $124.3 million of the loans placed in non-accrual status, mainly construction and
commercial loans, were current, or had delinquencies of less than 90 days in their interest payments, including $52.8 million of TDRs
maintained in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms
for reinstatement to accrual status and there is no doubt about full collectability. Collections on these loans are being recorded on a
cash basis through earnings, or on a cost-recovery basis, as conditions warrant.
During the year ended December 31, 2014, interest income of approximately $4.8 million related to non-performing loans with a
carrying value of $306.1 million as of December 31, 2014, mainly non-performing construction and commercial loans, was applied
against the related principal balances under the cost-recovery method.
The allowance to non-performing loans held for investment ratio as of December 31, 2014 was 42.45%, compared to 57.69% as
of December 31, 2013. As of December 31, 2014, approximately $208.6 million, or 40%, of total non-performing loans held for
investment have been charged-off to their net realizable value and no specific reserve was allocated as shown in the following table.
(Dollars in thousands)
As of December 31, 2014
Non-performing loans held for investment
charged off to realizable value
Other non-performing loans held
for investment
Total non-performing loans held
for investment
Allowance to non-performing loans held
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Construction
Loans
Consumer and
Finance Leases
Total
$
74,177
$
85,824 $
40,697
$
6,182 $
1,672 $
208,552
106,530
62,649
81,850
23,172
41,143
315,344
$
180,707
$
148,473 $
122,547
$
29,354 $
42,815 $
523,896
for investments
15.11 %
34.28 %
52.00 %
43.68 %
158.02 %
42.45 %
Allowance to non-performing loans held
for investments, excluding non-
performing loans charged off to
realizable value
As of December 31, 2013
Non-performing loans held for investment
charged off to realizable value
Other non-performing loans held
for investment
Total non-performing loans held
for investment
Allowance to non-performing loans held
25.63 %
81.24 %
77.85 %
55.33 %
164.44 %
70.52 %
$
67,849
$
32,961 $
29,769
$
11,603 $
1,192 $
143,374
93,592
87,146
85,064
47,263
39,110
352,175
$
161,441
$
120,107 $
114,833
$
58,866 $
40,302 $
495,549
for investments
20.51 %
60.89 %
74.28 %
60.84 %
145.16 %
57.69 %
Allowance to non-performing loans held
for investments, excluding non-
performing loans charged off to
realizable value
35.38 %
83.93 %
100.27 %
75.78 %
149.58 %
81.17 %
136
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico
that is similar to the U.S. government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’
financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual
commercial, commercial mortgage, construction, and residential mortgage loans in the U.S. mainland, fit the definition of a TDR. A
restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties
grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms
that bring a defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due
amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of December
31, 2014, the Corporation’s total TDR loans held for investment of $694.5 million consisted of $349.8 million of residential mortgage
loans, $171.9 million of commercial and industrial loans, $127.8 million of commercial mortgage loans, $12.5 million of construction
loans, and $32.5 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $0.1 million as of
December 31, 2014.
The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination o f
the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments, and
reduction of interest rates either permanently or for a period of up to four years increasing back in step-up rates. Additionally, in
certain cases, the restructuring may provide for the forgiveness of contractually due principal or interest. Uncollected interest is added
to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off.
These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and
would lose their homes in the foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably
assured that the borrower will comply with its contractual commitment, properties are foreclosed.
Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial
modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated
modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the
borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial
modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the
borrower enters into a permanent modification. As of December 31, 2014, the Corporation classified an additional $9.7 million of
residential mortgage loans as TDRs that were participating in or had been offered a trial modification.
For the commercial real estate, commercial and industrial, and construction portfolios, at the time of a restructuring, the
Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the
borrower’s financial difficulty. Concessions granted for commercial loans could include: reductions in interest rates to rates that are
considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of
borrower covenants; forgiveness of principal or interest; or other contract changes that would be considered a concession. The
Corporation mitigates loan defaults for its commercial loan portfolios through its collections function. The function’s objective is to
minimize both early stage delinquencies and losses upon default of commercial loans. In the case of the commercial and industrial,
commercial mortgage, and construction loan portfolios, the SAG focuses on strategies for the accelerated reduction of non-performing
assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the resolution
process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or adversely
classified status. The SAG utilizes relationship officers, collection specialists, and attorneys. In the case of residential construction projects,
the workout function monitors project specifics, such as project management and marketing, as deemed necessary. The SAG utilizes its
collections infrastructure of workout collection officers, credit work-out specialists, in-house legal counsel, and third-party
consultants. In the case of residential construction projects and large commercial loans, the function also utilizes third-party
specialized consultants to monitor the residential and commercial construction projects in terms of construction, marketing and sales,
and assists with the restructuring of large commercial loans.
In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan
facilities are structured as lines of credit, which are mainly one year in term and therefore are required to be renewed annually. Other
facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, the
timing of the completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions,
renewals, and restructurings are done in the normal course of business and not considered concessions, and the loans continue to be
recorded as performing.
137
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on
nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six
months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or
significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual at the time of the restructuring or after a shorter performance period. If the borrower’s
ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications
increase the Corporation’s interest income by returning a non-performing loan to performing status, if applicable, increase cash flows
by providing for payments to be made by the borrower, and avoid increases in foreclosure and OREO costs. The Corporation
continues to consider a modified loan as an impaired loan for purposes of estimating the allowance for loan and lease losses.
The following table provides a breakdown between accrual and nonaccrual TDRs:
(In thousands)
Non- FHA/VA Residential Mortgage loans
Commercial Mortgage Loans
Commercial and Industrial Loans
Construction Loans
Consumer Loans - Auto
Finance Leases
Consumer Loans - Other
Total Troubled Debt Restructurings
December 31, 2014
Accrual
Nonaccrual (1) (2) Total TDRs
$
$
266,810 $
69,374
131,544
4,282
10,558
1,926
10,146
494,640 $
82,965 $
58,392
40,382
8,225
6,433
255
3,161
199,813 $
349,775
127,766
171,926
12,507
16,991
2,181
13,307
694,453
(1) Included in nonaccrual loans are $52.8 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual
status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is
no doubt about full collectibility.
(2) Excludes nonaccrual TDRs held for sale with a carrying value of $45.7 million as of December 31, 2014.
The REO portfolio, which is part of non-performing assets, decreased by $36.2 million. The following table shows the activity
during the year ended December 31, 2014 of the REO portfolio by geographic region and type of property:
(In thousands)
Beginning Balance
Additions
Sales
Fair value adjustments
Puerto Rico
Commercial Construction Residential
As of December 31, 2014
Virgin Islands
Commercial Construction Residential
Residential
$
34,875 $
15,706
(17,725)
(7,189)
25,667 $
72,845 $
27,572
(16,906)
(8,979)
74,532 $
16,131 $
836
(4,891)
(1,235)
10,841 $
2,184 $
322
(1,576)
(282)
648 $
2,002 $
59
(1,947)
-
114 $
10,708 $
2,269
(6,429)
(342)
6,206 $
$
Florida
Consolidated
Commercial Construction
2,596 $
-
(570)
(303)
1,723 $
15,625 $
-
(14,057)
(560)
1,008 $
3,227 $
1,761
(1,621)
(103)
3,264 $
160,193
48,525
(65,722)
(18,993)
124,003
Net Charge-offs and Total Credit Losses
Total net charge-offs for 2014 were $173.0 million, or 1.81% of average loans, compared to net charge-offs of $393.3 million, or
4.01%, for 2013. The fair value adjustments related to mortgage loans acquired from Doral in 2014 and the bulk sales of assets and the
transfer of certain loans to held for sale in 2013 added $6.9 million and $232.4 million in charge-offs in 2014 and 2013, respectively.
Adjusted net charge-offs, excluding the impact of charge-offs resulting from the Doral transaction, the bulk sales of assets and the
transfer of loans to held for sale, amounted to $166.1 million, or an annualized 1.74% of average loans, an increase of $5.2 million
compared to 2013, mainly reflecting higher charge-offs in the consumer and commercial mortgage loan portfolios.
C&I loans net charge-offs in 2014 totaled $58.3 million, or 2.13% of related average loans, compared to $105.2 million, or 3.52%,
for 2013. C&I loans net charge-offs in 2014 included $6.9 million associated with the acquisition of mortgage loans from Doral and
net charge-offs in 2013 included $44.7 million of charge-offs related to the bulk sales. Excluding the impact of charge-offs related to
the acquisition of mortgage loans from Doral and the bulk sales, C&I net charge-offs for 2014 were $9.1 million lower than 2013.
Substantially all of the charge-offs recorded in 2014 were in Puerto Rico, including individual charge-offs in excess of $2 million
associated with six collateral dependent loans in Puerto Rico totaling $34.3 million and a $7.0 million charge-off associated with a
$37.0 million adversely classified loan paid off in Puerto Rico.
138
Commercial mortgage loans net charge-offs in 2014 were $15.2 million, or 0.84% of related average loans, compared to $62.6
million, or 3.44%, for 2013. Commercial mortgage loans net charge-offs in 2013 included $54.6 million of charge-offs related to the
bulk sale and the transfer of loans to held for sale in 2013. Excluding the impact of charge-offs related to the bulk sale and the transfer
of loans to held for sale, commercial mortgage loans net charge-offs for 2014 were $7.2 million higher than in 2013. Commercial
mortgage loans net charge-offs in 2014 were primarily in Puerto Rico, including $19.7 million on three relationships, partially offset
by recoveries of $10.2 million in the United States region.
Construction loans net charge-offs in 2014 were $5.5 million, or 2.76% of related average loans, compared to $41.2 million,
15.11%, for 2013. Construction loans net charge-offs in 2013 included $34.2 million of charge-offs related to the bulk sale and the
transfer of loans to held for sale. Excluding the impact of charge-offs related to the bulk sale and the transfer of loans to held for sale,
construction net charge-offs for 2014 were $1.6 million lower than 2013, primarily due to higher recoveries in both the Puerto Rico
and Florida regions. Recoveries of previously amounts charged-off for construction loans for 2014 were $3.6 million in the United
States and $2.4 million in Puerto Rico.
Residential mortgage loans net charge-offs in 2014 were $23.3 million, or 0.85% of related average loans, compared to $128.0
million, or 4.77%, for 2013. Residential mortgage loans net charge-offs in 2013 included $99.0 million of charge-offs related to the
bulk sales. Excluding the impact of charge-offs related to the bulk sales, residential mortgage loans net charge-offs for 2014 were $5.7
million lower than 2013 mainly due to a reduced amount of impaired loans and foreclosures after the bulk sale completed in the
second quarter of 2013.
Approximately $17.6 million in charge-offs for 2014 resulted from valuations for impairment purposes of residential mortgage
loans considered homogeneous given high delinquency and loan-to-value levels, compared to $17.2 million in 2013. Net charge-offs
on residential mortgage loans also included $4.7 million related to foreclosures, compared to $7.1 million in 2013.
Net charge-offs of consumer loans and finance leases in 2014 were $70.8 million, or 3.46% of related average loans, compared to
$56.2 million, or 2.76% of average loans, in 2013. The increase is mainly attributable to the auto loan portfolio.
139
The following table shows the ratios of net charge-offs to average loans by loan category for the last five years.
Residential mortgage (1)
Commercial mortgage (2)
Commercial and Industrial (3)
Construction (4)
Consumer loans and finance leases
Total loans (5)
2014
0.85 %
0.84 %
2.13 %
2.76 %
3.46 %
1.81 %
For the year ended December 31,
2012
2011
2013
4.77 %
3.44 %
3.52 %
15.11 %
2.76 %
4.01 %
1.32 %
1.41 %
1.21 %
10.49 %
1.92 %
1.74 %
1.32 %
3.21 %
1.57 %
16.33 %
2.33 %
2.68 %
2010
1.80 %
5.02 %
2.16 %
23.80 %
2.98 %
4.76 %
(1) Includes net charge-offs totaling $99.0 million associated with the bulk sales of assets in 2013. Residential net charge-offs to average loans, excluding
charge-offs associated with the bulk loan sales, was 1.13% in 2013. Also includes net charge-offs totaling $7.8 million associated with non-performing
residential mortgage loans sold in a bulk sale in 2010.
(2) Includes net charge-offs totaling $54.6 million associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for
sale in 2013. The ratio of commercial mortgage net charge-offs to average loans excluding charge-offs associated with the bulk sale of adversely classified
commercial assets and the transfer of loans to held for sale, was 0.45% in 2013. Also includes net charge-offs totaling $29.5 million associated with loans
transferred to held for sale in the fourth quarter of 2010. Commercial mortgage net charge-offs to average loans, excluding charge-offs associated with such
loans transferred to held for sale, was 3.38% in 2010.
(3) Includes net charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from Doral in 2014. The ratio of commercial and industrial
net charge-offs to average loans, excluding charge-offs associated with the acquisition of mortgage loans from Doral, was 1.95% in 2014. Includes net
charge-offs totaling $44.7 million associated with the bulk sale of adversely classified commercial assets in 2013. The ratio of commercial and industrial
net-charge offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets, was 2.04% in 2013. Also
includes net charge-offs totaling $8.6 million associated with loans transferred to held for sale in the fourth quarter of 2010. Commercial and industrial net
charge-offs to average loans, excluding charge offs associated with such loans transferred to held for sale, was 1.98% in 2010.
(4) Includes net charge-offs totaling $34.2 million associated with the bulk sales of assets and the transfer of loans to held for sale in 2013. The ratio of
construction loans net-charge offs to average loans, excluding charge-offs associated with the bulk loan sales and the transfer of loans to held for sale, was
2.91% in 2013. Also includes net charge-offs totaling $127.0 million associated with loans transferred to held for sale in the fourth quarter of 2010.
Construction net charge-offs to average loans, excluding charge-offs associated with such loans transferred to held for sale, was 18.93% in 2010.
(5) Includes net charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from Doral in 2014. The ratio of total net charge-offs to
average loans, excluding charge-offs associated with the acquisition of mortgage loans from Doral, was 1.74% in 2014. Includes net charge-offs totaling
$232.4 million associated with the bulk loan sales and the transfer of loans to held for sale in 2013. The ratio of total net-charge offs to average loans,
excluding charge-offs associated with the bulk loan sales and the transfer of loans to held for sale, was 1.68% in 2013. Also includes net charge-offs totaling
$165.1 million associated with loans transferred to held for sale in the fourth quarter of 2010. Total net charge-offs to average loans, excluding charge-offs
associated with such loans transferred to held for sale, was 3.60% in 2010.
140
The following table presents net charge-offs to average loans held in various portfolios by geographic segment:
December 31, 2014
December 31, 2013
December 31, 2012
PUERTO RICO:
Residential mortgage (1)
Commercial mortgage (2)
Commercial and Industrial (3) (4)
Construction (5)
Consumer and finance leases
Total loans (6) (7)
VIRGIN ISLANDS:
Residential mortgage (8)
Commercial mortgage
Commercial and Industrial (9)
Construction (10)
Consumer and finance leases
Total loans (11)
FLORIDA:
Residential mortgage
Commercial mortgage (12)
Commercial and Industrial (13)
Construction (14)
Consumer and finance leases
Total loans (15)
1.08%
1.72%
2.49%
4.16%
3.58%
2.27%
0.19%
0.10%
-0.23%
6.71%
0.58%
0.81%
0.03%
-3.12%
0.00%
-14.75%
0.73%
-1.37%
5.90%
4.26%
3.76%
15.00%
2.83%
4.37%
1.88%
0.11%
1.63%
18.08%
0.48%
3.50%
0.35%
0.46%
0.10%
6.44%
1.84%
0.61%
1.58%
1.39%
1.31%
6.34%
1.91%
1.64%
0.15%
0.00%
0.01%
23.14%
1.05%
3.41%
0.95%
1.70%
-0.65%
-8.89%
3.62%
1.04%
________
(1) For 2013, includes net charge-offs totaling $92.9 million associated with the bulk loan sales. The ratio of residential mortgage net charge-
offs to average loans in Puerto Rico, excluding charge-offs associated with the bulk sales, was 1.41%.
(2) For 2013, includes net charge-offs totaling $54.6 million associated with the bulk sale of adversely classified commercial assets and the
transfer of loans to held for sale. The ratio of commercial mortgage net charge-offs to average loans in Puerto Rico, excluding charge-offs
associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale, was 0.47%.
(3) For 2014, includes net charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from Doral. The ratio of
commercial and industrial net charge-offs to average loans in Puerto Rico, excluding charge-offs associated with the acquisition of
mortgage loans from Doral, was 2.29%.
(4) For 2013, includes net charge-offs totaling $44.7 million associated with the bulk sale of adversely classified commercial assets. The ratio
of commercial and industrial net charge-offs to average loans in Puerto Rico, excluding charge-offs associated with the bulk sale of
adversely classified commercial assets, was 2.15%.
(5) For 2013, includes net charge-offs totaling $19.0 million associated with the bulk sale of adversely classified commercial assets and the
transfer of loans to held for sale. The ratio of construction net charge-offs to average loans in Puerto Rico, excluding charge-offs associated
with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale, was 4.29%.
(6) For 2014, includes net charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from Doral. The ratio of net
charge-offs to average loans in Puerto Rico, excluding charge-offs associated with the acquisition of mortgage loans from Doral, was
2.18%.
(7) For 2013, includes net charge-offs totaling $211.2 million associated with the bulk loan sales and the transfer of loans to held for sale. The
ratio of total net charge-offs to average loans in Puerto Rico, excluding charge-offs associated with the bulk loan sales and the transfer of
loans to held for sale, was 1.89%.
(8) For 2013, includes net charge-offs totaling $6.1 million associated with the bulk sale of non-performing residential assets. The ratio of
residential mortgage net charge-offs to average loans in the Virgin Islands, excluding charge-offs associated with the bulk sale of non-
performing residential assets, was 0.22%.
(9) For 2014, recoveries in C&I loans in the Virgin Islands exceeded charge-offs.
(10) For 2013, includes net charge-offs totaling $15.2 million associated with the bulk loan sales and the transfer of loans to held for sale. The
ratio of construction loans net charge-offs to average loans in the Virgin Islands, excluding charge-offs associated with the bulk loan sale
and the transfer of loans to held for sale, was -0.48%.
(11) For 2013, includes net charge-offs totaling $21.3 million associated with the bulk loan sales and the transfer of loans to held for sale. The
ratio of total net-charge offs to average loans in the Virgin Islands, excluding charge-offs associated with the bulk loan sales and the
transfer of loans to held for sale, was 0.38%.
(12) For 2014, recoveries in commercial mortgage loans in Florida exceeded charge-offs.
(13) For 2012, recoveries in C&I loans in Florida exceeded charge-offs.
(14) For 2014 and 2012, recoveries in construction loans in Florida exceeded charge-offs.
(15) For 2014, recoveries in total loans in Florida exceeded charge-offs.
141
Total credit losses (equal to net charge-offs plus losses on OREO operations) for 2014 amounted to $193.6 million, or 2.00% of
average loans and repossessed assets, in contrast to credit losses of $435.8 million, or a loss rate of 4.37%, for 2013, including the
results of the bulk sales.
The following table presents OREO inventory and credit losses for the periods indicated:
OREO
OREO balances, carrying value:
Residential
Commercial
Construction
Total
OREO activity (number of properties):
Beginning property inventory
Properties acquired
Properties disposed
Ending property inventory
Average holding period (in days)
Residential
Commercial
Construction
OREO operations (loss) gain:
Market adjustments and (losses) gain on sale:
Residential
Commercial
Construction
Other OREO operations expenses
Net Loss on OREO operations
CHARGE-OFFS
Residential charge offs, net
Commercial charge offs, net
Construction charge offs, net
Consumer and finance leases charge-offs, net
Total charge-offs, net
Year Ended
December 31,
2014
2013
(Dollars in thousands)
$
$
29,579
75,654
18,770
124,003
$
$
40,286
90,472
29,435
160,193
496
209
(247)
458
526
382
870
490
716
320
(540)
496
444
281
574
379
(5,145)
(8,327)
(1,380)
(14,852)
(5,744)
(20,596)
$
(10,863)
(10,670)
(12,371)
(33,904)
(8,608)
(42,512)
$
(23,296)
(73,423)
(5,484)
(70,790)
(172,993)
(127,999)
(167,815)
(41,247)
(56,246)
(393,307)
TOTAL CREDIT LOSSES (1)
$
(193,589)
$
(435,819)
LOSS RATIO PER CATEGORY (2):
Residential
Commercial
Construction
Consumer
TOTAL CREDIT LOSS RATIO (3)
________
1.02%
1.77%
3.06%
3.43%
2.00%
5.07%
3.67%
17.84%
2.74%
4.37%
(1) Equal to OREO operations (losses) plus charge-offs, net.
(2) Calculated as net charge-offs plus market adjustments and gains (losses) on sale of OREO divided by average loans and
repossessed assets.
(3) Calculated as net charge-offs plus net loss on OREO operations divided by average loans and repossessed assets.
142
Operational Risk
The Corporation faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of
banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential
for operational and reputational loss has increased. In order to mitigate and control operational risk, the Corporation has developed,
and continues to enhance, specific internal controls, policies and procedures that are designated to identify and manage operational
risk at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the
Corporation’s business operations are functioning within the policies and limits established by management.
The Corporation classifies operational risk into two major categories: business specific and corporate-wide affecting all business
lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies,
processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, and legal and
compliance, the Corporation has specialized groups, such as the Legal Department, Information Security, Corporate Compliance, and
Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to
the needs of the business groups.
Legal and Compliance Risk
Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements, the risk of adverse
legal judgments against the Corporation, and the risk that a counterparty’s performance obligations will be unenforceable. The
Corporation is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory
scrutiny has been significantly increasing over the last several years. The Corporation has established and continues to enhance
procedures based on legal and regulatory requirements that are designed to ensure compliance with all applicable statutory and
regulatory requirements. The Corporation has a Compliance Director who reports to the Chief Risk Officer and is responsible for the
oversight of regulatory compliance and implementation of an enterprise-wide compliance risk assessment process. The Compliance
division has officer roles in each major business areas with direct reporting relationships to the Corporate Compliance Group.
Concentration Risk
The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the
Corporation has diversified its geographical risk as evidenced by its operations in the Virgin Islands and in Florida. Of the total gross
loans held for investment of $9.3 billion as of December 31, 2014, approximately 83% have credit risk concentration in Puerto Rico,
11% in the United States, and 6% in the Virgin Islands.
Exposure to the Puerto Rico Government
As of December 31, 2014, the Corporation had $339.0 million of credit facilities granted to the Puerto Rico government, its
municipalities and public corporations, of which $308.0 million was outstanding, compared to $397.8 million outstanding as of
December 31, 2013. Approximately $201.4 million of the outstanding credit facilities consists of loans to municipalities in Puerto
Rico. Municipal debt exposure is secured by ad valorem taxation without limitation as to rate or amount on all taxable property within
the boundaries of each municipality. The good faith, credit, and unlimited taxing power of the applicable municipality have been
pledged to the repayment of all outstanding bonds and notes. Approximately $13.2 million consists of loans to units of the central
government, and approximately $93.4 million consists of loans to public corporations, including a $75.0 million credit extended to
PREPA for fuel purchases that have priority over senior bonds and other debt. In August 2014, PREPA entered into a forbearance
agreement with a group of banks, including FirstBank, to extend its maturing credit lines to March 31, 2015. As a result of the
forbearance, this credit facility was classified as a TDR loan during the third quarter of 2014. The loan has been maintained in accrual
status based on the estimated cash flow analyses performed on this non-collateral dependent loan, repayment prospects and
compliance with contractual terms.
Furthermore, the Corporation had $133.3 million outstanding as of December 31, 2014 in financing to the hotel industry in Puerto
Rico guaranteed by the TDF, compared to $200.4 million as of December 31, 2013.
In addition, as of December 31, 2014, the Corporation held approximately $61.2 million of Puerto Rico government and agencies
bond obligations, mainly bonds of the GDB and the Puerto Rico Building Authority, as part of its available-for-sale investment
securities portfolio, which were reflected at their aggregate fair value of $43.2 million. The fair value of the Puerto Rico government
obligations held by the Corporation increased by approximately $1.7 million during 2014.
143
As of December 31, 2014, the Corporation had $227.4 million of public sector deposits in Puerto Rico ($208.1 million in
transactional accounts and $19.3 million in time deposits) compared to $546.5 million as of December 31, 2013. Approximately 54%
came from municipalities in Puerto Rico and 46% came from public corporations and the central government. As mentioned above,
certain public corporations and agencies withdrew from FirstBank approximately $341.6 million during the second quarter of 2014.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in conformity with GAAP, which requires the
measurement of financial position and operating results in terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a greater impact on a financial institution’s performance than the effects of general levels of inflation.
Interest rate movements are not necessarily correlated with changes in the prices of goods and services.
Basis of Presentation
The Corporation has included in this Form 10-K the following financial measures that are not recognized under generally accepted
accounting principles, which are referred to as non-GAAP financial measures: (i) the calculation of net interest income, interest rate
spread and net interest margin rate on a tax-equivalent basis and excluding changes in the fair value of derivative instruments and
certain financial liabilities; (ii) the calculation of the tangible common equity ratio and the tangible book value per common share, (iii)
the Tier 1 common equity to risk-weighted assets ratio, and (iv) certain other financial measures adjusted to exclude the effect of the
acquisition of mortgage loans from Doral in 2014 and the bulk sales of assets and the transfer of loans to held for sale in 2013 as well
as excluding the write-off of the collateral pledged to Lehman and the loss contingency for attorneys’ fees awarded to the other party
in the Lehman litigation. Investors should be aware that non-GAAP financial measures have inherent limitations and should be read
only in conjunction with the Corporation’s consolidated financial data prepared in accordance with GAAP.
Net interest income, interest rate spread and net interest margin are reported excluding changes in the fair value of derivative
instruments and financial liabilities elected to be measured at fair value (“valuations”) and a $2.5 million prepayment penalty collected
on a commercial mortgage loan paid off in 2014, and on a tax-equivalent basis. The presentation of net interest income excluding
valuations provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The
changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value have no effect
on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax-equivalent adjustment
to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal
income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if
this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present
net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. This adjustment puts all earning assets,
most notably tax-exempt securities and certain loans, on a common basis that facilitates comparison of results to results of peers. Refer
to “Net Interest Income” above for the table that reconciles the non-GAAP financial measure “net interest income excluding fair value
changes and the $2.5 million prepayment penalty and on a tax-equivalent basis” with net interest income calculated and presented in
accordance with GAAP. The table also reconciles the non-GAAP financial measures “net interest spread and margin excluding fair
value changes and the $2.5 million prepayment penalty and on a tax-equivalent basis” with net interest spread and margin calculated
and presented in accordance with GAAP.
The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by the
financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit
intangibles, and other intangibles, such as the purchased credit card relationship intangible. Tangible assets are total assets less
goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible. Management and
many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more
traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other
intangible assets, typically stemming from the use of the purchase method of accounting for mergers and acquisitions. Neither tangible
common equity nor tangible assets, or the related measures should be considered in isolation or as a substitute for stockholders’
equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation
calculates its tangible common equity, tangible assets, and any other related measures may differ from that of other companies
reporting measures with similar names. Refer to “Risk Management-Capital” above for a reconciliation of the Corporation’s tangible
common equity and tangible assets.
144
The Tier 1 common equity to risk-weighted assets ratio is calculated by dividing (a) Tier 1 capital less non-common elements
including qualifying perpetual preferred stock and qualifying trust preferred securities by (b) risk-weighted assets, which assets are
calculated in accordance with current applicable bank regulatory requirements (Basel I). The Tier 1 common equity ratio is not
required by GAAP. Management is currently monitoring this ratio, along with the other ratios discussed above, in evaluating the
Corporation’s capital levels and believes that, at this time, the ratio may be of interest to investors. Refer to “Risk Management-
Capital” above for a reconciliation of stockholders’ equity (GAAP) to Tier 1 common equity.
To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation provides additional
measures of provision for loan and lease losses, provision for loan and lease losses to net charge-offs, net charge-offs, and net charge-
offs to average loans, to exclude the impact of the mortgage loans acquired from Doral in 2014 in full satisfaction of the secured
borrowings that such entity owed to FirstBank and the bulk sales of assets and the transfer of non-performing loans to held for sale in
2013. In addition, the Corporation provides additional measures of adjusted non-interest income and adjusted non-interest expenses.
Adjusted non-interest income excluded the write-off of the collateral pledged to Lehman in 2013 and adjusted non-interest expenses
excludes expenses related to the bulk sales of assets completed in the first half of 2013 and attorneys’ fees related to the Lehman
litigation recorded in 2013. Management believes that these non-GAAP measures enhance the ability of analysts and investors to
analyze trends in the Corporation’s business and to better understand the performance of the Corporation. In addition, the Corporation
may utilize these non-GAAP financial measures as a guide in its budgeting and long-term planning process. Any analysis of these
non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. Refer to
“Overview of Results of Operations” above for the reconciliation of these non-GAAP financial measures to the GAAP financial
measures, except for: (i) the reconciliation with respect to the calculation of net charge offs and net charge-offs to average loans
excluding the impact of the mortgage loans acquired from Doral in the second quarter of 2014 in full satisfaction of secured
borrowings that such entity owed to FirstBank and (ii) the non-GAAP financial measure “provision for loan and lease losses to net
charge-offs ratio, excluding the impact of the bulk sales of assets and loans transferred to held for sale” with the provision for loan
losses to net charge-offs ratio calculated and presented in accordance with GAAP, which are included below:
(Dollars in thousands)
2014
As Reported (GAAP)
Loss on Acquisition of
Mortgage Loans from Doral
Adjusted, excluding Loss
on Acquisition of
Mortgage Loans from
Doral (Non-GAAP)
Total net charge-offs
Total net charge-offs to average loans
Commercial and Industrial
Commercial and Industrial loans net charge-offs to average loans
$
172,993 $
1.81%
58,255
2.13%
6,908
$
6,908
166,085
1.74%
51,347
1.95%
(In thousands)
Provision for loan and lease losses and net charge-offs, excluding special
items (Non-GAAP)
Special Items:
Bulk sales of assets and loans transferred to held for sale
Provision for loan and lease losses and net charge-offs (GAAP)
Provision for loan and lease losses to net charge-offs, excluding special
items (Non-GAAP)
Provision for loan and lease losses to net charge-offs (GAAP)
145
Provision for Loan and Lease
Losses to Net Charge-Off,
(Non GAAP to GAAP reconciliation)
Year Ended
December 31, 2013
Provision for Loan
and Lease Losses
Net Charge-Offs
$
$
111,749
$
160,863
132,002
243,751
$
232,444
393,307
69.47 %
61.97 %
Selected Quarterly Financial Data
Financial data showing results of the 2014 and 2013 quarters is presented below. In the opinion of management, all
adjustments necessary for a fair presentation have been included. These results are unaudited.
March 31
June 30
September 30 December 31
2014
Interest income
Net interest income
Provision for loan losses
Net income
Net income attributable to common stockholders -
basic
Net income attributable to common stockholders -
diluted
Earnings per common share-basic
Earnings per common share-diluted
Interest income
Net interest income
Provision for loan losses
Net (loss) income
Net (loss) income attributable to common
stockholders -basic
Net (loss) income attributable to common
stockholders -diluted
(Loss) earnings per common share-basic
(Loss) earnings per common share-diluted
$
$
$
$
(In thousands, except for per share results)
156,662 $
127,694
26,999
23,201
158,423 $
129,907
26,744
21,225
160,571 $
131,320
31,915
17,083
158,293
129,152
23,872
330,778
17,462
22,505
23,201
330,778
17,462
22,505
23,201
0.08 $
0.08 $
0.11 $
0.11 $
0.11 $
0.11 $
330,778
1.57
1.56
March 31
June 30
September 30 December 31
2013
(In thousands, except for per share results)
162,203 $
130,905
22,195
15,940
160,670 $
126,888
87,464
(122,583)
160,225 $
124,493
111,123
(72,633)
162,690
132,659
22,969
14,789
(72,633)
(122,583)
15,940
14,789
(72,633)
(122,583)
15,940
14,789
$
$
(0.35) $
(0.60) $
(0.35) $
(0.60) $
0.08 $
0.08 $
0.07
0.07
Some infrequent transactions that significantly affected quarterly periods include:
During the fourth quarter of 2014, the $302.9 million partial reversal of FisrtBank’s deferred tax assets valuation allowance resulted
in an increase in net income of that quarter of approximately $316 million as compared to the fourth quarter of 2013.
During the second quarter of 2014, the acquisition of mortgage loans from Doral Financial Corporation in full satisfaction of
secured borrowings resulted in a $1.4 million charge to the provision for loan and lease losses and approximately $0.6 million of
expenses specifically related to this transaction were recorded in the second quarter of 2014.
During the first quarter of 2013, the bulk sale of adversely classified and non-performing assets, mainly commercial loans, and the
transfer of certain non-performing loans to held for sale resulted in a total loss of $68.0 million, of which $64.1 million was charged
against the provision for loan and lease losses.
During the first quarter of 2013, expenses of approximately $1.2 million related to the terminated preferred stock exchange offer.
During the second quarter of 2013, the bulk sale of residential non-performing assets resulted in a total loss of $72.9 million, of
which $67.9 million was charged against the provision for loan and lease losses.
During the second quarter of 2013, the Corporation recorded a loss of $66.6 million related to the Lehman collateral write-off.
146
During the third quarter of 2013, the Corporation recorded expenses of approximately $1.7 million in connection with the
secondary offering of the Corporation’s common stock by certain of the Corporation’s existing stockholders.
During the third quarter of 2013, the Corporation recorded expenses of $1.7 million related to the conversion of the credit cards
processing platform.
During the fourth quarter of 2013, the Corporation recorded a charge of $1.4 million related to expenses and valuation adjustments
in connection with branch consolidations and restructuring efforts.
During the fourth quarter of 2013, the Corporation recorded a loss contingency of $2.5 million related to attorneys’ fees awarded to
the other party in connection with the denial of the Corporation’s motion for Summary judgment on its claim to recover assets pledged
to Lehman.
CEO and CFO Certifications
First BanCorp.’s Chief Executive Officer and Chief Financial Officer have filed with the SEC certifications required by Section 302
and Section 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Annual Report on Form 10-K and the
certifications required by Section III(b)(4) of the Emergency Stabilization Act of 2008 as Exhibits 99.1 and 99.2 to this Annual Report
on Form 10-K.
In addition, in 2014, First BanCorp’s Chief Executive Officer certified to the NYSE that he was not aware of any violation by the
Corporation of the NYSE corporate governance listing standards.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required herein is incorporated by reference to the information included under the sub caption “Interest Rate Risk
Management” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in this Form
10-K.
147
Item 8. Financial Statements and Supplementary Data
FIRST BANCORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm………………………………………………….
149
Management’s Report on Internal Control over Financial Reporting………………………………………… 150
Report of Independent Registered Public Accounting Firm - Internal…..……...…………………………….
Control over Financial Reporting………………..…………………………………………………………. 151
Consolidated Statements of Financial Condition……………………………………………………………... 152
Consolidated Statements of Income (Loss) …………………………………………………………………... 153
Consolidated Statements of Comprehensive Income (Loss) …………………………………………………. 154
Consolidated Statements of Cash Flows……………………………………………………………………… 155
Consolidated Statements of Changes in Stockholders’ Equity……………………………………………….. 156
Notes to Consolidated Financial Statements………………………………………………………………….. 157
148
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
First BanCorp.:
We have audited the accompanying consolidated statements of financial condition of First BanCorp. and subsidiaries (the
“Corporation”) as of December 31, 2014 and 2013, and the related consolidated statements of income (loss), comprehensive income
(loss), cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2014. These
consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
First BanCorp. and its subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each
of the three years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First
BanCorp. and its subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in
Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 16, 2015 expressed an unqualified opinion on the effectiveness of the Corporation’s internal
control over financial reporting.
/s/ KPMG LLP
San Juan, Puerto Rico
March 16, 2015
Stamp No. E148802 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
149
Management’s Report on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of First BanCorp.:
First BanCorp.’s (the “Corporation”) internal control over financial reporting is a process effected by those charged with
governance, management, and other personnel, designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and financial statements for regulatory reporting purposes prepared in accordance with the
instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). The Corporation’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance
that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP and financial
statements for regulatory reporting purposes, and that receipts and expenditures of the Corporation are being made only in accordance
with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention, or
timely detection and correction of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management is responsible for establishing and maintaining effective internal control over financial reporting, including controls
over the preparation of regulatory financial statements. Management assessed the effectiveness of the Corporation’s internal control
over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions
for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), as of December 31, 2014, based on the
framework set forth by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (1992). Based upon its assessment, management has concluded that, as of December 31, 2014, the
Corporation’s internal control over financial reporting, including controls over the preparation of regulatory financial statements in
accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), is effective
based on the criteria established in Internal-Control Integrated Framework.
Management’s assessment of the effectiveness of internal control over financial reporting, including controls over the preparation
of regulatory financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C), as of December 31, 2014, has been audited by KPMG LLP, an independent public accounting firm, as
stated in their report dated March 16, 2015.
First BanCorp.
/s/ Aurelio Alemán
Aurelio Alemán
President and Chief Executive Officer
Date: March 16, 2015
/s/ Orlando Berges
Orlando Berges
Executive Vice President
and Chief Financial Officer
Date: March 16, 2015
150
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM –
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
First Bancorp.:
We have audited First Bancorp.’s (the “Corporation”) internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). The Corporation’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Bancorp. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of First Bancorp. and subsidiaries as of December 31, 2014 and 2013, and the related
consolidated statements of income (loss), comprehensive income (loss), cash flows, and changes in stockholders’ equity, for each of
the years in the three-year period ended December 31, 2014, and our report dated March 16, 2015, expressed an unqualified opinion
on those consolidated financial statements.
/s/ KPMG LLP
San Juan, Puerto Rico
March 16, 2015
Stamp No. E148803 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
151
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
Cash and due from banks
Money market investments:
Time deposits with other financial institutions
Other short-term investments
Total money market investments
Investment securities available for sale, at fair value:
Securities pledged that can be repledged
Other investment securities
Total investment securities available for sale
Other equity securities
Investment in unconsolidated entity
Loans, net of allowance for loan and lease losses of $222,395
(2013 - $285,858)
Loans held for sale, at lower of cost or market
Total loans, net
Premises and equipment, net
Other real estate owned
Accrued interest receivable on loans and investments
Other assets
Total assets
LIABILITIES
Non-interest-bearing deposits
Interest-bearing deposits
Total deposits
Securities sold under agreements to repurchase
Advances from the Federal Home Loan Bank (FHLB)
Other borrowings
Accounts payable and other liabilities
Total liabilities
Commitments and Contingencies (Notes 25 and 28)
STOCKHOLDERS' EQUITY
Preferred stock, authorized, 50,000,000 shares:
Non-cumulative Perpetual Monthly Income Preferred Stock: issued
22,004,000 shares,outstanding 1,444,146 shares (2013- 2,521,872 shares
outstanding), aggregate liquidation value of $36,104 (2013- $63,047)
Common stock, $0.10 par value, authorized, 2,000,000,000 shares; issued,
213,724,749 shares (2013 - 207,635,157 shares issued)
Less: Treasury stock (at par value)
Common stock outstanding, 212,984,700 shares outstanding
(2013 - 207,068,978 shares outstanding)
Additional paid-in capital
Retained earnings, includes legal surplus reserve of $40.0 million (2013 - $0)
Accumulated other comprehensive loss, net of tax of $7,752
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, 2014 December 31, 2013
(In thousands, except for share information)
$
779,147 $
454,302
300
16,661
16,961
1,025,966
939,700
1,965,666
25,752
-
9,040,041
76,956
9,116,997
166,926
124,003
50,796
481,587
12,727,835 $
900,616 $
8,583,329
9,483,945
900,000
325,000
231,959
115,188
11,056,092
300
201,069
201,369
1,042,482
935,800
1,978,282
28,691
7,279
9,350,312
75,969
9,426,281
166,946
160,193
54,012
179,570
12,656,925
851,212
9,028,712
9,879,924
900,000
300,000
231,959
129,184
11,441,067
36,104
21,372
(74)
21,298
916,067
716,625
(18,351)
1,671,743
12,727,835 $
63,047
20,764
(57)
20,707
888,161
322,679
(78,736)
1,215,858
12,656,925
$
$
$
The accompanying notes are an integral part of these statements.
152
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Interest and dividend income:
Loans
Investment securities
Money market investments
Total interest income
Interest expense:
Deposits
Securities sold under agreements to repurchase
Advances from FHLB
Notes payable and other borrowings
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Non-interest income (loss) :
Service charges and fees on deposit accounts
Mortgage banking activities
Net gain (loss) on sale of investments (includes $42 accumulated other
comprehensive income reclassification for other-than-temporary impairment
on equity securities for the year ended December 31, 2013)
Other-than-temporary impairment losses on available-for-sale debt securities:
Total other-than-temporary impairment losses
Portion of other-than-temporary impairment losses previously recognized in
other comprehensive income
Net impairment losses on available-for-sale debt securities
Equity in loss of unconsolidated entity
Impairment of collateral pledged to Lehman
Insurance commission income
Other non-interest income
Total non-interest income (loss)
Non-interest expenses:
Employees' compensation and benefits
Occupancy and equipment
Business promotion
Professional fees
Taxes, other than income taxes
Insurance and supervisory fees
Net loss on other real estate owned (OREO) and OREO operations
Credit and debit card processing expenses
Communications
Other non-interest expenses
Total non-interest expenses
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Net income (loss) attributable to common stockholders
Net income (loss) per common share:
Basic
Diluted
Dividends declared per common share
Year Ended December 31,
2014
2013
(In thousands, except per share information)
2012
$
579,176 $
52,881
1,892
633,949
590,334 $
53,527
1,927
645,788
78,127
26,989
3,561
7,199
115,876
518,073
109,530
408,543
91,787
25,933
6,031
7,092
130,843
514,945
243,751
271,194
590,656
45,294
1,827
637,777
128,259
28,432
12,142
7,239
176,072
461,705
120,499
341,206
16,709
14,685
16,974
16,830
18,373
19,960
262
(42)
-
-
(388)
(388)
(7,279)
-
6,868
30,491
61,348
135,422
58,290
16,531
47,940
18,089
39,131
20,596
15,449
7,766
19,039
378,253
(117)
(117)
(16,691)
(66,574)
5,955
28,176
(15,489)
130,815
60,746
15,977
49,444
18,109
48,470
42,512
12,909
7,401
28,645
415,028
36
-
(2,002)
(2,002)
(19,256)
-
5,549
26,731
49,391
125,329
60,927
14,093
28,337
13,473
52,596
25,116
6,005
7,085
21,922
354,883
91,638
(159,323)
35,714
300,649
(5,164)
(5,932)
392,287 $
(164,487) $
29,782
393,946 $
(164,487) $
29,782
1.89 $
1.87 $
- $
(0.80) $
(0.80) $
- $
0.15
0.14
-
$
$
$
$
$
The accompanying notes are an integral part of these statements.
153
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
2014
2013
(In thousands)
2012
Net income (loss)
$
392,287 $
(164,487) $
29,782
Available-for-sale debt securities on which an other-than-
temporary impairment has been recognized:
Subsequent unrealized gain on debt securities on which an
other-than-temporary impairment has been recognized
Reclassification adjustment for other-than-temporary
impairment on debt securities included in net income
All other unrealized gains (losses) on available-for-sale securities:
All other unrealized holding gains (losses) arising
during the period
Reclassification adjustments for net gain included in
net income
Reclassification adjustment for other-than-temporary
impairment on equity securities
Income tax (expense) benefit related to items of other
comprehensive income
1,781
4,060
3,754
388
117
2,002
58,478
(111,381)
3,476
(262)
-
-
-
42
(6)
-
-
2
Other comprehensive income (loss) for the year, net of tax
60,385
(107,168)
9,234
Total comprehensive income (loss)
$
452,672 $
(271,655) $
39,016
The accompanying notes are an integral part of these statements.
154
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
Amortization of intangible assets
Provision for loan and lease losses
Deferred income tax (benefit) expense
Stock-based compensation
Gain on sales of investments, net
Other-than-temporary impairments on debt securities
Other-than-temporary impairments on equity securities
Equity in loss of unconsolidated entity
Impairment of collateral pledged to Lehman
Derivative instruments and financial liabilities measured at fair value,
unrealized gain
(Gain) loss on sales of premises and equipment and other assets
Net gain on sales of loans
Net amortization/accretion of premiums, discounts, and deferred loan fees and costs
Originations and purchases of loans held for sale
Sales and repayments of loans held for sale
Loans held for sale valuation adjustment
Amortization of broker placement fees
Net amortization/accretion of premium and discounts on investment securities
Increase in accrued income tax payable
Decrease (increase) in accrued interest receivable
Increase in accrued interest payable
Decrease in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Principal collected on loans
Loans originated and purchased
Proceeds from sales of loans held for investment
Proceeds from sales of repossessed assets
Proceeds from sales of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from principal repayments and maturities of available-for-sale securities
Additions to premises and equipment
Proceeds from sales of premises and equipment and other assets
Net redemptions/sales (purchases) of other equity securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net (decrease) increase in deposits
Net repayments of securities sold under agreements to repurchase
Net FHLB advances proceeds (paid)
Repurchase of outstanding common stock
Repayments of medium-term notes
Proceeds from common stock sold, net of costs
Issuance costs of common stock issued in exchange for preferred stock
Series A through E
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash and cash equivalents include:
Cash and due from banks
Money market instruments
2014
Year Ended December 31,
2013
(In thousands)
2012
$
392,287 $
(164,487) $
29,782
20,983
4,943
109,530
(306,010)
4,221
(262)
388
-
7,279
-
(936)
(21)
(7,715)
(2,431)
(311,305)
328,822
-
6,662
5,417
3,397
3,216
6,812
16,327
(17,251)
264,353
3,487,748
(3,423,241)
74,058
66,683
4,861
(170,419)
233,046
(22,262)
1,320
2,939
254,733
(402,641)
-
25,000
(946)
-
-
23,980
6,078
243,751
(2,783)
2,930
-
117
42
16,691
66,574
(1,871)
(4)
(7,317)
(4,203)
(467,365)
547,404
1,503
7,900
6,840
657
(2,341)
3,631
43,023
20,935
341,685
2,800,471
(3,263,973)
314,282
80,032
-
(690,377)
330,336
(11,789)
4
9,566
(431,448)
7,478
-
(208,440)
(455)
-
-
(62)
(378,649)
140,437
655,671
796,108 $
-
(201,417)
(291,180)
946,851
655,671 $
24,217
3,306
120,499
575
826
-
2,002
-
19,256
-
(1,557)
283
(10,953)
(2,930)
(451,124)
441,474
-
9,869
12,222
497
636
696
29,355
(79)
228,852
3,048,549
(3,037,480)
38,608
74,680
1,878
(1,012,527)
1,203,101
(11,937)
1,016
(806)
305,082
(53,729)
(100,000)
141,000
-
(21,957)
1,037
-
(33,649)
500,285
446,566
946,851
779,147 $
16,961
796,108 $
454,302 $
201,369
655,671 $
730,016
216,835
946,851
$
$
$
The accompanying notes are an integral part of these statements.
155
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock:
Balance at beginning of year
Exchange of preferred stock- Series A through E
Balance at end of year
Common Stock outstanding:
Balance at beginning of year
Common stock issued as compensation
Common stock withheld for taxes
Common stock sold
Common stock issued in exchange for Series A through E preferred stock
Restricted stock grants
Restricted stock forfeited
Balance at end of year
Additional Paid-In Capital:
Balance at beginning of year
Stock-based compensation
Common stock withheld for taxes
Common stock sold
Common stock issued in exchange for Series A through E preferred stock
Reversal of issuance costs of Series A through E preferred stock exchanged
Issuance costs of common stock issued in exchange for Series A through E
preferred stock
Restricted stock grants
Common stock issued as compensation
Restricted stock forfeited
Balance at end of year
Retained Earnings:
Balance at beginning of year
Net income (loss)
Excess of carrying amount of Series A through E preferred stock exchanged over
fair value of new shares of common stock
Balance at end of year
Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of year
Other comprehensive income (loss), net of tax
Balance at end of year
Year Ended December 31,
2014
2013
(In thousands)
2012
$
63,047 $
(26,943)
36,104
20,707
32
(18)
-
459
122
(4)
21,298
888,161
4,221
(928)
-
23,904
921
(62)
(122)
(32)
4
63,047 $
-
63,047
20,624
22
(7)
-
-
74
(6)
20,707
885,754
2,930
(433)
-
-
-
-
(74)
(22)
6
916,067
888,161
322,679
392,287
1,659
716,625
(78,736)
60,385
(18,351)
487,166
(164,487)
-
322,679
28,432
(107,168)
(78,736)
63,047
-
63,047
20,513
-
-
29
-
82
-
20,624
884,002
826
-
1,008
-
-
-
(82)
-
-
885,754
457,384
29,782
-
487,166
19,198
9,234
28,432
Total stockholders' equity
$
1,671,743 $
1,215,858 $
1,485,023
The accompanying notes are an integral part of these statements.
156
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). The following is a description of First BanCorp.’s (“First BanCorp.” or “the
Corporation”) most significant policies:
Nature of business
First BanCorp. is a publicly owned, Puerto Rico-chartered financial holding company that is subject to regulation, supervision, and
examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Corporation is a full
service provider of financial services and products with operations in Puerto Rico, the United States, the U.S. Virgin Islands
(USVI), and the British Virgin Islands (BVI).
The Corporation provides a wide range of financial services for retail, commercial, and institutional clients. As of December 31,
2014, the Corporation controlled two wholly owned subsidiaries: FirstBank Puerto Rico (“FirstBank” or the “Bank”), and FirstBank
Insurance Agency, Inc. (“FirstBank Insurance Agency”). FirstBank is a Puerto Rico-chartered commercial bank, and FirstBank
Insurance Agency is a Puerto Rico-chartered insurance agency. 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. FirstBank also operates in the
state of Florida (USA), subject to regulation and examination by the Florida Office of Financial Regulation and the FDIC, in the
USVI, subject to regulation and examination by the United States Virgin Islands Banking Board, and in the BVI, 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.
FirstBank conducts its business through its main office located in San Juan, Puerto Rico, 44 banking branches in Puerto Rico as of
December 31, 2014, 12 branches in the USVI and BVI, and 10 branches in the state of Florida (USA). FirstBank has 6 wholly owned
subsidiaries with operations in Puerto Rico: First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company
specializing in the origination of small loans with 27 offices in Puerto Rico; First Management of Puerto Rico, a domestic corporation,
which holds tax-exempt assets; FirstBank Puerto Rico Securities Corp., a broker-dealer subsidiary engaged in municipal bond
underwriting and financial advisory services on structured financings principally provided to government entities in the
Commonwealth of Puerto Rico; FirstBank Overseas Corporation, an international banking entity organized under the International
Banking Entity Act of Puerto Rico; and two other companies that hold and operate certain particular other real estate owned
properties. FirstBank had one active subsidiary with operations outside of Puerto Rico: First Express, a finance company specializing
in the origination of small loans with 2 offices in the USVI.
Effective as of 11:59 p.m. on December 31, 2014, the operations conducted by First Mortgage as a separate subsidiary were merged
with and into FirstBank.
Effective as of the close of business on Friday, February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank,
assumed approximately $625 million in deposits related to such branches and purchased approximately $325 million performing
residential mortgage loans through an alliance with Banco Popular of Puerto Rico who was the successful lead bidder with the FDIC
on the failed Doral Bank. These numbers, which are as of December 31, 2014, are subject to post-closing adjustments based on
closing totals and purchase accounting adjustments. Refer to Note 33 for additional information.
Principles of consolidation
The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Statutory business trusts that are wholly owned by the Corporation
and are issuers of trust-preferred securities, and entities in which the Corporation has a non controlling interest, are not consolidated in
the Corporation’s consolidated financial statements in accordance with authoritative guidance issued by the Financial Accounting
Standards Board (“FASB”) for consolidation of variable interest entities. See “Variable Interest Entities” below for further details
regarding the Corporation’s accounting policy for these entities.
157
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Reclassifications
For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2014 presentation. These
reclassifications include, but are not limited to, the presentation of expenses on collection agencies’ fees that were previously
presented as part of other non-interest expenses and were reclassified to the professional fees expenses caption, expenses of stock-
based compensation for non-employee directors previously presented as employees’ compensation and benefits were reclassified to
the professional fees expenses caption and cash management-related fees previously presented as part of other non-interest income
that were reclassified as part of service charges and fees on deposit accounts. These reclassifications had no impact on the previously
reported results of operations, financial condition, or cash flows.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management
has made significant estimates in several areas, including the allowance for loan and lease losses, valuations of investment securities,
the fair value of assets acquired including purchased credit-impaired (PCI) loans, valuations of residential mortgage servicing rights,
valuations of OREO properties, and income taxes, including deferred taxes.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from the Federal Reserve Bank
of New York (the “New York FED” or “Federal Reserve”) and other depository institutions, and short-term investments with original
maturities of three months or less.
Investment securities
The Corporation classifies its investments in debt and equity securities into one of four categories:
Held-to-maturity — Securities that the entity has the intent and ability to hold to maturity. These securities are carried at
amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold
other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has
occurred. As of December 31, 2014 and 2013, the Corporation did not hold held-to-maturity investment securities.
Trading — Securities that are bought and held principally for the purpose of selling them in the near term. These securities are
carried at fair value, with unrealized gains and losses reported in earnings. As of December 31, 2014 and 2013, the Corporation did
not hold investment securities for trading purposes.
Available-for-sale — Securities not classified as held-to-maturity or trading. These securities are carried at fair value, with
unrealized holding gains and losses, net of deferred taxes, reported in other comprehensive income (“OCI”) as a separate
component of stockholders’ equity, and do not affect earnings until they are realized or are deemed to be other-than-temporarily
impaired.
Other equity securities — Equity securities that do not have readily available fair values are classified as other equity securities
in the consolidated statements of financial condition. These securities are stated at the lower of cost or realizable value. This
category is principally composed of stock that is owned by the Corporation to comply with Federal Home Loan Bank (FHLB)
regulatory requirements. Their realizable value equals their cost.
Premiums and discounts on investment securities are amortized as an adjustment to interest income on investments over the life of
the related securities under the interest method. Net realized gains and losses and valuation adjustments considered other-than-
temporary, if any, related to investment securities are determined using the specific identification method and are reported in
noninterest income as net gain (loss) on sale of investments and net impairment losses on debt securities, respectively. Purchases and
sales of securities are recognized on a trade-date basis.
158
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Evaluation of other-than-temporary impairment (“OTTI”) on held-to-maturity and available-for-sale securities
On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic
circumstances indicating that a security with an unrealized loss has suffered OTTI. A security is considered impaired if the fair value
is less than its amortized cost basis.
The Corporation evaluates whether the impairment is other-than-temporary depending upon whether the portfolio consists of debt
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 debt securities 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 issuer’s ability to repay its bond obligations, the length of time and
the extent to which the fair value has been less than the amortized cost basis, and changes in the near-term prospects of the underlying
collateral, if applicable, such as changes in default rates, loss severity given default, and significant changes in prepayment
assumptions. The Corporation also takes into consideration the latest information available about the overall financial condition of an
issuer, credit ratings, recent legislation, government actions affecting the issuer’s industry, and actions taken by the issuer to deal with
the economic climate. OTTI must be recognized in earnings if the Corporation has the intent to sell the debt security or it is more
likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the
Corporation does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss
has occurred. An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present
value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an
OTTI, if any, is recorded as net impairment losses on debt securities in the statements of income (loss), while the remaining portion of
the impairment loss is recognized in OCI, net of taxes, provided the Corporation does not intend to sell the underlying debt security
and it is more likely than not that the Corporation will not have to sell the debt security prior to recovery. The previous amortized cost
basis less the OTTI recognized in earnings is the new amortized cost basis of the investment. The new amortized cost basis is not
adjusted for subsequent recoveries in fair value. However, for debt securities for which OTTI was recognized in earnings, the
difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income. For
further disclosures, refer to Note 4 to the consolidated financial statements.
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 issuer’s industry trends, the historical performance of the stock, credit ratings, as well as the
Corporation’s 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, it records an impairment 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 12 consecutive months or more.
Variable interest entities (“VIE”)
A VIE is an entity in which the Corporation holds an equity interest. An institution that has a controlling financial interest in a VIE
is referred to as the primary beneficiary and consolidates the VIE. The Corporation is deemed to have a controlling financial interest
and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the
VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to
the VIE.
In connection with a sale of loans with a book value of $269.3 million to CPG/GS PR NPL, LLC (“CPG/GS”) completed on
February 16, 2011, the Bank received a 35% subordinated interest in CPG/GS, as further discussed in Note 13. The Corporation’s
investment in this unconsolidated entity was considered significant under Rule 3-09 of Regulation S-X for the year ended December
31, 2012. This rule looks to Rule 1-02(w) of Regulation S-X to determine the significance of the investee. The significance threshold
for Rule 3-09 is 20% of assets or income. The Corporation must provide full financial information for unconsolidated subsidiaries and
50%-or-less owned entities accounted for by the equity method if the entities are significant, for any fiscal year presented, under the
Rule 1-02(w) tests (investment or income tests) in Regulation S-X.
159
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation accounts for its investment in CPG/GS under the equity method and includes the investment as part of investment
in unconsolidated entity in the consolidated statements of financial condition. When applying the equity method, the Corporation
follows the hypothetical liquidation book value (“HLBV”) method to determine its share of earnings or losses of the unconsolidated
entity. Under the HLBV method, the Corporation determines its share of earnings or losses by determining the difference between its
“claim on the entity’s book value” at the end of the period as compared to the beginning of the period. This claim is calculated as the
amount the Corporation would receive if the entity were to liquidate all of its assets at recorded amounts determined in accordance
with GAAP and distribute the resulting cash to the investors, according to their respective priorities as provided in the contractual
agreements. The Bank reports its share of CPG/GS’s operating results on a one-quarter lag basis. In addition, as a result of using
HLBV, the difference between the Bank’s investment in CPG/GS and its claim on the book value of CPG/GS at the date of the
investment, known as the basis difference, is amortized over the estimated life of the investment. The loss recorded in 2014 reduced
the carrying amount of the Bank’s investment in CPG/GS to zero. No negative investment needs to be reported as the Bank has no
legal obligation or commitment to provide further financial support to this entity; thus, no further losses will be recorded on this
investment. Any potential increase in the carrying value of the investment in CPG/GS, under the HLBV method, would depend upon
how better off the Bank is at the end of the period than it was at the beginning of the period after the waterfall calculation performed to
determine the amount of gain allocated to the investors.
Loans held for investment
Loans that the Corporation has the ability and intent to hold for the foreseeable future are classified as held for investment. The
substantial majority of the Corporation’s loans are classified as held for investment. Loans are stated at the principal outstanding
balance, net of unearned interest, cumulative charge-offs, 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 that approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on
certain personal loans, auto loans and finance leases and discounts and premiums are recognized as income under a method that
approximates the interest method. When a loan is paid-off or sold, any unamortized net deferred fee (cost) is credited (charged) to
income. Credit card loans are reported at their outstanding unpaid principal balance plus uncollected billed interest and fees net of
amounts deemed uncollectible. PCI loans are reported net of any remaining purchase accounting adjustments. See “Loans acquired”
below for the accounting policy for PCI loans.
Non-Performing and Past-Due Loans - Loans on which the recognition of interest income has been discontinued are designated as
non-performing. Loans are classified as non-performing when they are 90 days past due for interest and principal, with the exception
of residential mortgage loans guaranteed by the Federal Housing Administration (the “FHA”) or the Veterans Administration (the
“VA”) and credit cards. It is the Corporation’s policy to report delinquent mortgage loans insured by the FHA or guaranteed b y the
VA as loans past due 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured.
However, the Corporation discontinues the recognition of income for FHA/VA loans when such loans are over 18 months delinquent.
As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), credit card loans are
generally charged off in the period in which the account becomes 180 days past due. Credit card loans continue to accrue finance
charges and fees until charged off at 180 days. Loans generally may be placed on non-performing status prior to when required by the
policies described above when the full and timely collection of interest or principal becomes uncertain (generally based on an
assessment of the borrower’s financial condition and the adequacy of collateral, if any). When a loan is placed on non-performing
status, any accrued but uncollected interest income is reversed and charged against interest income and amortization of any net
deferred fees is suspended. Interest income on non-performing loans is recognized only to the extent it is received in cash. However,
when there is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce the carrying
value of such loans (i.e., the cost recovery method). Generally, the Corporation returns a loan to accrual status when all delinquent
interest and principal becomes current under the terms of the loan agreement or when the loan is well secured and in the process of
collection, and collectability of the remaining interest and principal is no longer doubtful. Loans that are past due 30 days or more as
to principal or interest are considered delinquent, with the exception of residential mortgage, commercial mortgage, and construction
loans, which are considered past due when the borrower is in arrears on two or more monthly payments.
160
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Impaired Loans - A loan is considered impaired when, based upon current information and events, it is probable that the
Corporation will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the loan
agreement. Loans with insignificant delays or insignificant shortfalls in the amounts of payments expected to be collected are not
considered to be impaired. The Corporation measures impairment individually for those loans in the construction, commercial
mortgage, and commercial and industrial portfolios with a principal balance of $1 million or more and any loans that have been
modified in a troubled debt restructuring (“TDRs”). The Corporation also evaluates for impairment purposes certain residential
mortgage loans and home equity lines of credit with high delinquency and loan-to-value levels. Generally, consumer loans are not
individually evaluated for impairment on a regular basis except for impaired marine financing loans in amounts that exceed $1
million, home equity lines with high delinquency and loan-to-value levels and TDRs. Held-for-sale loans are not reported as impaired,
as these loans are recorded at the lower of cost or fair value.
The Corporation generally measures impairment and the related specific allowance for individually impaired loans based on the
difference between the recorded investment of the loan and the present value of the loans’ expected future cash flows, discounted at
the effective original interest rate of the loan at the time of modification, or the loan’s observable market price. If the loan is collateral
dependent, the Corporation measures impairment based upon the fair value of the underlying collateral, instead of discounted cash
flows, regardless of whether foreclosure is probable. Loans are identified as collateral dependent if the repayment is expected to be
provided solely by the underlying collateral, through liquidation or operation of the collateral. When the fair value of the collateral is
used to measure impairment on an impaired collateral-dependent loan and repayment or satisfaction of the loan is dependent on the
sale of the collateral, the fair value of the collateral is adjusted to consider estimated costs to sell. If repayment is dependent only on
the operation of the collateral, the fair value of the collateral is not adjusted for estimated costs to sell. If the fair value of the loan is
less than the recorded investment, the Corporation recognizes impairment by either a direct write-down or establishing an allowance
for the loan or by adjusting an allowance for the impaired loan. For an impaired loan that is collateral dependent, charge-offs are taken
in the period in which the loan, or portion of the loan, is deemed uncollectible, and any portion of the loan not charged off is adversely
credit risk rated at a level no worse than substandard.
A restructuring of a loan constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties,
grants a concession to the debtor that it would not otherwise consider. TDRs typically result from the Corporation’s loss mitigation
activities and residential mortgage loans modified in accordance with guidelines similar to those of the U.S. government’s Home
Affordable Modification Program, and could include rate reductions, principal forgiveness, term extensions, payment forbearance,
refinancing of any past-due amounts, including interest, escrow, and late charges and fees, and other actions intended to minimize the
economic loss and to avoid foreclosure or repossession of collateral.
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on
nonaccrual status until the borrower demonstrates a sustained period of performance (generally six consecutive months of payments,
inclusive of consecutive payments made prior to the modification), and there is evidence that such payments can and are likely to
continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are evaluated in
assessing whether the borrower can meet the new terms and may result in the loans being returned to accrual status at the time of the
restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the
loan remains classified as a nonaccrual loan. Refer to Note 7 for additional qualitative and quantitative information about TDRs.
In connection with commercial restructurings, the decision to maintain a loan that has been restructured on accrual status is based
on a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment under the modified
terms. The credit evaluation reflects consideration of the borrower’s future capacity and willingness to pay, which may include
evaluation of cash flow projections, consideration of the adequacy of collateral to cover all principal and interest, and trends indicating
improving profitability and collectibility of receivables. This evaluation also includes an evaluation of the borrower’s current
willingness to pay, which may include a review of past payment history, an evaluation of the borrower’s willingness to provide
information on a timely basis, and consideration of offers from the borrower to provide additional collateral or guarantor support.
The evaluation of mortgage and consumer loans for restructurings includes an evaluation of the client’s disposable income and
credit report, the value of the property, the loan to value relationship, and certain other client-specific factors that have impacted the
borrower’s ability to make timely principal and interest payments on the loan. In connection with retail restructurings, a
nonperforming loan will be returned to accrual status when current as to principal and interest, under revised terms, and upon
sustained historical repayment performance.
161
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation removes loans from TDR classification, consistent with authoritative guidance that allows for a TDR to be
removed from this classification in years following the modification, only when the following two circumstances are met:
(i)
(ii)
The loan is in compliance with the terms of the restructuring agreement and, therefore, is not considered impaired under the
revised terms; and
The loan yields a market interest rate at the time of the restructuring. In other words, the loan was restructured with an
interest rate equal to or greater than what the Corporation would have been willing to accept at the time of the restructuring
for a new loan with comparable risk.
If both of the conditions are met, the loan can be removed from the TDR classification in calendar years after the year in which the
restructuring took place. However, the loan continues to be individually evaluated for impairment. Loans classified as TDRs,
including loans in trial payment periods (trial modifications), are considered impaired loans.
With respect to loan splits, generally, Note A of a loan split is restructured under market terms, and Note B is fully charged off. If
Note A is in compliance with the restructured terms in years following the restructuring, Note A will be removed from the TDR
classification.
Interest income on impaired loans is recognized based on the Corporation’s policy for recognizing interest on accrual and non-
accrual loans.
Loans Acquired - All purchased loans are recorded at fair value at the date of acquisition. Loans acquired with evidence of credit
deterioration since their origination and where it is probable at the date of acquisition that the Corporation will not collect all
contractually required principal and interest payments are considered PCI loans. Evidence of credit quality deterioration as of the
purchase date may include statistics such as past due and non-accrual status, and revised loan terms. Residential and consumer PCI
loans have been aggregated into pools based on common risk characteristics. Each pool is accounted for as a single asset with a single
composite interest rate and an aggregate expectation of cash flows. In accounting for PCI loans, the difference between contractually
required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The
nonaccretable difference, which is neither accreted into income nor recorded on the consolidated statement of financial condition,
reflects estimated future credit losses expected to be incurred over the life of the pool of loans. The excess of cash flows expected to
be collected over the estimated fair value of PCI loans is referred to as the accretable yield. This amount is not recorded on the
statement of financial condition, but is accreted into interest income over the remaining life of the pool of loans, using the effective-
yield method.
Subsequent to acquisition, the Corporation completes quarterly evaluations of expected cash flows. Decreases in expected cash
flows attributable to credit will generally result in an impairment charge to the provision for loan and lease losses and the
establishment of an allowance for loan and lease losses. Increases in expected cash flows will generally result in a reduction in any
allowance for loan and lease losses established subsequent to acquisition and an increase in the accretable yield. The adjusted
accretable yield is recognized in interest income over the remaining life of the pool of loans.
Resolutions of loans may include sales of loans to third parties, receipt of payments in settlement with the borrower, or foreclosure
of the collateral. The Corporation’s policy is to remove an individual loan from a pool based on comparing the amount received from
its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the
entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The
remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method
is addressed by the Corporation’s quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full,
there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at
resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would
otherwise be deemed TDRs.
Because the initial fair value of PCI loans recorded at acquisition includes an estimate of credit losses expected to be realized over
the remaining lives of the loans, the Corporation separately tracks and reports PCI loans and excludes these loans from its delinquency
and non-performing loan statistics.
162
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For acquired loans that are not deemed impaired at acquisition, subsequent to acquisition the Corporation recognizes the difference
between the initial fair value at acquisition and the undiscounted expected cash flows in interest income over the period in which
substantially all of the inherent losses associated with the non-PCI loans at the acquisition date are estimated to occur. Thus, such
loans are accounted for consistently with other originated loans, potentially being classified as nonaccrual or impaired, as well as
being classified under the Corporation’s standard practice and procedures. In addition, these loans are considered in the determination
of the allowance for loan losses.
Charge-off of Uncollectible Loans - Net charge-offs consist of the unpaid principal balances of loans held for investment that the
Corporation determines are uncollectible, net of recovered amounts. Charge-offs are recorded as a reduction to the allowance for loan
and lease losses and subsequent recoveries of previously charged off amounts are credited to the allowance for loan and lease losses.
Collateral dependent loans in the construction, commercial mortgage, and commercial and industrial loan portfolios are charged off to
their net realizable value (fair value of collateral, less estimated costs to sell) when loans are considered to be uncollectible. Within
the consumer loan portfolio, auto loans and finance leases are reserved once they are 120 days delinquent and are charged off to their
estimated net realizable value when collateral deficiency is deemed uncollectible (i.e., when foreclosure/repossession is probable) or
when the loan is 365 days past due. Within the other consumer loans class, closed-end loans are charged off when payments are
120 days in arrears, except small personal loans. Open-end (revolving credit) consumer loans, including credit card loans, and small
personal loans are charged off when payments are 180 days in arrears. On a quarterly basis, residential mortgage loans that are 180
days delinquent and have an original loan-to-value ratio that is higher than 60% are reviewed and charged-off, as needed, to the fair
value of the underlying collateral. Generally, all loans may be charged off or written down to the fair value of the collateral prior to the
policies described above if a loss-confirming event occurred. Loss confirming events include, but are not limited to, bankruptcy
(unsecured), continued delinquency, or receipt of an asset valuation indicating a collateral deficiency when the asset is the sole source
of repayment. The Corporation does not record charge-offs on PCI loans that are performing in accordance with or better than
expectations as of the date of acquisition, as the fair value of these loans already reflects a credit component. The Corporation records
charge-offs on PCI loans only if actual losses exceed estimated losses incorporated into the fair value recorded at acquisition and the
amount is deemed uncollectible.
Loans held for sale
Loans that the Corporation intends to sell or that the Corporation does not have the ability and intent to hold for the foreseeable
future are classified as held-for-sale loans. Loans held for sale are stated at the lower-of-cost-or-market. Generally, the loans held-for-
sale portfolio consists of conforming residential mortgage loans that the Corporation intends to sell to the Government National
Mortgage Association (GNMA) and government sponsored entities (GSEs) such as the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Generally, residential mortgage loans held for sale are valued
on an aggregate portfolio basis and the value is primarily derived from quotations based on the mortgage-backed securities market.
The amount by which cost exceeds market value in the aggregate portfolio of loans held for sale, if any, is accounted for as a valuation
allowance with changes therein included in the determination of net income and reported as part of mortgage banking activities in the
consolidated statement of income (loss). Loan costs and fees are deferred at origination and are recognized in income at the time of
sale. The fair value of commercial mortgage and construction loans held for sale is primarily derived from external appraisals with
changes in the valuation allowance reported as part of other non-interest income in the consolidated statement of income (loss).
In certain circumstances, the Corporation transfers loans to/from held for sale or held for investment based on a change in strategy.
In particular, although no decision to sell any portion of its non-performing loan portfolio has been made, the Corporation continues to
evaluate options to further reduce non-performing loan levels. These options could include bulk loan sales. If such a change in holding
strategy is made, significant adjustments to the loans’ carrying values may be necessary. These loans are transferred to held for sale at
the lower of cost or fair value on the date of transfer and establish a new cost basis upon transfer. Write-downs of loans transferred
from held for investment to held for sale are recorded as charge-offs at the time of transfer.
163
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Allowance for loan and lease losses
The Corporation maintains the allowance for loan and lease losses at a level considered adequate to absorb losses currently inherent
in the loan and lease portfolio. The Corporation does not maintain an allowance for held-for-sale loans or PCI loans that are
performing in accordance with or better than expectations as of the date of acquisition, as the fair values of these loans already reflects
a credit component. The allowance for loan and lease losses provides for probable losses that have been identified with specific
valuation allowances for individually evaluated impaired loans and for probable losses believed to be inherent in the loan portfolio
that have not been specifically identified. The determination of the allowance for loan and lease losses requires significant estimates,
including the timing and amounts of expected future cash flows on impaired loans, consideration of current economic conditions, and
historical loss experience pertaining to the portfolios and pools of homogeneous loans, all of which may be susceptible to change.
The Corporation evaluates the need for changes to the allowance by portfolio loan segments and classes of loans within certain of
those portfolio segments. The Corporation combines loans with similar credit risk characteristics into the following portfolio
segments: commercial mortgage, construction, commercial and industrial, residential mortgage, and consumer loans. Classes are
usually disaggregations of the portfolio segments. The classes within the residential mortgage segment are residential mortgages
guaranteed by the U.S. government and other loans. The classes within the consumer portfolio are auto, finance leases, and other
consumer loans. Other consumer loans mainly include unsecured personal loans, credit cards, home equity lines, lines of credits, and
marine financing. The classes within the construction loan portfolio are land loans, construction of commercial projects, and
construction of residential projects. The commercial mortgage and commercial and industrial segments are not further segmented into
classes. The adequacy of the allowance for loan and lease losses is based on judgments related to the credit quality of each portfolio
segment. These judgments consider ongoing evaluations of each portfolio segment, including such factors as the economic risks
associated with each loan class, the financial condition of specific borrowers, the level of delinquent loans, historical loss experience,
the value of any collateral and, where applicable, the existence of any guarantees or other documented support. In addition to the
general economic conditions and other factors described above, additional factors considered include the internal risk ratings assigned
to loans. An internal risk rating is assigned to each commercial loan at the time of approval and is subject to subsequent periodic
review by the Corporation's senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the
Corporation’s continued evaluation of its asset quality.
The allowance for loan and lease losses is increased through a provision for credit losses that is charged to earnings, based on the
quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries.
The allowance for loan and lease losses consists of specific reserves based upon valuations of loans considered to be impaired and
general reserves. A specific valuation allowance is established for individual impaired loans in the commercial mortgage,
construction, commercial and industrial, and residential mortgage loan portfolios, primarily when the collateral value of the loan (if
the impaired loan is determined to be collateral dependent) or the present value of the expected future cash flows discounted at the
loan’s effective rate is lower than the carrying amount of that loan. The specific valuation allowance is computed for impaired
commercial mortgage, construction, commercial and industrial, and real estate loans with individual principal balances of $1 million
or more, TDRs, as well as smaller residential mortgage loans and home equity lines of credit considered impaired based on their
delinquency and loan-to-value levels. When foreclosure is probable and for collateral dependent loans, the impairment measure is
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 are generally updated annually thereafter. In addition,
appraisals and/or broker price opinions are also obtained for residential mortgage loans based on specific characteristics such as
delinquency levels, age of the appraisal, and loan-to-value ratios. The excess of the recorded investment in a collateral dependent loan
over the resulting fair value of the collateral is charged-off when deemed uncollectible.
For all other loans, which include small, homogeneous loans, such as auto loans, all classes in the consumer loan portfolio,
residential mortgages in amounts under $1 million and commercial and construction loans not considered impaired, the Corporation
maintains a general valuation allowance established through a process that begins with estimates of incurred losses based upon various
statistical analyses. The general reserve is primarily determined by applying loss factors according to the loan type and assigned risk
category (pass, special mention, and substandard not considered to be impaired; all doubtful loans are considered impaired).
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The Corporation uses a roll-rate methodology to estimate losses on its consumer loan portfolio based on delinquencies and
considering credit bureau score bands. The Corporation tracks the historical portfolio performance to arrive at a weighted average
distribution in each subgroup of each delinquency bucket. Roll-to-loss rates (loss factors) are calculated by multiplying the roll rates
from each subgroup within the delinquency buckets forward through loss. Once roll rates are calculated, the resulting loss factor is
applied to the existing receivables in the applicable subgroups within the delinquency buckets and the end results are aggregated to
arrive at the required allowance level. The Corporation’s assessment also involves evaluating key qualitative and environmental
factors, which include credit and macroeconomic indicators such as unemployment, bankruptcy trends, recent market transactions, and
collateral values to account for current market conditions that are likely to cause estimated credit losses to differ from historical loss
experience. The Corporation analyzes the expected delinquency migration to determine the future volume of delinquencies.
The non-PCI portion of a credit card portfolio acquired in 2012 was recorded at the fair value on the acquisition date of $353.2
million, net of a discount of $18.2 million. The discount at acquisition was attributable to uncertainties in the cash flows of this
portfolio based on an estimation of inherent credit losses. As previously discussed, the discount recorded at acquisition was accreted
and recognized in interest income over the period in which substantially all of the inherent losses associated with the non-PCI loans at
the acquisition date were estimated to occur. Subsequent to acquisition, the Corporation evaluated its estimate of embedded losses on
a quarterly basis. The allowance for non-PCI loans acquired was determined considering the outstanding balance of the portfolio net
of any unaccreted discount. To the extent the required allowance exceeded the unaccreted discount, a provision was required. The
remaining discount on the credit card portfolio acquired in 2012 was fully accreted into income during the first half of 2014. The
provision recorded during 2013 and 2014 relates to new purchases on these non-PCI credit card loans and to the allowance
methodology described above. The provision in 2013 and 2014 was not related to changes in expected loan losses assumed in the
accounting for the acquisition of the portfolio.
The cash flow analysis for each residential mortgage pool is performed at the individual loan level and then aggregated to the pool
level in determining the overall expected loss ratio. The model applies risk-adjusted prepayment curves, default curves, and severity
curves to each loan in the pool. For loan restructuring pools, the present value of expected future cash flows under new terms, at the
loan’s effective interest rate, is taken into consideration. Additionally, the default risk and prepayments related to loan restructurings
are based on, among other things, the historical experience of these loans. Loss severity is affected by the expected house price
scenario, which is based in part on recent house price trends. Default curves are used in the model to determine expected delinquency
levels. The risk-adjusted timing of liquidations and associated costs are used in the model, and are risk-adjusted for the geographic
area in which each property is located (Puerto Rico, Florida, or the Virgin Islands). For residential mortgage loans, the determination
of reserves includes the incorporation of updated loss factors applicable to loans expected to liquidate over the next twelve months,
considering the expected realization of similarly valued assets at disposition.
During the second quarter of 2014, the Corporation made certain enhancements to the general allowance estimation process for
commercial loans, which mainly consisted of the following:
Utilization of longer historical loss periods to better reflect the level of incurred losses in portfolio. Historical charge-off rates are
calculated by the Corporation on a quarterly basis by tracking cumulative charge-offs experienced over a two-year loss period on
loans according to their internal risk rating (referred to as “base rate” for the quarter). Prior to the second quarter enhancements, the
Corporation would use the base rate of the current quarter or the average of the last 4 quarters, if greater. During the second quarter of
2014, the Corporation eliminated the use of the “greater of” approach and adopted the utilization of the base rate average of the last 8
quarters. This change captures a longer historical period that helps mitigate period to period volatility in the loss rates.
Enhancements of the environmental factors adjustment. Prior to the second quarter of 2014 enhancements, these adjustments were
applied in the form of basis point additions to the loss ratio based on changes in credit and economic indicators observed in the most
recent periods. Beginning in the second quarter of 2014, the resulting factor derived from a set of risk-based ratings and weights
assigned to credit and economic indicators over a reasonable period is applied to a developed expected range of historical losses, in
order to adjust the base rates. These enhancements result in a framework that can be applied more consistently, by having a more
granular analysis that better captures trends in economic conditions and the impact on the Corporation’s portfolio.
In addition, the calculation of loss rates for asset classifications with limited or zero loss history was improved to consider these
loans’ migration experience.
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At the date of implementation, the Corporation performed a parallel computation of the general reserve for commercial loans. The
enhancements to the general allowance estimation process resulted in a net decrease to the allowance for loan losses of $4.8 million as
of the implementation date of May 31, 2014.
In the third quarter of 2014, similar enhancements to the environmental factors adjustment framework were applied to the consumer
loans portfolio. The framework was defined for secured and unsecured loans to consider the specific behaviors separately. With
respect to the historical charge-off rates, during the third quarter of 2014, the Corporation adopted the utilization of the base rate
calculated as the average of the net charge-off ratio for the 12-month period preceding the most recent four quarters. Previously, the
base rate was calculated as the average of the last two years’ annual net charge-off ratio. The effect of these enhancements on the
allowance for consumer loans was immaterial as of the implementation date of August 31, 2014.
Transfers and servicing of financial assets and extinguishment of liabilities
After a transfer of financial assets in a transaction that qualifies for sale accounting, the Corporation derecognizes the financial
assets when control has been surrendered, and derecognizes liabilities when extinguished.
The transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent
that consideration other than beneficial interests is received in exchange. The criteria that must be met to determine that the control
over transferred assets has been surrendered include: (1) the assets must be isolated from creditors of the transferor, (2) the transferee
must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the above criteria, the
Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured
borrowing.
Servicing Assets
The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or
purchased. The Corporation is actively involved in the securitization of pools of FHA-insured and VA-guaranteed mortgages for the
issuance of GNMA mortgage-backed securities. Also, certain conventional conforming loans are sold to FNMA or FHLMC with
servicing retained. When the Corporation securitizes or sells mortgage loans, it recognizes any retained interest, based on its fair
value.
Servicing assets (“MSRs”) retained in a sale or securitization arise from contractual agreements between the Corporation and
investors in mortgage securities and mortgage loans. The value of MSRs is derived from the net positive cash flows associated with
the servicing contracts. Under these contracts, the Corporation performs loan-servicing functions in exchange for fees and other
remuneration. The servicing functions typically include: collecting and remitting loan payments, responding to borrower inquiries,
accounting for principal and interest, holding custodial funds for payment of property taxes and insurance premiums, supervising
foreclosures and property dispositions, and generally administering the loans. The servicing rights, included as part of other assets in
the statements of financial condition, entitle the Corporation to annual servicing fees based on the outstanding principal balance of the
mortgage loans and the contractual servicing rate. The servicing fees are credited to income on a monthly basis when collected and
recorded as part of mortgage banking activities in the consolidated statements of income (loss). In addition, the Corporation generally
receives other remuneration consisting of mortgagor-contracted fees such as late charges and prepayment penalties, which are credited
to income when collected.
Considerable judgment is required to determine the fair value of the Corporation’s servicing assets. Unlike highly liquid
investments, the market value of servicing assets cannot be readily determined because these assets are not actively traded in securities
markets. The initial carrying value of the servicing assets is generally determined based on its fair value. The fair value of the MSRs
is determined based on a combination of market information on trading activity (MSR trades and broker valuations), benchmarking of
servicing assets (valuation surveys), and cash flow modeling. The valuation of the Corporation’s MSRs incorporates two sets of
assumptions: (1) market derived assumptions for discount rates, servicing costs, escrow earnings rates, floating earnings rates, and the
cost of funds and (2) market assumptions calibrated to the Corporation’s loan characteristics and portfolio behavior for escrow
balances, delinquencies and foreclosures, late fees, prepayments, and prepayment penalties.
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Once recorded, MSRs are periodically evaluated for impairment. Impairment occurs when the current fair value of the MSRs is less
than its carrying value. If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the
MSRs is adjusted through a valuation allowance. If the value of the MSRs subsequently increases, the recovery in value is recognized
in current period earnings and the carrying value of the MSRs is adjusted through a reduction in the valuation allowance. For purposes
of performing the MSR impairment evaluation, the servicing portfolio is stratified on the basis of certain risk characteristics such as
region, terms, and coupons. An other-than-temporary impairment analysis is prepared to evaluate whether a loss in the value of the
MSRs, if any, is other than temporary or not. When the recovery of the value is unlikely in the foreseeable future, a write-down of the
MSRs in the stratum to its estimated recoverable value is charged to the valuation allowance.
The servicing assets are amortized over the estimated life of the underlying loans based on an income forecast method as a reduction
of servicing income. The income forecast method of amortization is based on projected cash flows. A particular periodic amortization
is calculated by applying to the carrying amount of the MSRs the ratio of the cash flows projected for the current period to total
remaining net MSR forecasted cash flow.
Premises and equipment
Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the leases
(contractual term plus lease renewals that are “reasonably assured”) or the estimated useful lives of the improvements, whichever is
shorter. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.
Costs of renewals and betterments are capitalized. When assets are sold or disposed of, their cost and related accumulated depreciation
are removed from the accounts and any gain or loss is reflected in earnings as part of other non-interest income in the statement of
income (loss). When the asset is no longer used in operations, and the Corporation intends to sell it, the asset is reclassified to other
assets held-for-sale and is reported at the lower of carrying amount or fair value less cost to sell.
The Corporation has operating lease agreements primarily associated with the rental of premises to support the branch network or
for general office space. Certain of these arrangements are noncancelable and provide for rent escalation and renewal options. Rent
expense on noncancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term.
Other real estate owned (OREO)
OREO, which consists of real estate acquired in settlement of loans, is recorded at the lower of cost (carrying value of the loan) or
fair value minus estimated cost to sell the real estate acquired. Generally, loans have been written down to their net realizable value
prior to foreclosure. Any further reduction to their net realizable value is recorded with a charge to the allowance for loan losses at
foreclosure or a short-time after foreclosure. Thereafter, gains or losses resulting from the sale of these properties and losses
recognized on the periodic reevaluations of these properties are credited or charged to earnings and are included as part of net loss on
OREO operations in the statements of income (loss). The cost of maintaining and operating these properties is expensed as incurred.
The Corporation estimates fair values primarily based on appraisals, when available, and the net realizable value is reviewed and
updated periodically depending of the type of property.
Goodwill and other intangible assets
Business combinations are accounted for using the purchase method of accounting. Assets acquired and liabilities assumed are
recorded at estimated fair value as of the date of acquisition. After initial recognition, any resulting intangible assets are accounted for
as follows:
Goodwill
The Corporation evaluates goodwill for impairment on an annual basis, generally during the fourth quarter, or more often if events
or circumstances indicate there may be impairment. The Corporation evaluated goodwill for impairment as of October 1, 2014.
Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date
the goodwill is initially recorded. Once goodwill has been assigned to a reporting unit, it no longer retains its association with a
particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support
the value of the goodwill. The Corporation’s goodwill is related to the acquisition of FirstBank Florida in 2005.
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The Corporation bypassed the qualitative assessment in 2014 and proceeded directly to perform the first step of the two-step
goodwill impairment test. The first step (the “Step 1”) involves a comparison of the estimated fair value of the reporting unit to its
carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not
considered impaired. If the carrying value exceeds the estimated fair value, there is an indication of potential impairment and the
second step is performed to measure the amount of the impairment.
The second step (the “Step 2”), if necessary, involves calculating an implied fair value of the goodwill for each reporting unit for
which the Step 1 indicated a potential impairment. The implied fair value of goodwill is determined in a manner similar to the
calculation of the amount of goodwill in a business combination, by measuring the excess of the estimated fair value of the reporting
unit, as determined in the Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable
intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the
carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a
reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss
cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill.
Subsequent reversal of goodwill impairment losses is not permitted.
In determining the fair value of a reporting unit, which is based on the nature of the business and the reporting unit’s current and
expected financial performance, the Corporation uses a combination of methods, including market price multiples of comparable
companies, as well as a discounted cash flow analysis (“DCF”). The Corporation evaluates the results obtained under each valuation
methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and
appropriate under the circumstances.
The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these
evaluations include:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
a selection of comparable publicly traded companies, based on size, performance, and asset quality;
the discount rate applied to future earnings, based on an estimate of the cost of equity;
the potential future earnings of the reporting unit; and
the market growth and new business assumptions.
For purposes of the market comparable approach, valuation was determined based on market multiples for comparable companies
and market participant assumptions applied to the reporting unit to derive an implied value of equity.
For purposes of the DCF analysis approach, the valuation is based on estimated future cash flows. The financial projections used in
the DCF analysis for the reporting unit are based on the most recent available data. The growth assumptions included in these
projections are based on management’s expectations of the reporting unit’s financial prospects as well as particular plans for the entity
(i.e., restructuring plans). The cost of equity was estimated using the capital asset pricing model using comparable companies, an
equity risk premium, the rate of return of a “riskless” asset, a size premium based on the size of the reporting unit, and a company
specific premium. The resulting discount rate was analyzed in terms of reasonability given current market conditions.
The Step 1 evaluation of goodwill allocated to the Florida reporting unit, which is one level below the United States business
segment, under both valuation approaches (market and DCF) indicated that the fair value of the unit was above the carrying amount of
its equity book value as of the valuation date (October 1), which meant that Step 2 was not undertaken. Based on the analysis under
both the income and market approaches, the estimated fair value of the reporting units exceeds the carrying amount of the unit,
including goodwill, at the evaluation date.
The Corporation engaged a third-party valuator to assist management in the annual evaluation of the Florida unit’s goodwill as of
the October 1 valuation date. In reaching its conclusion on impairment, management discussed with the valuator the methodologies,
assumptions, and results supporting the relevant values for the goodwill and determined that they were reasonable.
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The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regards to the fair
value of reporting units. Actual values may differ significantly from these estimates. Such differences could result in future
impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the profitability of the
reporting unit where goodwill is recorded.
Goodwill was not impaired as of December 31, 2014 or 2013, nor was any goodwill written off due to impairment during 2014,
2013, and 2012.
Other Intangibles
Core deposit intangibles are amortized over their estimated lives, generally on a straight-line basis, and are reviewed periodically
for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
The Corporation performed impairment tests for the years ended December 31, 2014, 2013, and 2012 and determined that no
impairment was needed to be recognized for other intangible assets.
In connection with the acquisition of a FirstBank-branded credit card loan portfolio in 2012, the Corporation recognized at
acquisition a purchased credit card relationship intangible of $24.5 million ($16.4 million and $19.8 million as of December 31, 2014
and 2013, respectively) which is being amortized on an accelerated basis based on the estimated attrition rate of the purchased credit
card accounts, which reflects the pattern in which the economic benefits of the intangible asset are consumed. These benefits are
consumed as the revenue stream generated by the cardholder relationship is realized. For further disclosures, refer to Note 12 to the
consolidated financial statements.
Securities sold under agreements to repurchase
The Corporation sells securities under agreements to repurchase the same or similar securities. Generally, similar securities are
securities from the same issuer, with identical form and type, similar maturity, identical contractual interest rates, similar assets as
collateral, and the same aggregate unpaid principal amount. The Corporation retains control over the securities sold under these
agreements. Accordingly, these agreements are considered financing transactions and the securities underlying the agreements remain
in the asset accounts. The counterparty to certain agreements may have the right to repledge the collateral by contract or custom. Such
assets are presented separately in the statements of financial condition as securities pledged to creditors that can be repledged.
From time to time, the Corporation modifies repurchase agreements to take advantage of prevailing interest rates. Following
applicable GAAP guidance, if the Corporation determines that the debt under the modified terms is substantially different from the
original terms, the modification must be accounted for as an extinguishment of debt. Modified terms are considered substantially
different if the present value of the cash flows under the terms of the new debt instrument is at least 10% different from the present
value of the remaining cash flows under the terms of the original instrument. The new debt instrument will be initially recorded at fair
value, and that amount will be used to determine the debt extinguishment gain or loss to be recognized through the statement of
income (loss) and the effective rate of the new instrument. If the Corporation determines that the debt under the modified terms is not
substantially different, then the new effective interest rate shall be determined based on the carrying amount of the original debt
instrument. None of the repurchase agreements modified in the past were considered to be substantially different from the original
terms, and therefore, these modifications were not accounted for as extinguishments of debt.
Rewards Liability
The Corporation offers products, primarily credit cards, that offer reward program members with various rewards, such as airline
tickets, cash, or merchandise, based on account activity. The Corporation generally recognizes the cost of rewards as part of business
promotion expenses when the rewards are earned by the customer and, at that time, records the corresponding rewards liability. The
reward liability is computed based on points earned to date that are expected to be redeemed and the average cost per point
redemption. The reward liability is reduced as points are redeemed. In estimating the reward liability, the Corporation considers
historical reward redemption behavior, the terms of the current reward program, and the card purchase activity. The reward liability is
sensitive to changes in the reward redemption type and redemption rate, which is based on the expectation that the vast majority of all
points earned will eventually be redeemed. The reward liability, which is included in other liabilities in the consolidated statement of
financial condition, totaled $9.0 million and $8.1 million as of December 31, 2014 and 2013, respectively.
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Income taxes
The Corporation uses the asset and liability method for the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax
assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the
temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is given to
evidence that can be objectively verified, including both positive and negative evidence. The authoritative guidance for accounting for
income taxes requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future
reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards,
taxable income in carryback years, and tax planning strategies. In estimating taxes, management assesses the relative merits and risks
of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance. Refer to Note 24 to the
consolidated financial statements for additional information.
Under the authoritative accounting guidance, income tax benefits are recognized and measured based on a two-step analysis: 1) a
tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the
benefit is measured at the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The
difference between the benefit recognized in accordance with this analysis and the tax benefit claimed on a tax return is referred to as
an Unrecognized Tax Benefit (“UTB”). The Corporation classifies interest and penalties, if any, related to UTBs as components of
income tax expense. Refer to Note 24 for required disclosures and further information.
Treasury stock
The Corporation accounts for treasury stock at par value. Under this method, the treasury stock account is increased by the par
value of each share of common stock reacquired. Any excess paid per share over the par value is debited to additional paid-in capital
for the amount per share that was originally credited. Any remaining excess is charged to retained earnings.
Stock-based compensation
Compensation cost is recognized in the financial statements for all share-based payment grants. Between 1997 and 2007, the
Corporation had a stock option plan (the “1997 stock option plan”) covering eligible employees. On January 21, 2007, the 1997 stock
option plan expired; all outstanding awards under this plan continue to be in full force and effect, subject to their original terms. No
awards for shares could be granted under the 1997 stock option plan as of its expiration.
On April 29, 2008, the Corporation’s stockholders approved the First BanCorp 2008 Omnibus Incentive Plan, as amended (the
“Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options,
stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. The compensation cost
for an award, determined based on the estimate of the fair value at the grant date (considering forfeitures and any postvesting restrictions),
is recognized over the period during which an employee or director is required to provide services in exchange for an award, which is the
vesting period.
Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards
that will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect
on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the
forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase
the estimated forfeiture rate, which will result in a decrease in the expense recognized in the financial statements. If the actual forfeiture
rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will result in an
increase in the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any
compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture. For additional information
regarding the Corporation’s equity-based compensation and awards granted, refer to Note 19.
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Comprehensive income
Comprehensive income for First BanCorp. includes net income and the unrealized gain (loss) on available-for-sale securities, net of
estimated tax effects.
Segment Information
The Corporation reports financial and descriptive information about its reportable segments (see Note 31). Operating segments are
components of an enterprise about which separate financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance. The Corporation’s management determined that the segregation that
best fulfills the segment definition described above is by lines of business for its operations in Puerto Rico, the Corporation’s principal
market, and by geographic areas for its operations outside of Puerto Rico. As of December 31, 2014, the Corporation had six operating
segments that are all reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking;
Treasury and Investments; United States Operations; and Virgin Islands Operations. Refer to Note 31 for additional information.
Valuation of financial instruments
The measurement of fair value is fundamental to the Corporation’s presentation of its 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 mainly to manage liquidity needs and interest rate risks. A significant part of the
Corporation’s total assets is reflected at fair value on the Corporation’s financial statements.
The FASB authoritative guidance for fair value measurement 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. This guidance also establishes a fair value hierarchy for classifying
financial instruments. The hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are
observable or unobservable. Three levels of inputs may be used to measure fair value:
Level 1
Level 2
Level 3
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.
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.
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.
Under the fair value accounting guidance, an entity has the irrevocable option to elect, on a contract-by-contract basis, to measure
certain financial assets and liabilities at fair value at the inception of the contract and, thereafter, to reflect any changes in fair value in
current earnings. The Corporation did not make any fair value option election as of December 31, 2014 or 2013. See Note 26 for
additional information.
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FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Income recognition— Insurance agency
Commission revenue is recognized as of the effective date of the insurance policy. Additional premiums and rate adjustments are
recorded as they occur. The Corporation also receives contingent commissions from insurance companies as additional incentive for
achieving specified premium volume goals and/or the loss experience of the insurance placed by the Corporation. Contingent
commissions from insurance companies are recognized when determinable, which is generally when such commissions are received
or when the amount to be received is reported to the Corporation by the insurance company. An allowance is created for expected
adjustments to commissions earned relating to policy cancellations.
Advertising costs
Advertising costs for all reporting periods are expensed as incurred.
Earnings per common share
Earnings (loss) per share-basic is calculated by dividing net income (loss) attributable to common stockholders by the weighted
average number of outstanding common shares. Net income (loss) attributable to common stockholders represents net income (loss)
adjusted for any preferred stock dividends, including dividends declared, cumulative dividends related to the current dividend period
that have not been declared as of the end of the period, if any, and the accretion of discounts on preferred stock issuances, if any. Basic
weighted average common shares outstanding excludes unvested shares of restricted stock. For 2014, the net income attributable to
common stockholders also includes the one-time effect of the issuance of common stock in the conversion of the Series A through E
preferred stock. These transactions are further discussed in Note 20. The computation of earnings per share-diluted is similar to the
computation of earnings per share-basic except that the number of weighted average common shares is increased to include the
number of additional common shares that would have been outstanding if the dilutive common shares had been issued, referred to as
potential common shares.
Potential common shares consist of common stock issuable upon the assumed exercise of stock options, unvested shares of restricted
stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued
and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase
common stock at the exercise date. The difference between the numbers of potential shares issued and potential shares purchased is
added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested
shares of restricted stock, and outstanding warrants that result in lower potential shares issued than potential shares purchased under
the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an
antidilutive effect on earnings per share.
Recently issued accounting standards and Recently adopted accounting pronouncement
The FASB has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:
In July 2013, the FASB updated the Codification to provide explicit guidelines on how to present an unrecognized tax benefit in
financial statements when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. An
unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to
a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the
extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the
tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or
the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset
for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be
combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit
and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting
date. The amendments were effective for public entities with fiscal periods beginning after December 15, 2013. The adoption to this
guidance in 2014 did not have an effect on the Corporation’s financial statements. Refer to Note 24 for additional information about
the Corporation’s unrecognized tax benefits, including the settlement reached with the United States Internal Revenue Service (“IRS”)
in the third quarter of 2014.
172
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In January 2014, the FASB updated the Codification to clarify when a creditor should be considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan so that the loan should be derecognized and the
real estate property recognized in the financial statements. The Update clarifies that an in substance repossession or foreclosure
occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer
mortgage loan upon either: (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure,
or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of
a deed in lieu of foreclosure or through a similar legal agreement. In addition, creditors are required to disclose on an annual and
interim basis both (i) the amount of the foreclosed residential real estate property held and (ii) the recorded investment in consumer
mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements
of the applicable jurisdiction. The amendments are effective for public business entities for annual periods beginning after December
15, 2014, and interim periods within those fiscal years. Early adoption is permitted. The guidance can be implemented using either a
modified retrospective transition method or a prospective transition method. The Corporation adopted the provisions of this guidance
on a prospective basis during the first quarter of 2015 without any material impact on the Corporation’s financial statements. Required
disclosures will be provided in the first interim period of 2015 and prospectively.
In April 2014, the FASB issued an update to current accounting standards which will change the criteria for reporting discontinued
operations. The amendments will also require new disclosures about discontinued operations and disposals of components of an entity
that do not qualify for discontinued operations reporting. The amendments are effective for the Corporation for new disposals (or
classifications as held for sale) of components of the Corporation, should they occur, beginning in the first quarter of fiscal year 2016.
Early adoption is permitted for disposals (or classifications as held for sale) that have not been previously reported.
In May 2014, the FASB updated the Codification to create a new, principle-based revenue recognition framework. The Update is
the culmination of efforts by the FASB and the International Accounting Standards Board to develop a common revenue standard for
U.S. GAAP and International Financial Reporting Standards. The core principal of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. This guidance describes a 5-step process entities can apply to
achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to
understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the
significant judgments used in determining that information. The amendments are effective for public business entities for annual
periods beginning after December 15, 2016, including interim periods within those reporting periods. Early adoption is not permitted.
The Corporation is currently evaluating the impact that the adoption of this guidance will have on the presentation and disclosures in
its financial statements.
In June 2014, the FASB updated the Codification to respond to stakeholders’ concerns about current accounting and disclosures for
repurchase agreements and similar transactions. This Update requires two accounting changes. First, the Update changes the
accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements,
the Update requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement
with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. Additionally, the Update
introduces new disclosures to (i) increase transparency about the types of collateral pledged in secured borrowing transactions and (ii)
enable users to better understand transactions in which the transferor retains substantially all of the exposure to the economic return on
the transferred financial asset throughout the term of the transaction. For public business entities, the disclosure for repurchase
agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to
be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. All other
accounting and disclosure amendments in the Update are effective for public business entities for the first interim or annual period
beginning after December 15, 2014. The Corporation does not anticipate that the adoption of this guidance will have a material effect
on its financial statements.
In June 2014, the FASB updated the Codification to provide guidance for determining compensation cost under specific
circumstances when an employee’s compensation award is eligible to vest regardless of whether the employee is rendering service on
the date the performance target is achieved. This Update becomes effective for annual and interim periods beginning after December
15, 2015 with early adoption permitted. The Corporation is currently evaluating the impact that the adoption of this guidance will have
on the presentation and disclosures in its financial statements, if any.
173
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In August 2014, the FASB updated the Codification to reduce the diversity found in the classification of certain foreclosed
mortgage loans held by creditors that are either fully or partially guaranteed under government programs. Consistency in classification
upon foreclosure is expected in order to provide more decision-useful information. The amendments in this Update require that a
mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if: (i) the loan has a government
guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the
real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under the claim, and
(iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon
foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest)
expected to be recovered from the guarantor. The Update is effective for public business entities for annual periods, and interim
periods within those annual periods beginning after December 15, 2014. The guidance can be implemented using either a prospective
transition method or a modified retrospective transition method. The Corporation adopted the provisions of this guidance on a
prospective basis during the first quarter of 2015 without any material impact on the Corporation’s financial statements.
In August 2014, the FASB updated the Codification to provide guidance in GAAP about management’s responsibility to evaluate
whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that
the financial statements are issued. If conditions or events raise substantial doubt about an entity’s ability to continue as a going
concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose
information that enables users of the financial statements to understand. The Update is effective for all business entities for annual
periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The
Corporation expects the adoption of this guidance will have no impact on the Corporation’s financial position, results of operations,
comprehensive income, cash flows and disclosures.
In November 2014, the FASB updated the Codification to clarify how current GAAP should be interpreted in evaluating the
economic characteristics and risk of a host contract in a hybrid financial instrument that is issued in the form of a share. In addition,
the Update was issued to clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant
terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances)
when considering how to weight those terms and features. The effects of initially adopting this Update should be applied on a
modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year
for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. This Update is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption in an interim period
is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements,
if any.
In January 2015, the FASB updated the Codification as part of its initiative to reduce complexity in accounting standards (the
Simplification Initiative), to eliminate from GAAP the concept of extraordinary items. Under current GAAP, an event or transaction is
presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an
extraordinary item. In order to be classified as an extraordinary item the event or transaction must be: (i) unusual in nature, and (ii)
infrequent in occurrence. Before the update was issued, an entity was required to segregate these items from the results of ordinary
operations and show the items separately in the income statement, net of tax, after income from continuing operations. This Update is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption in an
interim period is permitted. The Corporation expects the adoption of this guidance will have no impact on the Corporation’s
consolidated financial statements.
174
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 2 – RESTRICTIONS ON CASH DUE AND DUE FROM BANKS
The Corporation’s bank subsidiary, FirstBank, is required by law to maintain minimum average weekly reserve balances to cover
demand deposits. The amount of those minimum average weekly reserve balances for the period that covered December 31, 2014 was
$124.8 million (2013 — $101.1 million). As of December 31, 2014 and 2013, the Bank complied with the requirement. Cash and due
from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.
As of December 31, 2014, and as required by the Puerto Rico International Banking Law, the Corporation maintained $300,000 in
time deposits, which were considered restricted assets related to FirstBank Overseas Corporation, an international banking entity that
is a subsidiary of FirstBank.
NOTE 3 – MONEY MARKET INVESTMENTS
Money market investments are composed of time deposits with other financial institutions and short-term investments with original
maturities of three months or less.
Money market investments as of December 31, 2014 and 2013 were as follows:
Time deposits with other financial institutions, weighted average interest rate 0.18%
(2013- 0.20%)
Other short-term investments, weighted average interest rate of 0.15%
(2013 - weighted average interest rate of 0.34%)
2014
2013
Balance
(Dollars in thousands)
$
300 $
300
16,661
201,069
16,961 $ 201,369
$
As of December 31, 2014 and 2013, the Corporation’s money market investments that were pledged as collateral for interest rate
swaps amounted to $0.20 million.
175
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 4 – INVESTMENT SECURITIES
Investment Securities Available for Sale
The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI,
approximate fair value, weighted average yield and contractual maturities of investment securities available for sale as of December
31, 2014 and 2013 were as follows:
U.S. Treasury securities:
Due within one year
Obligations of U.S.
government-sponsored
agencies:
After 1 to 5 years
After 5 to 10 years
Puerto Rico government
obligations:
After 1 to 5 years
After 5 to 10 years
After 10 years
United States and Puerto
Rico government
obligations
Mortgage-backed securities:
FHLMC certificates:
After 10 years
GNMA certificates:
After 1 to 5 years
After 5 to 10 years
After 10 years
FNMA certificates:
After 1 to 5 years
After 5 to 10 years
After 10 years
Other mortgage pass-through
trust certificates:
After 5 to 10 years
After 10 years
Total mortgage-backed
securities
Total investment securities
available for sale
Noncredit Loss
Component of
OTTI Recorded
in OCI
Amortized cost
December 31, 2014
Gross
Unrealized
Gains
(Dollars in thousands)
Losses
Fair value
Weighted
average
yield%
$
7,498 $
- $
1 $
- $
7,499
0.11
260,889
78,234
39,827
886
20,498
407,832
315,311
39
17,108
338,842
355,989
4,160
9,584
837,597
851,341
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
42
246
4,219
2,077
256,712
76,403
-
1
-
12,419
-
5,571
27,408
887
14,927
1.22
1.72
4.49
5.20
5.83
290
24,286
383,836
1.86
1,743
1,260
315,794
2.17
1
501
20,957
21,459
181
521
7,756
8,458
-
-
-
-
-
5
4,854
4,859
40
17,609
359,799
377,448
4,341
10,100
840,499
854,940
112
33,536
33,648
3.26
3.65
3.83
3.83
3.40
3.49
2.36
2.37
7.27
2.17
2.17
2.66
111
45,677
45,788
-
12,141
12,141
1
-
1
-
-
-
1,568,429
12,141
31,661
6,119
1,581,830
$
1,976,261 $
12,141 $
31,951 $
30,405 $
1,965,666
2.49
176
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Noncredit Loss
Component of
OTTI Recorded
in OCI
Amortized cost
December 31, 2013
Gross
Unrealized
Gains
(Dollars in thousands)
Losses
Fair value
Weighted
average
yield%
$
7,498 $
- $
1 $
- $
7,499
0.12
50,000
214,271
10,000
40,699
20,309
342,777
332,766
86
800
425,589
426,475
1,389
7,765
882,798
891,952
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,408
13,368
48,592
200,903
210
12,962
6,506
9,790
27,737
13,803
1.05
1.31
3.50
4.51
5.82
1
34,454
308,324
1.96
133
10,712
322,187
4
37
18,492
18,533
84
389
2,984
3,457
-
-
-
-
-
-
33,626
33,626
90
837
444,081
445,008
1,473
8,154
852,156
861,783
2.16
3.48
2.47
3.82
3.82
4.82
4.09
2.36
2.38
82
-
127
55,048
55,175
-
14,310
14,310
-
1
-
1
1
-
-
-
128
40,738
40,866
81
3.01
1,706,450
14,310
22,124
44,339
1,669,925
35
-
-
2
33
7.27
2.24
2.24
2.69
-
$
2,049,262 $
14,310 $
22,125 $
78,795 $
1,978,282
2.57
U.S. Treasury securities:
Due within one year
Obligations of U.S.
government-sponsored
agencies:
After 1 to 5 years
After 5 to 10 years
Puerto Rico government
obligations:
Due within one year
After 5 to 10 years
After 10 years
United States and Puerto
Rico government
obligations
Mortgage-backed securities:
FHLMC certificates:
After 10 years
GNMA certificates:
After 1 to 5 years
After 5 to 10 years
After 10 years
FNMA certificates:
After 1 to 5 years
After 5 to 10 years
After 10 years
Collateralized mortgage
obligations issued or
guaranteed by the FHLMC:
After 1 to 5 years
Other mortgage pass-through
trust certificates:
Over 5 to 10 years
After 10 years
Total mortgage-backed
securities
Equity securities (without
contractual maturity)(1)
Total investment securities
available for sale
(1) Represents common shares of another financial institution in Puerto Rico.
177
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of
investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted
average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in
fair value. The net unrealized gain or loss on securities available for sale and the noncredit loss component of OTTI are presented as
part of OCI.
The aggregate amortized cost and approximate market value of investment securities available for sale
as of December 31, 2014 by contractual maturity, are shown below:
Amortized Cost
Fair Value
(In thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total investment securities available for sale
$
$
7,498
304,915
105,923
1,557,925
1,976,261
$
$
7,499
288,501
105,111
1,564,555
1,965,666
178
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December
31, 2014 and 2013. The tables also include debt securities for which an OTTI was recognized and only the amount related to a credit
loss was recognized in earnings. Unrealized losses for which OTTI had been recognized have been reduced by any subsequent
recoveries in fair value.
Less than 12 months
As of December 31, 2014
12 months or more
Total
Fair Value
Fair Value
Fair Value
Unrealized
Losses
Unrealized
Losses
Unrealized
Losses
Debt securities:
Puerto Rico government
obligations
U.S. government agencies
obligations
Mortgage-backed securities:
FNMA
FHLMC
Other mortgage pass-through trust
certificates
(In thousands)
$
- $
- $
42,335 $
17,990 $
42,335 $
17,990
46,436
74
257,996
6,222
304,432
6,296
2,038
-
5
-
541,642
135,277
4,854
1,260
543,680
135,277
4,859
1,260
-
48,474 $
$
-
33,536
79 $ 1,010,786 $
12,141
33,536
42,467 $ 1,059,260 $
12,141
42,546
Less than 12 months
As of December 31, 2013
12 months or more
Total
Fair Value
Fair Value
Fair Value
Unrealized
Losses
Unrealized
Losses
Unrealized
Losses
Debt securities:
Puerto Rico government
obligations
U.S. government agencies
obligations
Mortgage-backed securities:
FNMA
FHLMC
Collateralized mortgage
obligations issued or
guaranteed by FHLMC
Other mortgage pass-through trust
certificates
Equity securities
(In thousands)
$
23,156 $
5,977 $
28,174 $
13,701 $
51,330 $
19,678
175,369
8,913
74,126
5,863
249,495
14,776
748,215
286,208
33,626
10,712
-
-
-
-
748,215
286,208
33,626
10,712
-
-
81
1
81
1
-
33
$ 1,232,981 $
-
2
59,230 $
40,738
-
143,119 $
14,310
-
40,738
33
33,875 $ 1,376,100 $
14,310
2
93,105
179
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Assessment for OTTI
Debt securities issued by U.S. government agencies, government-sponsored entities, and the U.S. Department of the Treasury (the
“U.S. Treasury”) accounted for approximately 96% of the total available-for-sale portfolio as of December 31, 2014 and no credit
losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s OTTI
assessment was concentrated mainly on private label mortgage-backed securities (“MBS”) with an amortized cost of $45.7 million for
which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a
credit loss exists and the period over which the debt security is expected to recover:
(cid:2) The length of time and the extent to which the fair value has been less than the amortized cost basis;
(cid:2) Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity
given default, and significant changes in prepayment assumptions;
(cid:2) The level of cash flows generated from the underlying collateral supporting the principal and interest payments on the debt
securities; and
(cid:2) Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information
available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting
the issuer’s industry, and actions taken by the issuer to deal with the present economic climate.
The Corporation recorded OTTI losses on available-for-sale debt securities as follows:
Total other-than-temporary impairment losses
Portion of other-than-temporary impairment losses previously recognized in OCI
Net impairment losses recognized in earnings
$
$
Private label MBS
2014
2013
(In thousands)
- $
(388)
(388) $
-
(117)
(117)
The following table summarizes the roll-forward of credit losses on debt securities held by the
Corporation for which a portion of an OTTI is recognized in OCI:
Credit losses at the beginning of the year
Additions:
Credit losses on debt securities for which an OTTI was
previously recognized
2014
2013
(In thousands)
5,389 $
5,272
$
388
117
Ending balance of credit losses on debt securities held
for which a portion of an OTTI was recognized in OCI
$
5,777 $
5,389
During 2014 and 2013, the $388 thousand and $117 thousand credit-related impairment loss, respectively, is related to private label
MBS, which are collateralized by fixed-rate mortgages on single-family residential properties in the United States. The interest rate on
these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral.
The underlying mortgages are fixed-rate, single-family loans with original high FICO scores (over 700) and moderate original loan-to-
value ratios (under 80%), as well as moderate delinquency levels.
180
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the
securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss
component was reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:
Discount rate
Prepayment rate
Projected Cumulative Loss Rate
December 31, 2014
December 31, 2013
Weighted
Average
14.5%
Range
14.5%
Weighted
Average
14.5%
Range
14.5%
32% 19.89% - 100.00%
7.9%
0.64% - 80.00%
29% 15.86% - 100.00%
6.8%
0.58% - 38.16%
No OTTI losses on equity securities held in the available-for-sale investment portfolio were recognized in 2014. The Corporation
recorded OTTI losses of $42 thousand on equity securities held in the available-for-sale investment portfolio for the year ended
December 31, 2013.
Total proceeds from the sale of securities available for sale during 2014 and 2012 amounted to approximately $4.9 million, and
$1.9 million, respectively. No sales of securities available for sale were completed in 2013. For the year ended December 31, 2014, a
$0.3 million gain was recorded on the sale of a Puerto Rico government agency bond and a $29 thousand loss was recorded on the sale
of equity securities. No gains or losses were realized in 2013 and 2012.
The following table states the names of issuers, and the aggregate amortized cost and market value of the securities of such issuers,
when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the
U.S. and Puerto Rico government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies
that are payable and secured by the same source of revenue or taxing authority, other than the U.S. government, are considered
securities of a single issuer and include debt and mortgage-backed securities.
FHLMC
GNMA
FNMA
FHLB
2014
2013
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
(In thousands)
(In thousands)
340,227 $
355,989
922,883
232,733
340,723 $
377,448
926,189
227,003
332,848 $
426,475
891,952
264,271
322,268
445,008
861,783
249,495
As of December 31, 2014, the Corporation held approximately $61.2 million of Puerto Rico government and agencies bond
obligations, mainly bonds of the Government Development Bank (“GDB”) and the Puerto Rico Building Authority, as part of its
available-for-sale investment securities portfolio, which were reflected at their aggregate fair value of $43.2 million. During 2014, the
fair value of these obligations increased by $1.7 million. In February 2014, Standard & Poor’s (“S&P”), Moody’s Investor Service
(“Moodys”) and Fitch Ratings (“Fitch”) downgraded the Commonwealth of Puerto Rico general obligation bonds and other
obligations of Puerto Rico instrumentalities to a non-investment grade category. In July 2014, the Puerto Rico debt was downgraded
further into speculative grade by these credit agencies after the enactment of The Puerto Rico Public Corporations Debt Enforcement
and Recovery Act (the “Recovery Act”) that provides a legislative framework for certain public corporations that are experiencing
severe financial stress to address their financial obstacles through an orderly statutory process that allows them to handle their debts.
In February 2015, a federal judge ruled that the Recovery Act is pre-empted by the Federal Bankruptcy Code and is therefore void.
After this decision, S&P downgraded Puerto Rico’s general obligation debt deeper into non-investment grade category.
The issuers of Puerto Rico government and agencies bonds held by the Corporation have not defaulted, and the contractual
payments on these securities have been made as scheduled. The Corporation has the ability and intent to hold these securities until a
recovery of the fair value occurs, and it is not more likely than not that the Corporation will be required to sell the securities prior to
such recovery. It is uncertain how the financial markets may react to any potential further rating downgrade of Puerto Rico’s debt.
However, further deterioration in the fiscal situation could adversely affect the value of Puerto Rico’s government obligations. The
Corporation will continue to closely monitor Puerto Rico’s political and economic status and evaluate the portfolio for any declines in
value that could be considered other-than temporary.
181
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Investments Held to Maturity
From time to time, the Corporation has securities held to maturity with an original maturity of three months or less that are
considered cash and cash equivalents and classified as money market investments in the consolidated statements of financial
condition. As of December 31, 2014 and 2013, the Corporation had no outstanding securities held to maturity that were classified as
cash and cash equivalents.
NOTE 5 – OTHER EQUITY SECURITIES
Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum
is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a
percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is
capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.
As of December 31, 2014 and 2013, the Corporation had investments in FHLB stock with a book value of $25.5 million and $28.4
million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from
FHLB stock for 2014, 2013, and 2012 amounted to $1.2 million, $1.4 million, and $1.4 million, respectively.
The shares of FHLB stock owned by the Corporation were issued by the FHLB of New York. The FHLB of New York is part of
the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally
chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system
is supervised by the Federal Housing Finance Agency, which ensures that the Federal Home Loan Banks operate in a financially safe
and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance
mission.
The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as
of December 31, 2014 and 2013 was $0.3 million.
182
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 6 – INTEREST AND DIVIDEND ON INVESTMENTS AND MONEY MARKET INSTRUMENTS
The following provides information about interest on investments and FHLB dividend income:
Mortgage-backed securities:
Taxable
Exempt
PR government obligations, U.S. Treasury securities, and U.S.
government agencies:
Taxable
Exempt
Equity securities:
Taxable
Other investment securities (including FHLB dividends)
Taxable
Total interest income on investment securities
Year Ended December 31,
2014
2013
(In thousands)
2012
$
16,303 $ 19,566 $
25,955
28,606
45,521
44,909
23,989
11,543
35,532
1,357
5,446
6,803
1,218
5,429
6,647
1,468
6,785
8,253
-
-
6
1,169
52,881
1,359
53,527
1,503
45,294
Interest on money market instruments:
Taxable
Exempt
Total interest income on money market instruments
Total interest and dividend income on investments and money
market instruments
1,734
158
1,892
1,231
696
1,927
1,137
690
1,827
$
54,773 $ 55,454 $
47,121
The following table summarizes the components of interest and dividend income on investments:
Interest income on investment securities and money
market investments
Dividends on FHLB stock
Year Ended December 31,
2014
2013
(In thousands)
2012
$
53,604 $
1,169
54,095 $
1,359
45,694
1,427
Total interest income and dividends on investments
$
54,773 $
55,454 $
47,121
183
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 7 – LOANS HELD FOR INVESTMENT
The following provides information about the loan portfolio held for investment:
Residential mortgage loans, mainly secured by first mortgages (1)(2)
$
3,011,187
$
2,549,008
December 31,
2014
December 31,
2013
(In thousands)
Commercial loans:
Construction loans
Commercial mortgage loans
Commercial and Industrial loans (3)
Loans to a local financial institution collateralized by
real estate mortgages (1)
Commercial loans
Finance leases
Consumer loans
Loans held for investment
Allowance for loan and lease losses
Loans held for investment, net
123,480
1,665,787
2,479,437
-
4,268,704
232,126
1,750,419
9,262,436
(222,395)
168,713
1,823,608
2,788,250
240,072
5,020,643
245,323
1,821,196
9,636,170
(285,858)
$
9,040,041
$
9,350,312
(1) On May 30, 2014, FirstBank acquired from Doral Financial Corporation ("Doral") mortgage loans, mainly residential mortgage loans, having an unpaid principal
balance of $241.7 million (estimated fair value at acquisition of $226.0 million) in full satisfaction of secured borrowings with a book value of $232.9 million
owed by Doral to FirstBank. Refer to "Acquired Loans including PCI Loans" below for additional information.
(2) On October 3, 2014, Firstbank purchased from Doral certain performing residential mortgage loans with approximately $192.6 million in outstanding unpaid
principal balance. Refer to "Purchases and Sales of Loans" below for additional information.
(3) As of December 31, 2014 and 2013, includes $1.1 billion and $1.2 billion, respectively, of commercial loans that are secured by real estate but are not dependent
upon the real estate for repayment.
As of December 31, 2014 and 2013, the Corporation had net deferred origination costs on its loan portfolio amounting to $9.3
million and $7.6 million, respectively. The total loan portfolio is net of unearned income of $35.1 million and $40.4 million as of
December 31, 2014 and 2013, respectively.
As of December 31, 2014, the Corporation was servicing residential mortgage loans owned by others aggregating $2.3 billion
(2013 — $2.1 billion), construction and commercial loans owned by others aggregating $2.7 million (2013 — $2.8 million), and
commercial loan participations owned by others aggregating $351.4 million (2013 — $446.0 million).
Various loans, mainly secured by first mortgages, were assigned as collateral for CDs, individual retirement accounts, and advances
from the FHLB. Total loans pledged as collateral amounted to $1.6 billion as of December 31, 2014 (2013 — $1.7 billion).
184
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Loans held for investment on which accrual of interest income had been discontinued were as follows:
Non-performing loans:
Residential mortgage
Commercial mortgage
Commercial and Industrial
Construction:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
Total non-performing loans held for investment (1) (2)(3)
December 31,
2014
December 31,
2013
(In thousands)
$
$
$
180,707
148,473
122,547
15,030
-
14,324
22,276
5,245
15,294
523,896
$
161,441
120,107
114,833
27,834
3,924
27,108
21,316
3,082
15,904
495,549
________________
(1) As of December 31, 2014 and 2013, excludes $54.6 million and $54.8 million, respectively, of non-performing loans
held for sale.
(2) Amount excludes PCI loans with a carrying value of approximately $102.6 million and $4.8 million as of December 31,
2014 and 2013, respectively, primarily mortgage loans acquired from Doral in the second quarter of 2014, as further
discussed below. These loans are not considered non-performing due to the application of the accretion method,
under which these loans will accrete interest income over the remaining life of the loans using an estimated cash
flow analysis.
(3) Non-performing loans exclude $494.6 million and $425.4 million of TDR loans that are in compliance with the modified
terms and in accrual status as of December 31, 2014 and 2013, respectively.
If these loans were accruing interest, the additional interest income realized would have been $48.9 million (2013— $40.3 million;
2012 — $75.1 million).
185
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s aging of the loans held for investment portfolio is as follows:
As of December 31, 2014
Residential mortgage:
FHA/VA and other government-guaranteed
loans (2) (3) (4)
Other residential mortgage loans (4)
Commercial:
Commercial and Industrial loans
Commercial mortgage loans (4)
Construction:
Land (4)
Construction-commercial
Construction-residential (4)
Consumer:
Auto loans
Finance leases
Other consumer loans
Total loans held for investment
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due (1)
Total Past
Due
Purchased
Credit-
Impaired
Loans
(In thousands)
Total loans
held for
investment
90 days past
due and still
accruing (2)
Current
$
- $
-
9,733
78,336
$
81,055 $
199,078
90,788
277,414
$
- $
98,494
62,782
2,481,709
$
153,570 $
2,857,617
81,055
18,371
22,217
-
7,445
15,482
143,928
171,281
173,590
186,763
-
3,393
2,305,847
1,475,631
2,479,437
1,665,787
21,381
22,808
-
-
-
210
-
-
15,264
-
14,324
15,474
-
14,324
77,385
8,751
9,801
118,154 $
19,665
2,734
6,054
139,659
$
22,276
5,245
18,671
671,122 $
119,326
16,730
34,526
928,935
$
-
-
-
-
-
717
$
102,604 $
40,447
24,562
28,673
55,921
24,562
42,997
234
-
-
941,456
215,396
654,394
8,230,897
$
1,060,782
232,126
689,637
9,262,436 $
-
-
3,377
147,226
(1) Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue
to accrue finance charges and fees until charged-off at 180 days.
(2) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed
to non-performing loans since the principal repayment is insured. These balances include $40.4 million of residential mortgage loans insured by the FHA or guaranteed by the VA
that are over 18 months delinquent, and are no longer accruing interest as of December 31, 2014.
(3) As of December 31, 2014, includes $9.3 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation)
to repurchase the defaulted loans.
(4) According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies
(FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears two
or more monthly payments. FHA/VA government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, land loans, and construction-residential loans past
due 30-59 days as of December 31, 2014 amounted to $14.0 million, $189.1 million, $20.8 million, $0.8 million, and $1.0 million, respectively.
186
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2013
Residential mortgage:
FHA/VA and other government-guaranteed
loans (2) (3) (4)
Other residential mortgage loans (4)
Commercial:
Commercial and Industrial loans
Commercial mortgage loans (4)
Construction:
Land (4)
Construction-commercial
Construction-residential (4)
Consumer:
Auto loans
Finance leases
Other consumer loans
Total loans held for investment
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due (1)
Total Past
Due
Purchased
Credit-
Impaired
Loans
(In thousands)
Total loans
held for
investment
90 days past
due and still
accruing (2)
Current
$
- $
-
12,180
88,898
$
78,645 $
172,286
90,825
261,184
$
- $
-
104,401 $
2,092,598
195,226
2,353,782
$
78,645
10,845
21,029
-
5,454
5,428
134,233
126,674
160,716
132,102
-
-
-
358
-
-
27,871
3,924
27,108
28,229
3,924
27,108
-
-
-
-
-
2,867,606
1,691,506
3,028,322
1,823,608
19,400
6,567
52,145
12,907
44,400
80,374
16,831
71,508
37
-
-
79,279
10,275
11,710
122,293 $
17,944
3,536
8,691
142,489 $
21,316
3,082
20,492
615,631 $
118,539
16,893
40,893
880,413 $
$
-
-
4,791
4,791 $
993,781
228,430
663,192
8,750,966 $
1,112,320
245,323
708,876
9,636,170 $
-
-
4,588
120,082
(1) Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue
to accrue finance charges and fees until charged-off at 180 days.
(2) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed
to non-performing loans since the principal repayment is insured. These balances include $37.0 million of residential mortgage loans insured by the FHA or guaranteed by the VA
that are over 18 months delinquent, and are no longer accruing interest as of December 31, 2013.
(3) As of December 31, 2013, includes $11.5 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation)
to repurchase the defaulted loans.
(4) According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies
(FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears two
or more monthly payments. FHA/VA government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, land loans, and construction-residential loans
past-due 30-59 days amounted to $23.9 million, $166.7 million, $18.4 million, $0.9 million, and $2.5 million, respectively.
187
Commercial Mortgage
Construction:
Land
Construction-commercial
Construction-residential
Commercial and Industrial
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s credit quality indicators by loan type as of December 31, 2014 and 2013 are summarized below:
Commercial Credit Exposure-Credit Risk Profile based on Creditworthiness
Category:
December 31, 2014
Substandard
Doubtful
Total
Adversely
Classified (1)
Total Portfolio
Loss
(In thousands)
$
273,027 $
897 $
- $
273,924 $
1,665,787
16,915
11,790
13,548
234,926
-
-
776
4,884
-
-
-
801
16,915
11,790
14,324
240,611
55,921
24,562
42,997
2,479,437
Commercial Credit Exposure-Credit Risk Profile based on Creditworthiness
Category:
Total
Adversely
Classified (1)
Total Portfolio
Loss
(In thousands)
December 31, 2013
Substandard
Doubtful
Commercial Mortgage
Construction:
Land
Construction-commercial
Construction-residential
Commercial and Industrial
$
317,365 $
9,160 $
234 $
326,759 $
1,823,608
31,777
16,022
27,829
205,807
3,308
-
2,209
7,998
52
-
241
973
35,137
16,022
30,279
214,778
80,373
16,831
71,509
3,028,322
(1) Excludes $54.6 million ($7.8 million land, $39.1 million construction-commercial, $0.9 million construction-residential,
and $6.8 million commercial mortgage) and $54.8 million ($7.8 million land, $39.1 million construction-commercial, $0.9
construction-residential and $7.0 million commercial mortgage) as of December 31, 2014 and 2013, respectively, of
non-performing loans held for sale.
The Corporation considers a loan as adversely classified if its risk rating is Substandard, Doubtful, or Loss. These categories are
defined as follows:
Substandard- A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the
collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of
the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not
corrected.
Doubtful- Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly
questionable and improbable. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived,
but Loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term.
Loss- Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not
warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical
or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. There is
little or no prospect for near term improvement and no realistic strengthening action of significance pending.
188
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2014
Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity
Residential Real-Estate
Other
residential
loans
Other
Consumer
Finance
Leases
FHA/VA/
Guaranteed (1)
Consumer
Auto
(In thousands)
Performing
Purchased Credit-Impaired (2)
Non-performing
Total
$
$
153,570 $
-
-
153,570 $
2,578,416 $
98,494
180,707
2,857,617 $
1,038,506 $
-
22,276
1,060,782 $
226,881 $
-
5,245
232,126 $
673,626
717
15,294
689,637
(1) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA
as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured.
These balances include $40.4 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are
over 18 months delinquent, and are no longer accruing interest as of December 31, 2014.
(2) PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans
will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
December 31, 2013
Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity
Residential Real-Estate
Consumer
FHA/VA/
Guaranteed (1)
Other
residential
loans
Auto
(In thousands)
Finance
Leases
Other
Consumer
Performing
Purchased Credit-Impaired (2)
Non-performing
Total
$
$
195,226 $
-
-
195,226 $
2,192,341 $
-
161,441
2,353,782 $
1,091,004 $
-
21,316
1,112,320 $
242,241 $
-
3,082
245,323 $
688,181
4,791
15,904
708,876
(1) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA
as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured.
These balances include $37.0 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are
over 18 months delinquent, and are no longer accruing interest as of December 31, 2013.
(2) PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these
loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
189
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables present information about impaired loans excluding PCI loans, which are reported separately, as discussed
below:
Impaired Loans
As of December 31, 2014
With no related allowance recorded:
FHA/VA-Guaranteed loans
Other residential mortgage loans
Commercial:
Commercial mortgage loans
Commercial and Industrial
loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
With an allowance recorded:
FHA/VA-Guaranteed loans
Other residential mortgage loans
Commercial:
Commercial mortgage loans
Commercial and Industrial
loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
Total:
FHA/VA-Guaranteed loans
Other residential mortgage loans
Commercial:
Commercial mortgage loans
Commercial and Industrial
loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Specific
Allowance
Average
Recorded
Investment
Interest Income
Recognized
Accrual Basis
(In thousands)
Interest
Income
Recognized
Cash Basis
$
-
74,177
$
-
80,522
$
- $
-
- $
75,711
- $
1,118
-
461
109,271
132,170
-
113,674
846
2,670
41,131
47,647
-
42,011
-
751
2,994
-
7,461
6,357
-
10,100
-
-
3,778
238,812 $
-
-
5,072
281,868 $
-
-
-
3,030
-
8,123
-
-
-
- $
-
-
3,924
246,473 $
38
-
167
-
-
75
2,244 $
-
$
350,067
- $
396,203
- $
10,854
- $
357,129
- $
15,852
101,467
116,329
14,289
104,191
1,891
195,240
226,431
21,314
198,930
5,097
9,120
11,790
8,102
12,821
11,790
8,834
794
790
993
10,734
11,867
8,130
16,991
2,181
11,637
706,595 $
16,991
2,181
12,136
803,716 $
2,787
253
3,131
55,205 $
18,504
2,367
12,291
724,143 $
64
-
-
1,173
198
1,634
25,909 $
- $
424,244
- $
476,725
- $
10,854
- $
432,840
- $
16,970
$
$
$
$
1
-
8
-
-
79
3,970
-
1,853
638
564
25
515
-
-
-
40
3,635
-
2,314
210,738
248,499
14,289
217,865
2,737
3,308
236,371
274,078
21,314
240,941
5,097
1,315
12,114
11,790
15,563
19,178
11,790
18,934
794
790
993
13,764
11,867
16,253
16,991
2,181
15,415
945,407 $
16,991
2,181
17,208
1,085,584 $
2,787
253
3,131
55,205 $
18,504
2,367
16,215
970,616 $
$
102
-
167
1,173
198
1,709
28,153 $
26
515
8
-
-
119
7,605
190
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2013
With no related allowance recorded:
FHA/VA-Guaranteed loans
Other residential mortgage loans
Commercial:
Commercial mortgage loans
Commercial and Industrial
loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
With an allowance recorded:
FHA/VA-Guaranteed loans
Other residential mortgage loans
Commercial:
Commercial mortgage loans
Commercial and Industrial
loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
Total:
FHA/VA-Guaranteed loans
Other residential mortgage loans
Commercial:
Commercial mortgage loans
Commercial and Industrial
loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Specific
Allowance
Average
Recorded
Investment
Interest Income
Recognized
Accrual Basis
(In thousands)
Interest
Income
Recognized
Cash Basis
$
- $
- $
220,428
237,709
- $
-
- $
222,617
- $
9,513
-
1,041
69,484
73,723
-
71,367
1,494
148
32,418
56,831
-
37,946
31
52
359
-
14,761
366
-
19,313
-
-
4,035
341,485 $
-
-
4,450
392,392 $
-
-
-
-
-
-
- $
360
-
17,334
-
-
3,325
352,949 $
8
-
52
-
-
139
11,237 $
- $
190,566
- $
212,028
- $
18,125
- $
193,372
- $
5,623
2
-
-
-
-
30
1,273
-
647
149,888
163,656
32,189
153,992
2,114
1,293
154,686
170,191
26,686
162,786
4,005
139
27,711
16,022
13,864
40,348
16,238
13,973
10,455
8,873
2,816
28,906
16,157
13,640
14,121
2,359
8,410
577,627 $
14,122
2,359
8,919
641,834 $
1,829
73
1,555
102,601 $
12,937
2,219
8,919
592,928 $
350
527
-
1,017
281
1,239
15,156 $
- $
410,994
- $
449,737
- $
18,125
- $
415,989
- $
15,136
44
-
50
-
-
1
2,174
-
1,688
219,372
237,379
32,189
225,359
3,608
1,441
187,104
227,022
26,686
200,732
4,036
191
$
$
$
$
28,070
16,022
28,625
40,714
16,238
33,286
10,455
8,873
2,816
29,266
16,157
30,974
14,121
2,359
12,445
919,112 $
14,122
2,359
13,369
1,034,226 $
1,829
73
1,555
102,601 $
12,937
2,219
12,244
945,877 $
$
358
527
52
1,017
281
1,378
26,393 $
46
-
50
-
-
31
3,447
191
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables show the activity for impaired loans and the related specific reserve during 2014 and 2013:
2014
2013
Impaired Loans:
Balance at beginning of year
Loans determined impaired during the year
Charge-offs
Loans sold, net of charge-offs
Loans transferred to held for sale
Increases to impaired loans - additional disbursements
Foreclosures
Loans no longer considered impaired
Paid in full or partial payments
Balance at end of year
Specific Reserve:
Balance at beginning of year
Provision for loan losses
Charge-offs
Balance at end of year
Acquired loans including PCI Loans
(In thousands)
$
$
$
919,112
306,390
(106,154)
(4,500)
-
5,028
(40,582)
(22,333)
(111,554)
945,407
1,465,294
280,860
(307,428)
(201,409)
(145,415)
6,624
(45,094)
(49,299)
(85,021)
919,112
$
2014
2013
(In thousands)
$
$
102,601 $
58,758
(106,154)
55,205 $
221,749
188,280
(307,428)
102,601
On May 30, 2014, FirstBank purchased from Doral all of its rights, title and interests in first and second mortgage loans having an
unpaid principal balance of approximately $241.7 million for an aggregate purchase price of approximately $232.9 million. Doral had
pledged the mortgage loans to FirstBank as collateral for secured borrowings pursuant to a series of credit agreements between the
parties entered into in 2006. As consideration for the purchase of the mortgage loans, FirstBank credited approximately $232.9 million
as full satisfaction of the outstanding balance of the Doral secured borrowings plus interest owed to FirstBank. The estimated fair
value of the mortgage loans at acquisition was $226.0 million. This transaction resulted in a loss of $6.9 million derived fro m the
difference between the fair value of the mortgage loans acquired, $226.0 million, and the book value of the secured borrowings of
$232.9 million. Approximately $5.5 million of the loss was part of the general allowance for loan losses established for commercial
loans in prior periods; thus, an additional charge of $1.4 million to the provision was recorded in the second quarter of 2014. In
addition, the Corporation recorded $0.6 million of professional service fees in the second quarter of 2014 specifically related to this
transaction.
Acquired loans are recorded at fair value at the date of acquisition. The Corporation concluded that loans with a contractual unpaid
principal balance of $119.2 million and an estimated fair value at acquisition of $102.8 million were acquired with evidence of credit
quality deterioration and, as purchased credit impaired loans, have been accounted for under ASC 310-30, while loans with a
contractual unpaid principal balance of $122.5 million and an estimated fair value at acquisition of $123.2 million are non-credit
impaired purchased loans that have been accounted for under ASC 310-20.
Subsequent to the day-one fair value, acquired loans accounted for under ASC 310-20 are accounted for consistently with other
originated loans, potentially becoming non-accrual or impaired, as well as being classified under the Corporation’s standard practices
and procedures. In addition, these loans are considered in the determination of the allowance for loan losses.
Under ASC 310-30, the acquired PCI loans were aggregated into pools based on similar characteristics (i.e. delinquency status, loan
terms). Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash
flows. The loans which are accounted for under ASC 310-30 by the Corporation are not considered non-performing and will continue
to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be
collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect
all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after
acquisition.
192
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On May 30, 2012, the Corporation reentered the credit card business with the acquisition of an approximate $406 million portfolio
of FirstBank-branded credit card loans from FIA Card Services (“FIA”). These loans were recorded on the consolidated statement of
financial condition at estimated fair value on the acquisition date of $368.9 million. The Corporation concluded that loans with a
contractual outstanding unpaid principal and interest balance at acquisition of $34.6 million and an estimated fair value of $15.7
million were PCI loans.
The carrying amount of PCI loans follows:
Residential mortgage loans
Commercial mortgage loans
Credit Cards
December 31,
December 31,
2014
2013
(In thousands)
98,494 $
3,393
717
102,604 $
-
-
4,791
4,791
$
$
The following tables present PCI loans by past due status as of December 31, 2014 and 2013:
As of December 31, 2014
Residential mortgage
loans (1)
Commercial mortgage
loans (1)
Credit Cards
30-59 Days
60-89 Days
more
90 days or
Total Past
Due
Current
Total PCI
loans
(In thousands)
$
-
$
12,571
$
15,176 $
27,747
$
70,747
$
98,494
-
47
356
25
443
42
799
114
2,594
603
3,393
717
$
47
$
12,952
$
15,661 $
28,660
$
73,944
$
102,604
_____________
(1) According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements
for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are
considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans and commercial mortgage loans
past due 30-59 days as of December 31, 2014 amounted to $16.6 million and $0.8 million, respectively.
As of December 31, 2013
30-59 Days
60-89 Days
more
Due
Current
90 days or
Total Past
Total PCI
loans
Credit Cards
$
377
$
354
$
(In thousands)
573 $
1,304
$
3,487
$
4,791
193
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Initial Fair Value and Accretable Yield of PCI Loans
At acquisition, the Corporation estimated the cash flows the Corporation expected to collect on PCI loans. Under the accounting
guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at
acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the
Corporation’s consolidated statement of financial condition. The excess of cash flows expected to be collected over the estimated fair
value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective-
yield method.
The following table presents acquired loans from Doral accounted for pursuant to ASC 310-30 as of the May 30, 2014 acquisition
date:
Contractually- required principal and interest
Less: Nonaccretable difference
Cash flows expected to be collected
Less: Accretable yield
Fair value of loans acquired in 2014
(In thousands)
$
$
275,842
(86,252)
189,590
(86,759)
102,831
The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of
estimated prepayments.
Changes in accretable yield of acquired loans
Subsequent to acquisition, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected.
These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of
fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and
nonaccretable difference or reclassifications from nonaccretable yield to accretable. Increases in the cash flows expected to be
collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in
expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s
provision for loan and lease losses, resulting in an increase to the allowance for loan losses. During 2014 and 2013, the Corporation
did not record charges to the provision for loan losses related to PCI loans, most of which were acquired on May 30, 2014.
Changes in the accretable yield of PCI loans for the years ended December 31, 2014 and 2013 were as follows:
Balance at beginning of period
Additions (accretable yield at acquisition
of loans from Doral)
Accretion recognized in earnings
Reclassification to non accretable
Balance at end of period
December 31, 2014
December 31, 2013
$
$
(In thousands)
- $
86,759
(4,299)
-
82,460
$
2,171
-
(819)
(1,352)
-
194
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Changes in the carrying amount of loans accounted for pursuant to ASC 310-30 follows:
Balance at beginning of period (1)
Additions (2)
Accretion
Collections
Ending balance
Year ended
December 31, 2014
(In thousands)
$
$
4,791
102,831
4,299
(9,317)
102,604
(1) For the year ended December 31, 2014, the beginning balance relates to PCI loans acquired as part of the credit card portfolio purchased in the second quarter
of 2012.
(2) Represents the estimated fair value of the PCI loans acquired from Doral at the date of acquisition.
The outstanding principal balance of PCI loans, including amounts charged off by the Corporation, amounted to $135.5 million as
of December 31, 2014 (December 31, 2013- $22.7 million).
Purchases and Sales of Loans
On October 3, 2014, the Corporation purchased from Doral all of its rights, title and interests in certain performing residential
mortgage loans (the “Mortgage Loans”) with approximately $192.6 million in outstanding unpaid principal balance.
As consideration for the purchase of the Mortgage Loans, FirstBank paid approximately $192.7 million in cash (the “Purchase
Price”), less a holdback of $1.3 million which was deposited into escrow to cover certain representations and warranties made by
Doral Bank with respect to the Mortgage Loans. The Corporation incurred $0.7 million in professional service fees during the third
quarter of 2014 specifically related to this transaction. The Mortgage Loans were acquired by FirstBank on a servicing-released basis.
In addition to loans acquired from Doral, during 2014, the Corporation purchased $146.5 million of residential mortgage loans
consistent with a strategic program established by the Corporation in 2005 to purchase ongoing residential mortgage loan production
from mortgage bankers in Puerto Rico. Generally, the loans purchased from mortgage bankers were conforming residential mortgage
loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including
through securitization transactions depending upon the Corporation’s interest rate risk management strategies. When the Corporation
sells such loans, it generally keeps the servicing of the loans.
In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA and GSEs.
GNMA and GSEs, such as FNMA and FHLMC, generally securitize the transferred loans into mortgage-backed securities for sale into
the secondary market. The Corporation sold approximately $138.5 million of performing residential mortgage loans to FNMA and
FHLMC during 2014. Also, the Corporation securitized approximately $198.7 million of FHA/VA mortgage loans into GNMA
mortgage-backed securities during 2014. The Corporation’s continuing involvement in these loan sales consists primarily of servicing
the loans. In addition, the Corporation agreed to repurchase loans when it breaches any of the representations and warranties included
in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e.,
ensuring that the mortgage was properly underwritten according to established guidelines).
For loans sold to GNMA, the Corporation holds an option to repurchase individual delinquent loans issued on or after January 1,
2003 when the borrower fails to make any payment for three consecutive months. This option gives the Corporation the ability, but
not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA.
Under ASC Topic 860, Transfers and Servicing, once the Corporation has the unilateral ability to repurchase a delinquent loan, it is
considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase
liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan.
195
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
During 2014, 2013, and 2012, the Corporation repurchased pursuant to its repurchase option with GNMA $37.8 million, $28.3
million, and $53.9 million, respectively, of loans previously sold to GNMA. The principal balance of these loans is fully guaranteed
and the risk of loss related to repurchases is generally limited to the difference between the delinquent interest payment advanced to
GNMA computed at the loan’s interest rate and the interest payments reimbursed by FHA, which are computed at a pre-determined
debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to maintain acceptable delinquency rates on
outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA. The Corporation generally remediates
any breach of representations and warranties related to the underwriting of such loans according to established GNMA guidelines
without incurring losses. The Corporation does not maintain a liability for estimated losses as a result of breaches in representations
and warranties.
Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation
repurchased at par loans previously sold to FNMA and FHLMC in the amounts of $2.3 million, $6.1 million, and $3.0 million during
2014, 2013, and 2012, respectively. The Corporation’s risk of loss with respect to these loans is also minimal as these repurchased
loans are generally performing loans with documentation deficiencies. A $0.7 million loss was recorded in 2014 related to breaches in
representations and warranties and a $0.5 million charge was recorded for compensatory fees imposed by GSEs on the Bank as a
servicer. Historically, losses experienced related to breaches in representations and warranties have been immaterial. As a
consequence, as of December 31, 2014, the Corporation does not maintain a liability for estimated losses on loans expected to be
repurchased as a result of breaches in loan and servicer representations and warranties.
The Corporation sold $53.0 million of commercial mortgage loan participations during 2014, none in 2013.
Bulks Sales of Assets and Transfers of Loans to Held For Sale
On March 28, 2013, the Corporation completed the sale of adversely classified loans with a book value of $211.4 million ($100.1
million of commercial and industrial loans, $68.8 million of commercial mortgage loans, $41.3 million of construction loans, and $1.2
million of residential mortgage loans), and $6.3 million of OREO properties in a cash transaction. Included in the bulk sale was
$185.0 million of non-performing assets. The sales price of this bulk sale was $120.2 million. Approximately $39.9 million of reserves
had already been allocated to the loans. This transaction resulted in total charge-offs of $98.5 million and an incremental loss of $58.9
million, reflected in the provision for loan and lease losses for the year 2013. In addition, the Corporation recorded $3.9 million of
professional fees specifically related to this bulk sale of assets. This transaction resulted in a total pretax loss of $62.8 million.
In addition, during the first quarter of 2013, the Corporation transferred to held for sale non-performing loans with an aggregate
book value of $181.6 million. These transfers resulted in charge-offs of $36.0 million and an incremental loss of $5.2 million reflected
in the provision for loan and lease losses for the year 2013.
During the second quarter of 2013, the Corporation completed the sale of a $40.8 million non-performing commercial mortgage loan
that was among the loans transferred to held for sale in the first quarter of 2013 without incurring additional losses.
In a separate transaction during 2013, the Corporation foreclosed on the collateral underlying $39.2 million related to one of the
loans written-off and transferred to held for sale in the first quarter of 2013. The Corporation recorded losses of $4.9 million in 2013
related to this loan after the transfer to held for sale ($1.7 million of lower of cost or market adjustment and $3.2 million of write-
downs to the value of foreclosed properties, recorded as part of net loss on OREO and OREO operations in the statement of income
(loss)). During 2014, the Corporation recorded losses of $4.1 million related to this relationship ($3.8 million of market value
adjustments and $0.3 million on the sale of one of the foreclosed properties).
Furthermore, in the third quarter of 2013, approximately $6.4 million of construction loans held for sale participations were paid off,
resulting in a gain of $0.3 million included as part of “Other income” in the statement of income (loss).
On June 21, 2013, the Corporation announced that it had completed a sale of non-performing residential mortgage loans with a book
value of $203.8 million and OREO properties with a book value of $19.2 million in a cash transaction. The sales price of this bulk sale
was $128.3 million. Approximately $30.1 million of reserves had already been allocated to the loans. This transaction resulted in total
charge-offs of $98.0 million and an incremental loss of $69.8 million, reflected in the provision for loan and lease losses for the 2013
year. In addition, the Corporation recorded $3.1 million of professional service fees specifically related to this bulk sale of non-
performing residential assets. This transaction resulted in a total pretax loss of $72.9 million.
196
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s primary goal with respect to these sales was to accelerate the disposition of non-performing assets, which is the
main priority of the Corporation’s Strategic Plan. The opportunistic sale of distressed assets is a pivotal and tactical step in the
Corporation’s efforts to reduce balance sheet risk, improve earnings in the future through reductions of credit-related-costs, and
enhance credit quality consistent with regulators’ expectations of adequate levels of adversely classified assets for financial
institutions.
Loan Portfolio Concentration
The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, FirstBank, also lends in the USVI
and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment of $9.3
billion as of December 31, 2014, approximately 83% have credit risk concentration in Puerto Rico, 11% in the United States, and 6%
in the USVI and BVI.
As of December 31, 2014, the Corporation had $339.0 million of credit facilities granted to the Puerto Rico government, its
municipalities and public corporations, of which $308.0 million was outstanding, compared to $397.8 million outstanding as of
December 31, 2013. In addition, the outstanding balance of facilities granted to the government of the Virgin Islands amounted to
$57.7 million as of December 31, 2014, compared to $60.6 million as of December 31, 2013. Approximately $201.4 million of the
outstanding credit facilities consists of loans to municipalities in Puerto Rico. Municipal debt exposure is secured by ad valorem
taxation without limitation as to rate or amount on all taxable property within the boundaries of each municipality. The good faith,
credit, and unlimited taxing power of the applicable municipality have been pledged to the repayment of all outstanding bonds and
notes. Approximately $13.2 million consists of loans to units of the central government, and approximately $93.4 million consists of
loans to public corporations that generally receive revenues from the rates they charge for services or products, such as electric power
services, including a $75.0 million credit extended to the Puerto Rico Electric Power Authority (“PREPA”) for fuel purchases that
have priority over senior bonds and other debt. In August 2014, PREPA entered into a forbearance agreement with a group of ba nks,
including FirstBank, to extend its maturing credit lines to March 31, 2015. As a result of the forbearance, this credit facility was
classified as a TDR during the third quarter of 2014. The loan has been maintained in accrual status based on the estimated cash flow
analyses performed on this noncollateral dependent loan, repayment prospects and compliance with contractual terms. Major public
corporations have varying degrees of independence from the central government and many receive appropriations or other payments
from the Puerto Rico’s government general fund. Debt issued by the central government can either carry the full faith, credit and
taxing power of the Commonwealth of Puerto Rico or represent an obligation that is subject to annual budget appropriations.
Furthermore, the Corporation had $133.3 million outstanding as of December 31, 2014 in financing to the hotel industry in Puerto
Rico guaranteed by the Puerto Rico Tourism Development Fund (“TDF”), compared to $200.4 million as of December 31, 2013. The
TDF is a subsidiary of the GDB that works with private-sector financial institutions to structure financings for new hospitality
projects.
As disclosed in Note 4, S&P, Moody’s and Fitch downgraded the credit rating of the Commonwealth of Puerto Rico’s debt to non-
investment grade categories. The Corporation cannot predict at this time the impact that the current fiscal situation of the
Commonwealth of Puerto Rico and the various legislative and other measures adopted and to be adopted by the Puerto Rico
government in response to such fiscal situation will have on the Puerto Rico economy and on the Corporation’s financial condition
and results of operations.
Troubled Debt Restructurings
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico
that is similar to the U.S. government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’
financial condition, restructurings or loan modifications through this program as well as other restructurings of individual commercial,
commercial mortgage, construction, and residential mortgage loans in the U.S. mainland fit the definition of a TDR. A restructuring of
a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession
to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a
defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due amounts, including
interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of December 31, 2014, the
Corporation’s total TDR loans held for investment of $694.5 million consisted of $349.8 million of residential mortgage loans, $171.9
million of commercial and industrial loans, $127.8 million of commercial mortgage loans, $12.5 million of construction loans, and
$32.5 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $0.1 million as of December 31,
2014.
197
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination o f
the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments, and
reduction of interest rates either permanently or for a period of up to four years increasing back in step-up rates. Additionally, in
certain cases, the restructuring may provide for the forgiveness of contractually due principal or interest. Uncollected interest is added
to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off.
These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and
would lose their homes in the foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably
assured that the borrower will comply with its contractual commitment, properties are foreclosed.
Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial
modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated
modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the
borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial
modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the
borrower enters into a permanent modification. As of December 31, 2014, the Corporation classified an additional $9.7 million of
residential mortgage loans as TDRs that were participating in or had been offered a trial modification.
For the commercial real estate, commercial and industrial, and construction loan portfolios, at the time of a restructuring, the
Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the
borrower’s financial difficulty. Concessions granted for commercial loans could include: reductions in interest rates to rates that are
considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of
borrower covenants; forgiveness of principal or interest; or other contract changes that would be considered a concession. The
Corporation mitigates loan defaults for its commercial loan portfolios through its collection function. The function’s objective is to
minimize both early stage delinquencies and losses upon default of commercial loans. In the case of the commercial and industrial,
commercial mortgage, and construction loan portfolios, the Corporation’s Special Asset Group (“SAG”) focuses on strategies for the
accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to
the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the
non-performing and/or adversely classified status. The SAG utilizes relationship officers, collection specialists, and attorneys. In the case
of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed
necessary. The SAG utilizes its collections infrastructure of workout collection officers, credit work-out specialists, in-house legal
counsel, and third-party consultants. In the case of residential construction projects and large commercial loans, the function also
utilizes third-party specialized consultants to monitor the residential and commercial construction projects in terms of construction,
marketing and sales, and assists with the restructuring of large commercial loans.
In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan
facilities are structured as lines of credit, which are mainly one year in term and therefore are required to be renewed annually. Other
facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, the
timing of the completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions,
renewals, and restructurings are done in the normal course of business and not considered concessions, and the loans continue to be
recorded as performing.
198
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Selected information on TDRs that includes the recorded investment by loan class and modification type is
summarized in the following tables. This information reflects all TDRs:
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings (2)
Interest rate
below market
Maturity or
term
extension
December 31, 2014
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or
interest
(In thousands)
Other (1)
Total
$
$
24,850 $
29,881
7,533
-
6,154
-
-
37
68,455 $
5,859 $
12,737
80,642
283,317 $
72,493
31,553
- $
-
3,074
35,749 $
12,655
49,124
349,775
127,766
171,926
202
337
380
376
129
100,662 $
1,732
3,112
10,363
1,805
10,812
415,187 $
-
-
-
-
443
3,517 $
536
434
6,248
-
1,886
106,632 $
2,470
10,037
16,991
2,181
13,307
694,453
(1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would
be considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table.
(2) Excludes TDR held for sale amounting to $45.7 million as of December 31, 2014.
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings (2)
Interest rate
below market
Maturity or
term
extension
December 31, 2013
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or
interest
(In thousands)
Other (1)
Total
$
$
23,428 $
36,543
12,099
878
-
6,054
-
-
227
79,229 $
6,059 $
12,985
11,341
274,562 $
83,993
12,835
- $
7
3,122
33,195 $
20,048
52,554
337,244
153,576
91,951
2,012
-
160
706
1,286
256
34,805 $
1,760
3,924
3,173
8,350
1,072
8,638
398,307 $
-
-
994
-
-
-
4,123 $
675
-
513
5,066
-
1,743
113,794 $
5,325
3,924
10,894
14,122
2,358
10,864
630,258
(1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be
considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table above.
(2) Excludes TDRs held for sale amounting to $45.9 million as of December 31, 2013.
199
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents the Corporation's TDR activity:
Beginning balance of TDRs
New TDRs
Increases to existing TDRs - additional disbursements
Charge-offs post-modification
Sales, net of charge-offs
Foreclosures
Removed from TDR classification
TDRs transferred to held for sale
Paid-off and partial payments
Ending balance of TDRs
Year Ended
December 31, 2014
Year Ended
December 31, 2013
(In thousands)
$
$
630,258
164,108
1,903
(43,916)
(4,500)
(4,948)
-
-
(48,452)
694,453
$
$
941,730
124,424
2,864
(132,595)
(104,915)
(11,886)
(6,764)
(129,964)
(52,636)
630,258
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on
nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six
months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or
significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual at the time of the restructuring or after a shorter performance period. If the borrower’s
ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications
increase the Corporation’s interest income by returning a non-performing loan to performing status, if applicable, increase cash flows
by providing for payments to be made by the borrower, and avoid increases in foreclosure and OREO costs. The Corporation
continues to consider a modified loan as an impaired loan for purposes of estimating the allowance for loan and lease losses. A TDR
loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to
accept for a new loan with comparable risk may not be reported as a TDR, or an impaired loan in the calendar years subsequent to the
restructuring, if it is in compliance with its modified terms. The Corporation did not remove loans from the TDR classification during
2014.
The following table provides a breakdown between accrual and nonaccrual of TDRs:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
December 31, 2014
Accrual
Nonaccrual (1) (2)
(In thousands)
Total TDRs
$
$
266,810 $
69,374
131,544
834
3,448
10,558
1,926
10,146
494,640 $
82,965 $
58,392
40,382
1,636
6,589
6,433
255
3,161
199,813 $
349,775
127,766
171,926
2,470
10,037
16,991
2,181
13,307
694,453
(1) Included in nonaccrual loans are $52.8 million in loans that are performing under the terms of the restructuring agreement
but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance
under the revised terms for reinstatement to accrual status and there is no doubt about full collectability.
(2) Excludes nonaccrual TDRs held for sale with a carrying value of $45.7 million as of December 31, 2014.
200
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
December 31, 2013
Accrual
Nonaccrual (1)(2)
(In thousands)
Total TDRs
$
$
263,919 $
53,509
84,419
1,000
-
3,332
8,512
2,275
8,417
425,383 $
73,324 $
38,441
69,156
4,325
3,924
7,562
5,610
85
2,448
204,875 $
337,243
91,950
153,575
5,325
3,924
10,894
14,122
2,360
10,865
630,258
(1) Included in nonaccrual loans are $95.7 million in loans that are performing under the terms of the restructuring agreement
but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance
under the revised terms for reinstatement to accrual status and there is no doubt about full collectability.
(2) Excludes nonaccrual TDRs held for sale with a carrying value of $45.9 million as of December 31, 2013.
TDRs exclude restructured residential mortgage loans that are guaranteed by the U.S. federal government (i.e., FHA/VA loans)
totaling $71.5 million. The Corporation excludes FHA/VA guaranteed loans from TDRs given that, in the event that the borrower
defaults on the loan, the principal and interest (debenture rate) are guaranteed by the U.S. government; therefore, the risk of loss on
these types of loans is very low. The Corporation does not consider loans with U.S. federal government guarantees to be impaired
loans for the purpose of calculating the allowance for loan and lease losses.
Loan modifications that are considered TDRs completed during 2014 and 2013 were as follows:
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
Year ended December 31, 2014
Number of
contracts
Pre-modification
Outstanding Recorded
Investment
Post-modification
Outstanding Recorded
Investment
(In thousands)
291 $
9
17
6
-
602
45
1,492
2,462 $
40,166 $
2,853
105,372
257
-
8,903
953
7,240
165,744 $
39,194
2,855
105,110
219
-
8,748
800
7,182
164,108
201
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-commercial
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
Year ended December 31, 2013
Number of
contracts
Pre-modification
Outstanding Recorded
Investment
Post-modification
Outstanding Recorded
Investment
(In thousands)
17 $
27
-
-
1
557
75
1,452
2,428
4,557 $
6,000 $
79,531
-
-
195
7,582
1,435
6,518
149,783
251,044 $
6,161
53,525
-
-
195
7,582
1,435
6,518
124,424
199,840
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-
performing loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a
higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to
make payments of either principal, interest, or both for a period of 90 days or more.
Loan modifications considered TDRs that defaulted during the years ended December 31, 2014 and 2013, and had become TDRs
during the 12 months preceding the default date were as follows:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans
Land
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total
Year ended December 31,
2014
2013
Number of
contracts
Recorded
Investment
Number of
contracts
Recorded
Investment
55 $
2
2
1
-
45
241
6
352 $
(In thousands)
8,087
4,604
1,537
46
-
697
989
115
16,075
81 $
1
2
2
1
9
40
3
139 $
13,415
46,102
3,829
66
186
86
219
38
63,941
For certain TDRs, the Corporation splits the loans into two new notes, A and B notes. The A note is restructured to comply with the
Corporation’s lending standards at current market rates, and is tailored to suit the customer’s ability to make timely interest and
principal payments. The B note includes the granting of the concession to the borrower and varies by situation. The B note is charged
off but the borrower’s obligation is not forgiven, and any payments collected are accounted for as recoveries. At the time of the
restructuring, the A note is identified and classified as a TDR. If the loan performs for at least six months according to the modified
terms, the A note may be returned to accrual status. The borrower’s payment performance prior to the restructuring is included in
assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the
restructuring. In the periods following the calendar year in which a loan is restructured, the A note may no longer be reported as a
TDR if it is on accrual status, is in compliance with its modified terms, and yields a market rate (as determined and documented at the
time of the restructuring).
202
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The recorded investment in loans held for investment restructured using the A/B note restructure workout strategy was
approximately $46.0 million and $78.3 million at December 31, 2014 and 2013, respectively. The following table provides additional
information about the volume of this type of loan restructuring and the effect on the allowance for loan and lease losses in 2014 and
2013:
(In thousands)
Principal balance deemed collectible at end of year
Amount (recovered) charged off
(Reductions) to the provision for loan losses
Allowance for loan losses at end of year
December 31, 2014 December 31, 2013
$
$
$
$
46,032 $
(7,501) $
(8,341) $
731 $
78,342
20,889
(4,084)
1,436
Of the loans comprising the $46.0 million that has been deemed to be collectible as of December 31, 2014, approximately $44.3
million was placed in accrual status as the borrowers have exhibited a period of sustained performance. These loans continue to be
individually evaluated for impairment purposes.
203
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 8 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for loan and lease losses were as follows:
Year Ended December 31, 2014
Allowance for loan and lease losses:
Beginning balance
Charge-offs
Recoveries
Provision (release)
Ending balance
Ending balance: specific reserve for impaired loans
Ending balance: purchased credit-impaired loans
Ending balance: general allowance
Loans held for investment:
Ending balance
Ending balance: impaired loans
Ending balance: purchased credit-impaired
loans
Ending balance: loans with general
allowance
Year Ended December 31, 2013
Allowance for loan and lease losses:
Beginning balance
Charge-offs
Charge-offs related to bulk sales
Recoveries
Provision
Reclassification (1)
Ending balance
Ending balance: specific reserve for impaired loans
Ending balance: purchased credit-impaired loans
Ending balance: general allowance
Loans held for investment:
Ending balance
Ending balance: impaired loans
Ending balance: purchased credit-impaired
loans
Ending balance: loans with general allowance
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Residential
Commercial
Mortgage Loans Mortgage Loans Industrial Loans
Commercial and Construction
Loans
33,110 $
(24,345)
1,049
17,487
27,301 $
10,854 $
- $
16,447 $
73,138 $
(25,807)
10,639
(7,076)
50,894 $
14,289 $
- $
36,605 $
(In thousands)
85,295 $
(61,935)
3,680
36,681
63,721 $
21,314 $
- $
42,407 $
35,814 $
(11,533)
6,049
(17,508)
12,822 $
2,577 $
- $
10,245 $
Consumer
Loans
Total
58,501 $
(76,696)
5,906
79,946
67,657 $
6,171 $
- $
61,486 $
285,858
(200,316)
27,323
109,530
222,395
55,205
-
167,190
3,011,187 $
424,244 $
1,665,787 $
210,738 $
2,479,437 $
236,371 $
123,480 $
39,467 $
1,982,545 $
34,587 $
9,262,436
945,407
98,494 $
3,393 $
- $
- $
717 $
102,604
2,488,449 $
1,451,656 $
2,243,066 $
84,013 $
1,947,241 $
8,214,425
Residential
Commercial
Mortgage Loans Mortgage Loans Industrial Loans
Commercial and Construction
Loans
68,354 $
(30,192)
(98,972)
1,165
92,755
-
33,110 $
18,125 $
- $
14,985 $
97,692 $
(27,400)
(40,057)
4,855
27,357
10,691
73,138 $
32,189 $
- $
40,949 $
(In thousands)
146,900 $
(65,171)
(44,678)
4,636
53,048
(9,440)
85,295 $
26,686 $
- $
58,609 $
61,600 $
(30,539)
(12,784)
2,076
16,712
(1,251)
35,814 $
22,144 $
- $
13,670 $
Consumer
Loans
Total
60,868 $
(63,108)
-
6,862
53,879
-
58,501 $
3,457 $
- $
55,044 $
435,414
(216,410)
(196,491)
19,594
243,751
-
285,858
102,601
-
183,257
2,549,008 $
410,994 $
1,823,608 $
219,372 $
3,028,322 $
187,104 $
168,713 $
72,717 $
2,066,519 $
28,925 $
9,636,170
919,112
- $
2,138,014 $
- $
1,604,236 $
- $
2,841,218 $
- $
95,996 $
4,791 $
2,032,803 $
4,791
8,712,267
(1) During the second quarter of 2013, after a comprehensive review of substantially all of the loans in our commercial portfolios, the classification of certain loans was revised to more
accurately depict the nature of the underlying loans. This reclassification resulted in a net increase of $269.0 million in commercial mortgage loans, since the principal source of repayment
for such loans is derived primarily from the operation of the underlying real estate, with a corresponding decrease of $246.8 million in commercial and industrial loans and a $22.2 million
decrease in construction loans. The Corporation evaluated the impact of this reclassification on the provision for loan losses and determined that the effect of this adjustment was not
material to any previously reported results.
Refer to Note 1, Nature of Business and Summary of Significant Accounting Policies – Allowance for loans and lease losses, for
additional information about certain enhancements to the general allowance estimation process for commercial and consumer loans
made in 2014.
204
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The bulk sale of approximately $217.7 million of adversely classified assets, mainly commercial loans, completed in the first
quarter of 2013 resulted in charge-offs of approximately $98.5 million. In determining the historical loss rate for the computation of
the general reserve for commercial loans, the Corporation includes the portion of these charge-offs that was related to the acceleration
of previously reserved credit losses amounting to approximately $39.9 million. The Corporation considered that the portion not
deemed to be credit-related was not indicative of the ultimate losses that may have occurred had the assets been resolved on an
individual basis, over time and not in a steeply discounted bulk sale. A transaction, such as this one, entered into to expedite the
reduction of non-performing and adversely classified assets, can result in charge-offs that are not reflective of true credit-related
charge-off-history since there is a component related to the discounted value realized on a bulk sale basis. Accordingly, the
Corporation concluded that it is reasonable to exclude the component related to the discounted value from its historical charge-off
analysis used in estimating its allowance for loan losses.
As of December 31, 2014, the Corporation maintained a $0.2 million reserve for unfunded loan commitments mainly related to
outstanding construction and commercial and industrial loan commitments. The reserve for unfunded loan commitments is an estimate
of the losses inherent in off-balance sheet loan commitments to borrowers that are experiencing financial difficulties at the balance
sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end
amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other
liabilities in the consolidated statements of financial condition.
NOTE 9 – LOANS HELD FOR SALE
The Corporation’s loans held-for-sale portfolio was composed of:
Residential mortgage loans
Construction loans
Commercial mortgage loans
Total
December 31,
2014
2013
(In thousands)
$
$
22,315 $
47,802
6,839
76,956 $
21,168
47,802
6,999
75,969
Non-performing loans held for sale totaled $54.6 million ($6.8 million commercial mortgage and $47.8 million construction loans) as
of December 31, 2014 and $54.8 million ($7.0 million commercial mortgage and $47.8 million construction loans) as of December 31,
2013. The Corporation continues to seek to resolve and dispose of its non-performing commercial and construction loans held for sale.
205
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 10 – RELATED-PARTY TRANSACTIONS
The Corporation granted loans to its directors, executive officers, and certain related individuals or entities in the ordinary course of
business. The movement and balance of these loans were as follows:
Balance at December 31, 2012
New loans
Payments
Other changes
Balance at December 31, 2013
New loans
Payments
Other changes
Balance at December 31, 2014
Amount
(In thousands)
4,093
51
(750)
(1,999)
1,395
61
(133)
10
1,333
$
$
These loans do not involve more than normal risk of collectability and management considers that they present terms that are no
more favorable than those that would have been obtained if the transactions had been with unrelated parties. The amounts reported as
other changes include changes in the status of those who are considered related parties, which, for 2014, was mainly related to an
addition of one new director and the resignation of one executive officer, and for 2013, was mainly due to the resignation of one
independent director of the Corporation.
From time to time, the Corporation, in the ordinary course of its business, obtains services from related parties or makes
contributions to non-profit organizations that have some association with the Corporation. Management believes the terms of such
arrangements are consistent with arrangements entered into with independent third parties.
NOTE 11 – PREMISES AND EQUIPMENT
Premises and equipment comprise:
Useful Life In
Years
As of December 31,
2014
2013
(Dollars in thousands)
Buildings and improvements
Leasehold improvements
Furniture and equipment
$
10-35
1-10
2-10
Accumulated depreciation
Land
Projects in progress
Total premises and equipment, net
$
140,592
63,065
161,865
365,522
(232,272)
133,250
25,655
8,021
166,926
$
$
141,836
57,833
147,640
347,309
(216,170)
131,139
25,655
10,152
166,946
Depreciation and amortization expense amounted to $21.0 million, $24.0 million, and $24.2 million for the years ended
December 31, 2014, 2013, and 2012, respectively. During 2013, the Corporation reclassified at fair value approximately $2.2 million
to other assets held for sale certain fixed assets no longer being used for operations after the consolidation of certain bank branches.
This resulted in a charge of $0.5 million recorded as part of “other non-interest income” on the statement of income (loss).
206
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 12 – GOODWILL AND OTHER INTANGIBLES
Goodwill as of December 31, 2014 and 2013 amounted to $28.1 million, recognized as part of “Other Assets” in the consolidated
statement of financial condition. The Corporation conducted its annual evaluation of goodwill and other intangibles during the fourth
quarter of 2014. The Corporation’s goodwill is related to the acquisition of FirstBank Florida in 2005.
The Corporation bypassed the qualitative assessment in 2014 and proceeded directly to perform the first step of the two-step
goodwill impairment test. The Step 1 evaluation of goodwill allocated to the Florida reporting unit under both valuation approaches
(market and discounted cash flow analysis) indicated that the fair value of the unit was above the carrying amount of its equity book
value as of the valuation date (October 1); therefore, the completion of the Step 2 was not required. Based on the analysis under both
the market and discounted cash flow analysis, the estimated fair value of equity of the reporting unit exceeded the carrying amount of
the entity, including goodwill at the evaluation date. Goodwill was not impaired as of December 31, 2014 or 2013, nor was any
goodwill written off due to impairment during 2014, 2013, and 2012.
In connection with the acquisition of the FirstBank-branded credit card loan portfolio, in the second quarter of 2012, the
Corporation recognized a purchased credit card relationship intangible of $24.5 million, which is being amortized over the next seven
years on an accelerated basis based on the estimated attrition rate of the purchased credit card accounts, which reflects the pattern in
which the economic benefits of the intangible asset are consumed. These benefits are consumed as the revenue stream generated by
the cardholder relationship is realized.
The following table shows the gross amount and accumulated amortization of the Corporation’s intangible assets recognized as part
of Other Assets in the consolidated statement of financial condition:
Core deposit intangible:
Gross amount
Accumulated amortization
Net carrying amount
Remaining amortization period
Purchased credit card relationship intangible:
Gross amount
Accumulated amortization
Net carrying amount
Remaining amortization period
As of
December 31,
2014
As of
December 31,
2013
(Dollars in thousands)
$
$
$
$
45,844 $
(40,424)
5,420 $
8.4 years
24,465 $
(8,076)
16,389 $
6.9 years
45,844
(38,863)
6,981
9.8 years
24,465
(4,678)
19,787
8.0 years
The following table presents the estimated aggregate annual amortization expense for intangible assets:
2015
2016
2017
2018
2019 and after
$
Amount
(In thousands)
4,439
4,157
3,595
2,711
6,907
207
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 13 – NON CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS
The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement,
including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by
applicable accounting guidance.
When evaluating transfers and other transactions with Variable Interest Entities (“VIEs”) for consolidation, the Corporation first
determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable
interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated
or not.
Below is a summary of transfers of financial assets to VIEs for which the Corporation has retained some level of continuing
involvement:
GNMA
The Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in
which the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities
issued through these transactions are guaranteed by the issuer and, as such, under seller/servicer agreements, the Corporation is
required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of December 31, 2014, the
Corporation serviced loans securitized through GNMA with a principal balance of $1.1 billion.
Trust Preferred Securities
In 2004, FBP Statutory Trust I, a financing subsidiary of the Corporation, 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 Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a
statutory trust that is wholly owned by the Corporation, 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 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 Corporation’s Junior Subordinated Deferrable Debentures. The debentures are presented in the Corporation’s
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 June 17, 2034 and September 20,
2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Deferrable Debentures may be
shortened (such 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 applicable rules and regulations. The Collins
Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates certain trust-preferred securities from
Tier 1 Capital. Bank Holding Companies, such as the Corporation, must fully phase out these instruments from Tier 1 capital by
January 1, 2016 (25% allowed in 2015 and 0% in 2016); however, these instruments may remain in Tier 2 capital until the instruments
are redeemed or mature. The Corporation has elected to defer the interest payments that were due on quarterly periods since March
2012. The aggregate amount of payments deferred and accrued approximates $21.9 million as of December 31, 2014. Under the
indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments of interest on
the subordinated debentures by extending the interest payment period at any time and from time to time during the term of the
subordinated debentures for up to twenty consecutive quarterly periods. Future interest payments are subject to the Federal Reserve
approval.
208
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Grantor Trusts
During 2004 and 2005, a third party to the Corporation, from now on identified as the seller, established a series of statutory trusts
to effect the securitization of mortgage loans and the sale of trust certificates. The seller initially provided the servicing for a fee,
which is senior to the obligations to pay trust certificate holders. The seller then entered into a sales agreement through which it sold
and issued the trust certificates in favor of the Corporation’s banking subsidiary. Currently, the Bank is the sole owner of the trust
certificates; the servicing of the underlying residential mortgages that generate the principal and interest cash flows is performed by
another third party, which receives a servicing fee. The securities are variable rate securities indexed to 90-day LIBOR plus a spread.
The principal payments from the underlying loans are remitted to a paying agent (servicer) who then remits interest to the Bank;
interest income is shared to a certain extent with the FDIC, which has an interest only strip (“IO”) tied to the cash flows of the
underlying loans and is entitled to receive the excess of the interest income less a servicing fee over the variable rate income that the
Bank earns on the securities. This IO is limited to the weighted average coupon of the securities. The FDIC became the owner of the
IO upon the intervention of the seller, a failed financial institution. No recourse agreement exists and the risks from losses on non
accruing loans and repossessed collateral are absorbed by the Bank as the sole holder of the certificates. As of December 31, 2014,
the amortized balance and carrying value of the Grantor Trusts amounted to $45.7 million and $33.5 million, respectively, with a
weighted average yield of 2.17%.
Investment in unconsolidated entity
On February 16, 2011, FirstBank sold an asset portfolio consisting of performing and non-performing construction, commercial
mortgage and commercial and industrial loans with an aggregate book value of $269.3 million to CPG/GS, an entity organized under
the laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC ("PRLP"), a company created by
Goldman, Sachs & Co. and Caribbean Property Group. In connection with the sale, the Corporation received $88.5 million in cash
and a 35% interest in CPG/GS, and made a loan in the amount of $136.1 million representing seller financing provided by FirstBank.
The loan has a seven-year maturity and bears variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all
of the acquiring entity's assets as well as the PRLP's 65% ownership interest in CPG/GS. As of December 31, 2014, the carrying
amount of the loan was $25.2 million, which was included in the Corporation's Commercial and Industrial loans held for investment
portfolio. FirstBank’s equity interest in CPG/GS is accounted for under the equity method and included as part of Investment in
unconsolidated entity in the Consolidated Statements of Financial Condition. When applying the equity method, the Bank follows the
HLBV method to determine its share in CPG/GS’s earnings or loss. Under HLBV, the Bank determines its share in CPG/GS’s
earnings or loss by determining the difference between its “claim on CPG/GS’s book value” at the end of the period as compared to
the beginning of the period. This claim is calculated as the amount the Bank would receive if CPG/GS were to liquidate all of its
assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to the investors, PRLP and
FirstBank, according to their respective priorities as provided in the contractual agreement. The Bank reports its share of CPG/GS’s
operating results on a one-quarter lag basis. In addition, as a result of using HLBV, the difference between the Bank’s investment in
CPG/GS and its claim on the book value of CPG/GS at the date of the investment, known as the basis difference, is amortized over the
estimated life of the investment, or five years. CPG/GS records its loans receivable under the fair value option. Equity in loss of
unconsolidated entity for the year ended December 31, 2014 of $7.3 million includes $1.8 million related to the amortization of the
basis differential, compared to equity in loss of unconsolidated entity of $16.7 million for 2013. The loss recorded in 2014 reduced to
zero the carrying amount of the Bank’s investment in CPG/GS. No negative investment needs to be reported as the Bank has no legal
obligation or commitment to provide further financial support to this entity; thus, no further losses will be recorded on this investment.
Any potential increase in the carrying value of the investment in CPG/GS, under the HLBV method, would depend upon how better
off the Bank is at the end of the period than it was at the beginning of the period after the waterfall calculation performed to determine
the amount of gain allocated to the investors.
FirstBank also provided an $80 million advance facility to CPG/GS to fund unfunded commitments and costs to complete projects
under construction, which was fully disbursed in 2011, and a $20 million working capital line of credit to fund certain expenses of
CPG/GS. During 2013, the working capital line of credit was renewed and reduced to $7 million for a period of two years expiring
September 2015. During 2012, CPG/GS repaid the outstanding balance of the advance facility to fund unfunded commitments, and the
funds became available for redrawal under a one-time revolver agreement. These loans bear variable interest at 30-day LIBOR plus
300 basis points. As of December 31, 2014, the carrying value of the revolver agreement and working capital line were $30.4 million
and $0, respectively, which was included in the Corporation's commercial and industrial loans held for investment portfolio.
209
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Cash proceeds received by CPG/GS are first used to cover operating expenses and debt service payments, including the note
receivable, the advanced facility, and the working capital line, described above, which must be substantially repaid before proceeds
can be used for other purposes, including the return of capital to both PRLP and FirstBank. FirstBank will not receive any return on its
equity interest until PRLP receives an aggregate amount equivalent to its initial investment and a priority return of at least 12%,
resulting in FirstBank’s interest in CPG/GS being subordinate to PRLP’s interest. CPG/GS will then begin to make payments pro rata
to PRLP and FirstBank, 35% and 65%, respectively, until FirstBank has achieved a 12% return on its invested capital and the
aggregate amount of distributions is equal to FirstBank’s capital contributions to CPG/GS.
The Bank has determined that CPG/GS is a VIE in which the Bank is not the primary beneficiary. In determining the primary
beneficiary of CPG/GS, the Bank considered applicable guidance that requires the Bank to qualitatively assess the determination of
the primary beneficiary (or consolidator) of CPG/GS based on whether it has both the power to direct the activities of CPG/GS that
most significantly impact the entity's economic performance and the obligation to absorb losses of CPG/GS that could potentially be
significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
The Bank determined that it does not have the power to direct the activities that most significantly impact the economic
performance of CPG/GS as it does not have the right to manage the loan portfolio, impact foreclosure proceedings, or manage the
construction and sale of the property; therefore, the Bank concluded that it is not the primary beneficiary of CPG/GS. As a creditor to
CPG/GS, the Bank has certain rights related to CPG/GS; however, these are intended to be protective in nature and do not provide the
Bank with the ability to manage the operations of CPG/GS. Since CPG/GS is not a consolidated subsidiary of the Bank and the
transaction met the criteria for sale accounting under authoritative guidance, the Bank accounted for this transaction as a true sale,
recognizing the cash received, the notes receivable, and the interest in CPG/GS, and derecognizing the loan portfolio sold.
The initial fair value of the investment in CPG/GS was determined using techniques with significant unobservable (Level 3) inputs.
The valuation inputs included an estimate of future cash flows, expectations about possible variations in the amount and timing of
cash flows, and a discount factor based on a rate of return. The Corporation researched available market data and internal information
(i.e., proposals received for the servicing of distressed assets and public disclosures and other information about similar structures
and/or of distressed asset sales) and determined reasonable ranges of expected returns for FirstBank’s equity interest.
The rate of return of 17.57% was used as the discount factor to estimate the value of FirstBank’s equity interest and represents the
Bank’s estimate of the yield a market participant would require. A reasonable range of equity returns was assessed based on
consideration of a range of company-specific risk premiums. The valuation of this type of equity interest is highly subjective and
somewhat dependent on nonobservable market assumptions, which may result in variations from market participant to market
participant.
Servicing Assets
The Corporation is actively involved in the securitization of pools of FHA-insured and VA-guaranteed mortgages for issuance of
GNMA mortgage-backed securities. Also, certain conventional conforming loans are sold to FNMA or FHLMC with servicing
retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are
originated or purchased.
The changes in servicing assets are shown below:
Balance at beginning of year
Capitalization of servicing assets
Amortization
Adjustment to fair value
Other (1)
Balance at end of year
2014
Year Ended December 31,
2013
(In thousands)
2012
$
$
21,987 $
4,321
(3,156)
(228)
(86)
22,838 $
17,524 $
7,649
(3,289)
460
(357)
21,987 $
15,226
6,348
(3,014)
(394)
(642)
17,524
(1) Amount represents the adjustment to fair value related to the repurchase of loans serviced for others.
210
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation
allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being
serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.
Changes in the impairment allowance related to servicing assets were as follows:
Balance at beginning of year
Temporary impairment charges
OTTI of servicing assets
Recoveries
Balance at end of year
The components of net servicing income are shown below:
Servicing fees
Late charges and prepayment penalties
Adjustment for loans repurchased
Other (1)
Servicing income, gross
Amortization and impairment of servicing assets
Servicing income, net
2014
Year ended December 31,
2013
(In thousands)
2012
212 $
343
(385)
(115)
55 $
672 $
277
-
(737)
212 $
2,725
763
(2,447)
(369)
672
2014
Year ended December 31,
2013
(In thousands)
2012
6,999 $
695
(86)
(1,253)
6,355
(3,384)
2,971 $
7,164 $
701
(357)
(407)
7,101
(2,829)
4,272 $
5,650
642
(642)
-
5,650
(3,408)
2,242
$
$
$
$
(1) Mainly consisted of compensatory fees imposed by GSEs and losses related to representations and warranties.
211
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s servicing assets are subject to prepayment and interest rate risks. Key economic assumptions used in determining
the fair value at the time of sale ranged as follows:
Maximum
Minimum
2014:
Constant prepayment rate:
Government-guaranteed mortgage loans
Conventional conforming mortgage loans
Conventional non-conforming mortgage loans
Discount rate:
Government-guaranteed mortgage loans
Conventional conforming mortgage loans
Conventional non-conforming mortgage loans
2013:
Constant prepayment rate:
Government-guaranteed mortgage loans
Conventional conforming mortgage loans
Conventional non-conforming mortgage loans
Discount rate:
Government-guaranteed mortgage loans
Conventional conforming mortgage loans
Conventional non-conforming mortgage loans
2012:
Constant prepayment rate:
Government-guaranteed mortgage loans
Conventional conforming mortgage loans
Conventional non-conforming mortgage loans
Discount rate:
Government-guaranteed mortgage loans
Conventional conforming mortgage loans
Conventional non-conforming mortgage loans
9.6 %
9.4 %
14.0 %
11.5 %
9.5 %
13.9 %
10.5 %
10.9 %
14.3 %
12.0 %
10.0 %
14.3 %
12.4 %
12.8 %
13.8 %
12.0 %
10.0 %
14.3 %
9.1 %
8.9 %
12.7 %
11.5 %
9.5 %
13.8 %
8.9 %
8.7 %
12.3 %
11.5 %
9.5 %
13.8 %
11.6 %
12.3 %
13.3 %
12.0 %
10.0 %
14.3 %
212
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 2014, fair values of the Corporation’s servicing assets were based on a valuation model that incorporates market
driven assumptions regarding discount rates and mortgage prepayment rates, adjusted by the particular characteristics of the
Corporation’s servicing portfolio. The weighted-averages of the key economic assumptions used by the Corporation in its valuation
model and the sensitivity of the current fair value to immediate 10% and 20% adverse changes in those assumptions for mortgage
loans as of December 31, 2014 were as follows:
Carrying amount of servicing assets
Fair value
Weighted average expected life (in years)
Constant prepayment rate (weighted average annual rate)
Decrease in fair value due to 10% adverse change
Decrease in fair value due to 20% adverse change
Discount rate (weighted average annual rate)
Decrease in fair value due to 10% adverse change
Decrease in fair value due to 20% adverse change
(Dollars in
thousands)
22,838
24,932
8.85
9.74 %
936
1,813
10.60 %
1,037
1,996
$
$
$
$
$
$
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change
in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing
asset is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities.
NOTE 14 – DEPOSITS AND RELATED INTEREST
The following table summarizes deposit balances:
Type of account and interest rate:
Non-interest-bearing checking accounts
Savings accounts - 0.05% to 0.85% (2013- 0.20% to 1.00%)
Interest-bearing checking accounts - 0.10% to 1.06%
(2013- 0.25% to 1.06%)
Certificates of deposit- 0.10% to 5.05% (2013- 0.10% to 5.05%)
Brokered certificates of deposit- 0.20% to 4.70% (2013- 0.45% to 4.94%)
December 31,
2014
2013
(In thousands)
$
$
900,616 $
2,450,484
1,054,136
2,191,663
2,887,046
9,483,945 $
851,212
2,334,831
1,167,480
2,384,378
3,142,023
9,879,924
The weighted average interest rate on total interest-bearing deposits as of December 31, 2014 and 2013 was 0.82% and 0.93%,
respectively.
As of December 31, 2014, the aggregate amount of overdrafts in demand deposits that were reclassified as loans amounted to $0.8
million (2013 — $2.6 million).
213
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents a summary of CDs, including brokered CDs, with a remaining term of more than
one year as of December 31, 2014:
Over one year to two years
Over two years to three years
Over three years to four years
Over four years to five years
Over five years
Total
Total
(In thousands)
$
$
1,304,563
326,771
133,303
45,670
36,256
1,846,563
As of December 31, 2014, CDs in denominations of $100,000 or higher amounted to $4.3 billion (2013 — $4.7 billion) including
brokered CDs of $2.9 billion (2013 — $3.1 billion) at a weighted average cost of 0.77% (2013 — 0.97%) 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. As of December 31, 2014, unamortized broker placement fees amounted to $6.1 million (2013— $9.1 million), which are
amortized over the contractual maturity of the brokered CDs under the interest method.
Brokered CD's mature as follows:
One to ninety days
Over ninety days to one year
One to three years
Three to five years
Over five years
Total
December 31,
2014
(In thousands)
$
$
361,594
1,473,840
956,783
58,795
36,034
2,887,046
As of December 31, 2014, deposit accounts issued to government agencies with a carrying value of $400.7 million (2013 —
$705.8 million) were collateralized by securities and loans with an amortized cost of $634.0 million (2013 — $784.0 million) and an
estimated market value of $624.8 million (2013 — $761.9 million). As of December 31, 2014, the Corporation had $227.4 million of
government deposits in Puerto Rico (2013- $546.5 million) and $173.3 million in the Virgin Islands (2013- $159.3 million).
In 2014, Act 24-2014 was approved by the Puerto Rico Legislature, seeking to further strengthen the liquidity of the GDB and the
GDB’s oversight of public funds. As anticipated, certain public corporations and agencies withdrew from First Bank approximately
$341.6 million during the second quarter of 2014.
A table showing interest expense on deposits follows:
Interest-bearing checking accounts
Savings
Certificates of deposit
Brokered certificates of deposit
Total
2014
Year Ended December 31,
2013
(In thousands)
2012
$
$
6,446 $
15,416
26,371
29,894
78,127 $
8,419 $
15,852
29,264
38,252
91,787 $
9,421
17,382
34,602
66,854
128,259
The interest expense on deposits includes the amortization of broker placement fees related to brokered CDs amounting to $6.7
million, $7.9 million, and $9.9 million for 2014, 2013, and 2012, respectively.
214
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 15 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repurchase agreements) consist of the following:
December, 31
2014
2013
(Dollars in thousands)
Repurchase agreements, interest ranging from 2.45% to 4.50%
(December 31, 2013: 2.45% to 3.32%) (1)
$
900,000
$
900,000
(1) As of December 31, 2014, includes $800 million with an average rate of 3.30%, and that lenders have the right to call before their contractual maturities
at various dates beginning on January 9, 2015. Subsequent to December 31, 2014, no lender has exercised its call option on repurchase agreements.
In addition, $500 million of the $900 million is tied to variable rates.
The weighted average interest rates on repurchase agreements as of December 31, 2014 and 2013 were 3.24% and 2.83%,
respectively. Accrued interest payable on repurchase agreements amounted to $5.2 million and $4.5 million as of December 31, 2014
and 2013, respectively.
Repurchase agreements mature as follows:
December 31, 2014
(In thousands)
Over one year to three years
Three to five years
Total
$
$
700,000
200,000
900,000
The following securities were sold under agreements to repurchase:
December 31, 2014
Underlying Securities
Amortized
Cost of
Underlying
Securities
Balance of
Borrowing
Approximate
Fair Value
of Underlying
Securities
Weighted
Average
Interest Rate
of Security
U.S. government-sponsored agencies
Mortgage-backed securities
Total
Accrued interest receivable
$
$
$
(In thousands)
170,495 $
852,132
150,051 $
749,949
166,320
859,646
1.27 %
2.53 %
1,022,627 $
900,000 $
1,025,966
2,846
215
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Underlying Securities
December 31, 2013
Amortized
Cost of
Underlying
Securities
Balance of
Borrowing
Approximate
Fair Value
of Underlying Interest Rate
Weighted
Average
Securities
of Security
(In thousands)
U.S. government-sponsored agencies
Mortgage-backed securities
Total
Accrued interest receivable
$
$
$
212,218 $
858,626
178,360 $
721,640
198,968
843,514
1.31 %
2.59 %
1,070,844 $
900,000 $
1,042,482
2,925
The maximum aggregate balance outstanding at any month-end during 2014 was $900 million (2013 — $900 million). The average
balance during 2014 was $900 million (2013 — $900 million). The weighted-average interest rate during 2014 and 2013 was 3.00%
and 2.88%, respectively.
As of December 31, 2014 and 2013, the securities underlying such agreements were delivered to the dealers with which the
repurchase agreements were transacted.
Repurchase agreements as of December 31, 2014, grouped by counterparty, were as follows:
(Dollars in thousands)
Counterparty
Amount
Weighted Average
Maturity (In Months)
Citigroup Global Markets
JP Morgan Chase
Dean Witter / Morgan Stanley
Credit Suisse First Boston
$
$
300,000
200,000
100,000
300,000
900,000
22
26
34
36
216
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 16 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
The following is a summary of the advances from the FHLB:
Fixed-rate advances from FHLB, with a weighted average
interest rate of 1.17% (December 31, 2013 - 1.11%)
$
325,000 $
300,000
Advances from FHLB mature as follows:
December 31, December 31,
2014
2013
(In thousands)
Over one to three years
Three to four years
Total
December 31,
2014
(In thousands)
$
$
300,000
25,000
325,000
Advances are received from the FHLB under an Advances, Collateral Pledge, and Security Agreement (the “Collateral
Agreement”). Under the Collateral Agreement, the Corporation is required to maintain a minimum amount of qualifying mortgage
collateral with a market value of generally 125% or higher than the outstanding advances. As of December 31, 2014, the estimated
value of specific mortgage loans pledged as collateral amounted to $812.6 million (2013 — $764.6 million), as computed by the
FHLB for collateral purposes. The carrying value of such loans as of December 31, 2014 amounted to $1.1 billion (2013 — $988.0
million). As of December 31, 2014, the Corporation had additional capacity of approximately $487.6 million on this credit facility
based on collateral pledged at the FHLB, including a haircut reflecting the perceived risk associated with the collateral. Haircut refers
to the percentage by which an asset’s market value is reduced for the purpose of collateral levels. Advances may be repaid prior to
maturity, in whole or in part, at the option of the borrower upon payment of any applicable fee specified in the contract governing
such advance. In calculating the fee, due consideration is given to (i) all relevant factors, including but not limited to, any and all
applicable costs of repurchasing and/or prepaying any associated liabilities and/or hedges entered into with respect to the applicable
advance; (ii) the financial characteristics, in their entirety, of the advance being prepaid; and (iii), in the case of adjustable-rate
advances, the expected future earnings of the replacement borrowing as long as the replacement borrowing is at least equal to the
original advance’s par amount and the replacement borrowing’s tenor is at least equal to the remaining maturity of the prepaid
advance.
NOTE 17 – OTHER BORROWINGS
Other borrowings consist of:
Junior subordinated debentures due in 2034,
interest-bearing at a floating rate of 2.75%
over 3-month LIBOR (2.99% as of December 31, 2014
and December 31, 2013)
Junior subordinated debentures due in 2034,
interest-bearing at a floating rate of 2.50%
over 3-month LIBOR (2.75% as of December 31, 2014
and December 31, 2013)
217
December 31,
2014
December 31,
2013
(In thousands)
$
103,093 $
103,093
128,866
231,959 $
128,866
231,959
$
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 18 – EARNINGS PER COMMON SHARE
The calculation of earnings (losses) per common share for the years ended December 31, 2014, 2013, and 2012 are as follows:
Net income (loss)
Favorable impact from issuing common stock in exchange for
Series A through E preferred stock (1)
Net income (loss) attributable to common stockholders
Weighted Average Shares:
Average common shares outstanding
Average potential dilutive common shares
Average common shares outstanding - assuming dilution
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Year Ended December 31,
2014
2012
2013
(In thousands, except per share information)
$
392,287 $
(164,487) $
29,782
1,659
393,946
-
(164,487)
-
29,782
208,752
1,788
210,540
205,542
-
205,542
205,366
462
205,828
$
$
1.89 $
(0.80) $
1.87 $
(0.80) $
0.15
0.14
____________
(1) Excess of carrying amount of the Series A through E preferred stock exchanged over the fair value of new common
shares issued in 2014.
Earnings (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted
average number of common shares issued and outstanding. Net income (loss) attributable to common stockholders represents net
income (loss) adjusted for any preferred stock dividends, including any dividends declared, and any cumulative dividends related to
the current dividend period that have not been declared as of the end of the period. For 2014, net income attributable to common
stockholders also includes the one-time effect to retained earnings of the issuance of common stock in exchange for Series A through
E preferred stock. These transactions are discussed in Note 20 to the consolidated financial statements. Basic weighted average
common shares outstanding exclude unvested shares of restricted stock.
Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of
restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are
issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to
purchase common stock at the exercise date. The difference between the numbers of potential shares issued and potential shares
purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock
options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than potential shares
purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion
would have an antidilutive effect on earnings per share. Stock options not included in the computation of outstanding shares because
they were antidilutive amounted to 82,575; 101,435, and 113,158 for the years ended December 31, 2014, 2013, and 2012,
respectively. Warrants outstanding to purchase 1,285,899 shares of common stock and 1,411,185 unvested shares of restricted stock
were excluded from the computation of diluted earnings per share for the year 2013 because the Corporation reported a net loss
attributable to common stockholders for the period and their inclusion would have an antidilutive effect.
218
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 19 – STOCK-BASED COMPENSATION
Between 1997 and January 2007, the Corporation had the 1997 stock option plan that authorized the granting of up to 579,740
options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed
20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not
less than the fair market value of the stock on the date the option was granted. Stock options were fully vested upon grant. The
maximum term to exercise these options is 10 years. The 1997 stock option plan provides for a proportionate adjustment in the
exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock,
merger or reorganization, and certain other issuances and distributions such as stock appreciation rights.
On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue in full force and
effect, subject to their original terms. No awards of shares could be granted under the 1997 stock option plan as of its expiration.
The activity of stock options granted under the 1997 stock option plan for the year ended December 31, 2014 is set forth below:
Number of Weighted Average Contractual Term
Weighted Average Aggregate
Intrinsic
Value
Remaining
Options
Exercise Price
(Years)
(In thousands)
Beginning of year
Options expired
Options cancelled
End of year outstanding and exercisable
101,435 $
(12,795)
(6,065)
82,575 $
206.95
321.75
226.15
187.75
1.4 $
-
On April 29, 2008, the Corporation’s stockholders approved the First Bancorp 2008 Omnibus Incentive Plan, (the “Omnibus Plan”).
The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation
rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. The Omnibus Plan authorizes the issuance
of up to 8,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. The
Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and
authority to determine those eligible to receive awards and to establish the terms and conditions of any awards, subject to various limits and
vesting restrictions that apply to individual and aggregate awards.
Under the Omnibus Plan, during 2014, 379,573 shares of restricted stock were awarded to the Corporation’s independent directors
subject to vesting periods that range from 1 to 5 years. In addition, during 2014, the Corporation issued 840,138 shares of restricted stock
that will vest based on the employees’ continued service with the Corporation. Fifty percent (50%) of those shares vest in two years from
the grant date and the remaining 50% vest in three years from the grant date. Included in those 840,138 shares of restricted stock are
653,138 shares granted to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim
Final Rule, which permit TARP recipients to grant “long-term restricted stock” without violating the prohibition on paying or accruing
a bonus payment if it satisfies the following requirements: (i) the value of the grant may not exceed one-third of the amount of the
employee’s annual compensation, (ii) no portion of the grant may vest before two years after the grant date, and (iii) the grant must be
subject to a further restriction on transfer or payment as described below. Specifically, the stock that has otherwise vested may not
become transferable at any time earlier than as permitted under the schedule set forth by TARP, which is based on the repayment in
25% increments of the aggregate financial assistance received from the U.S. Treasury. Hence, notwithstanding the vesting period
mentioned above, the employees covered by TARP are restricted from transferring the shares. The U.S. Treasury confirmed that,
effective March 2014, it has recovered more than a 25% of its investment on First Bancorp. Therefore, the restriction on transfer
relating to 25% of the shares granted under TARP requirements was released.
The fair value of the shares of restricted stock granted in 2014 was based on the market price of the Corporation’s outstanding
common stock on the date of the grant. For the 653,138 shares of restricted stock granted under the TARP requirements, the market
price was discounted due to the postvesting transfer restrictions. For purposes of computing the discount, the Corporation estimated an
appreciation of 16% in the value of the common stock using the Capital Asset Pricing Model as a basis of what would be a market
participant’s expected return on the Corporation’s stock and assumed that the U.S. Treasury would hold its outstanding common stock
of the Corporation for two years, resulting in a fair value of $2.63 for restricted shares granted under the TARP requirements. Also,
the Corporation used empirical data to estimate employee termination; separate groups of employees that have similar historical
exercise behavior were considered separately for valuation purposes.
219
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes the restricted stock activity in 2014 under the Omnibus Plan for both executive
officers covered by the TARP requirements and other employees as well as for the independent directors:
Non-vested shares at beginning of year
Granted
Forfeited
Vested
Non-vested shares at end of year
2014
Number of
shares of
restricted
stock
Weighted
Average
Grant Date
Fair Value
1,411,185 $
1,219,711
(40,090)
(263,650)
2,327,156 $
3.04
3.75
3.53
3.31
3.39
For the years ended December 31, 2014, 2013 and 2012, the Corporation recognized $2.6 million, $1.6 million and $0.9 million,
respectively, of stock-based compensation expense related to restricted stock awards. As of December 31, 2014, there was $3.9
million of total unrecognized compensation cost related to nonvested shares of restricted stock. The weighted average period over
which the Corporation expects to recognize such cost is 2.1 years.
In 2013, the Corporation granted 26,780 shares of restricted stock to the independent directors subject to a one-year vesting period.
In addition, during 2013, the Corporation granted 716,405 shares of restricted stock that will vest based on the employees’ continued
service with the Corporation. 50% of those shares vest in two years from the grant date and the remaining 50% vest in three years
from the grant date. Included in those 716,405 shares of restricted stock are 582,905 shares granted to certain senior officers consistent
with the requirements of TARP. The employees covered by TARP are restricted from transferring the shares, subject to certain
conditions as explained above.
The fair value of the shares of restricted stock granted in 2013 was based on the market price of the Corporation’s outstanding
common stock on the date of the grant. However, for the 582,905 shares of restricted stock granted under the TARP requirements, the
market price was discounted due to the postvesting restrictions. For purposes of computing the discount, the Corporation assumed
appreciation of 13% in the value of the common stock and a holding period by the U.S. Treasury of its outstanding common stock of
the Corporation of two years, resulting in a fair value of $3.02 for restricted shares granted under the TARP requirements.
Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based
awards that will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a
significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the
period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an
adjustment is made to increase the estimated forfeiture rate, which will result in a decrease in the expense recognized in the financial
statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated
forfeiture rate, which will result in an increase in the expense recognized in the financial statements. When unvested options or shares
of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of
the forfeiture. Approximately, $0.1 million of compensation expense was reversed in each of years 2014 and 2013 related to forfeited
awards; no compensation expense was reversed in 2012.
Also, under the Omnibus Plan, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary
amounts paid to certain executive officers primarily by paying the increased salary amounts in the form of shares of the Corporation’s
common stock, instead of cash. During 2014, the Corporation issued 312,850 shares of common stock (2013 – 220,639 shares) with a
weighted average market value of $5.20 (2013 - $6.23 market value) as salary stock compensation. This resulted in a compensation
expense of $1.7 million recorded in 2014 (2013 – $1.4 million).
During 2014, the Corporation withheld 105,000 shares (2013 – 71,326 shares) from the common stock paid to certain senior officers
as additional compensation and 68,870 shares of restricted stock that vested during 2014 to cover employees’ payroll and income tax
withholding liabilities; these shares are held as treasury shares. The Corporation paid any fractional share of salary stock that the
officer was entitled to in cash. In the consolidated financial statements, the Corporation treats shares withheld for tax purposes as
common stock repurchases.
220
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 20 – STOCKHOLDERS’ EQUITY
Common Stock
As of December 31, 2014 and 2013, the Corporation had 2,000,000,000 authorized shares of common stock with a par value of
$0.10 per share. As of December 31, 2014 and 2013, there were 213,724,749 and 207,635,157 shares issued, respectively, and
212,984,700 and 207,068,978, shares outstanding, respectively. On July 30, 2009, the Corporation announced the suspension of
common and preferred stock dividends effective with the preferred dividend for the month of August 2009.
In 2014 and 2013, the Corporation granted 379,573 shares and 26,780 shares, respectively, of restricted stock under the Omnibus
Plan, to the independent directors subject to vesting periods ranging from one to five years. Also in 2014 and 2013, the Corporation
granted 840,138 shares and 716,405 shares, respectively, of restricted stock, to certain senior officers and certain other employees. The
restrictions on such restricted stock will lapse with respect to 50% over a two-year period and 50% over a three-year period. Included
in the shares of restricted stock granted in 2014 and 2013 are 653,138 shares and 582,905 shares, respectively, granted to certain senior
officers consistent with the requirements of TARP. Refer to Note 19 for additional details. The shares of restricted stock may vest more
quickly in the event of death, disability, retirement, or a change in control. Based on particular circumstances evaluated by the
Compensation Committee upon the termination of a holder of restricted stock, the Corporation’s Board of Directors may, with the
recommendation of the Compensation Committee, accelerate the vesting of the restricted stock held by such holder upon termination
of employment. Holders of restricted stock have the right to dividends or dividend equivalents, as applicable, during the restriction
period. Such dividends or dividend equivalents will accrue during the restriction period, but will not be paid until restrictions lapse.
The holder of restricted stock has the right to vote the shares.
In addition, in 2014, the Corporation issued 312,850 shares of common stock as increased compensation to certain executive
officers (2013 – 220,639 shares). Refer to Note 19 for additional details. As of December 31, 2014 and December 31, 2013, there were
2,327,156 and 1,411,185 shares of unvested restricted stock outstanding. During 2014, 40,090 shares of restricted stock were forfeited
(2013 – 58,985 shares) and the restrictions on 263,650 shares of restricted stock lapsed (2013 – 43,522 shares).
On August 16, 2013, certain of the Corporation’s existing stockholders completed a secondary offering of the Corporation’s
common stock. The U.S. Treasury sold 12 million shares of common stock, funds affiliated with Thomas H. Lee Partners, L.P.
(“THL”) sold 8 million shares of common stock, and funds managed by Oaktree Capital Management, L.P. (“Oaktree”) sold 8 million
shares of common stock. Subsequently, on September 11, 2013, the underwriters in the secondary offering exercised their option to
purchase an additional 2.9 million shares of common stock from the selling stockholders (1,261,356 shares from the U.S. Treasury,
840,903 shares from THL and 840,904 shares from Oaktree). The Corporation did not receive any proceeds from the offering. Non-
interest expenses for 2013 included approximately $1.7 million in costs associated with the secondary offering, including $1.1 million
paid by the Corporation for underwriting discounts and commissions.
During the fourth quarter of 2014, the U.S. Treasury sold 4.4 million shares of First BanCorp.’s common stock through its first pre-
defined written trending plan. On March 9, 2015, the U.S. Treasury announced the sale of an additional 5 million shares of First
Bancorp.’s common stock through its second pre-defined written trading plan. As of the announcement date, the U.S. Treasury held
10,291,553 shares, or 4.8%, of First Bancorp.’s common stock, excluding the common shares underlying the warrant owned by the
U.S. Treasury, and each of THL and Oaktree owned 19.7% of the Corporation’s outstanding common stock.
Preferred Stock
The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1, redeemable at the Corporation’s option
subject to certain terms. This stock may be issued in series and the shares of each series will have such rights and preferences as are
fixed by the Board of Directors when authorizing the issuance of that particular series. As of December 31, 2014, the Corporation has
five outstanding series of non-convertible, non-cumulative preferred stock: 7.125% non-cumulative perpetual monthly income
preferred stock, Series A; 8.35% non-cumulative perpetual monthly income preferred stock, Series B; 7.40% non-cumulative
perpetual monthly income preferred stock, Series C; 7.25% non-cumulative perpetual monthly income preferred stock, Series D; and
7.00% non-cumulative perpetual monthly income preferred stock, Series E. The liquidation value per share is $25.
221
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Effective January 17, 2012, the Corporation delisted all of its outstanding series of non-convertible, non-cumulative preferred stock
from the New York Stock Exchange. The Corporation has not arranged for listing and/or registration on another national securities
exchange or for quotation of the Series A through E Preferred Stock in a quotation medium. During the first quarter of 2013, the
Corporation commenced an offer to issue shares of its common stock in exchange for any and all of the remaining issued and
outstanding shares of Series A through E non-cumulative perpetual monthly income preferred stock. The offer was terminated on
April 9, 2013 given that the Corporation did not receive the consent required from holders of shares of the Series A through E
preferred stock to amend the certificate of designation of each series of the Series A through E Preferred Stock (the Preferred Stock
Amendment). The Preferred Stock Amendment was a condition to the completion of the exchange offer. In addition, the consent
solicitation was terminated, and no consent fee became payable with respect to consents granted in favor of the Preferred Stock
Amendment. All shares of the Series A through E Preferred Stock that were tendered were returned promptly to the tendering holders.
In 2014, the Corporation issued an aggregate of 4,597,121 shares of its common stock in exchange for an aggregate of 1,077,726
shares of the Corporation’s Series A through E Preferred Stock, having an aggregate liquidation value of $26.9 million. The shares of
common stock were issued to holders of the Series A through E Preferred Stock in separate and unrelated transactions in reliance upon
the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, as amended, for securities exchanged by an issuer with
existing security holders where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting
such exchange. The exchange resulted in a decrease in the carrying (liquidation) value of the Series A through E preferred stock of
$26.9 million, and common stock and additional paid-in capital was increased in the amount of the fair value of the common stock
issued. The Corporation recorded the par value of the shares issued as common stock ($0.10 per common share) or $0.5 million. The
excess of the common stock fair value over the par value, or $23.9 million, was recorded in additional paid-in capital. The excess of
the carrying amount of the shares of preferred stock over the fair value of the shares of common stock, or $1.7 million, was recorded
as an increase to retained earnings and an increase in earnings per common share computation.
The results of the exchange with respect to Series A through E preferred stock were as follows:
Title of Securities
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
7.00% Noncumulative Perpetual
Monthly Income Preferred
Stock, Series E
Shares of
Preferred
stock
outstanding
prior to
exchange
Liquidation
preference per
share
Shares of
preferred
stock
exchanged
Shares of
preferred
stock
outstanding
after exchange
Aggregate
liquidation
preference
after exchange
(In thousands)
Shares of
common stock
issued
$25
$25
$25
$25
$25
450,195
252,809
197,386 $
4,935
1,081,652
475,987
179,841
296,146
7,404
769,379
460,611
210,759
249,852
6,246
890,830
510,592
225,070
285,522
7,138
961,724
624,487
2,521,872
209,247
1,077,726
415,240
1,444,146 $
10,381
36,104
893,536
4,597,121
222
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Treasury stock
During 2014 and 2013, the Corporation withheld an aggregate of 173,870 shares and 71,326 shares, respectively, of the common
stock paid to certain senior officers as additional compensation and restricted stock that vested during 2014 to cover employees’
payroll and income tax withholding liabilities; these shares are also held as treasury shares. As of December 31, 2014 and 2013, the
Corporation had 740,049 and 566,179 shares held as treasury stock, respectively.
FirstBank Statutory Reserve (Legal Surplus)
The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be
transferred to legal surplus until such surplus equals the total of paid-in capital on common and preferred stock. Amounts transferred
to the legal surplus account from the retained earnings account are not available for distribution to the stockholders without the prior
consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law 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 the Bank cannot pay dividends until it can replenish the reserve fund to an amount of at least 20% of the original capital
contributed. During 2014, $40.0 million was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part
of retained earnings in the Corporation’s statement of financial condition, amounted $40.0 million as of December 31, 2014 (2013 -
$0).
NOTE 21 – EMPLOYEES’ BENEFIT PLAN
FirstBank provides contributory retirement plans pursuant to Section 1081.01 of the Puerto Rico Internal Revenue Code of 2011 for
Puerto Rico employees and Section 401(k) of the U.S. Internal Revenue Code for USVI and U.S. employees (the “Plans”). All
employees are eligible to participate in the Plans after three months of service for purposes of making elective deferral contributions
and one year of service for purposes of sharing in the Bank’s matching, qualified matching, and qualified nonelective contributions.
Under the provisions of the Plans, the Bank contributes 25% of the first 4% of the participant’s compensation contributed to the Plans
on a pretax basis. Participants were permitted to contribute up to $13,000 for 2012, and $15,000 for each of 2013 and 2014 ($17,000
for 2012, and $17,500 for each of 2013 and 2014 for USVI and U.S. employees). Additional contributions to the Plans are voluntarily
made by the Bank as determined by its Board of Directors. No additional discretionary contributions were made for the years ended
December 31, 2014, 2013 and 2012. The Bank had a total plan expense of $2.2 million for the year ended December 31, 2014,
$0.8 million for 2013, and $0.7 million for 2012.
223
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 22 –OTHER NON-INTEREST INCOME
A detail of other non-interest income is as follows:
2014
Year Ended December 31,
2013
(In thousands)
2012
Non-deferrable loan fees
Commissions and fees-broker-dealer-related
Lower of cost or market adjustment-commercial and construction
loans held for sale
Credit card loans interchange and other fees
Other
Total
$
2,238 $
459
2,248 $
97
5,090
2,630
-
6,204
21,590
(1,503)
6,694
20,640
-
7,239
11,772
$
30,491 $
28,176 $
26,731
NOTE 23 –OTHER NON-INTEREST EXPENSE
A detail of non-interest expenses is as follows:
Supplies and printing
Contingency adjustment-tax credits
Reserve release for off-balance sheet exposures
Contingency for attorney's fees-Lehman
Amortization of intangible assets
Data processing fees
Write-down and losses on sale of non-real estate
repossessed properties
Other
Year Ended December 31,
2014 2013 2012
$
(In thousands)
3,014 $
-
(443)
2,500
6,078
1,601
2,140 $
-
(653)
-
4,943
1,619
2,811
2,489
(1,914)
-
3,306
1,568
737
338
10,253 15,632 13,324
263
Total
$ 19,039 $ 28,645 $ 21,922
224
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 24 – INCOME TAXES
Income tax expense includes Puerto Rico and USVI income taxes as well as applicable United States (“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. and USVI income tax purposes and is generally subject to U.S. and USVI income
tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business
in those regions. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions
and limitations.
Under the Puerto Rico Internal Revenue Code of 2011 as amended (the “2011 PR Code”), the Corporation and its subsidiaries are
treated as separate taxable entities and are not entitled to file a consolidated tax return and, thus, the Corporation is not able to utilize
losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from an NOL, a
particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carryforward period. The 2011
PR Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in
Puerto Rico and 85% on dividends received from other taxable domestic corporations.
225
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 an
International Banking Entity (“IBE”) unit of the Bank and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose
interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. The IBE 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 on the specific activities identified in the IBE Act. An IBE that operates as a unit of
a bank pays income taxes at normal rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income.
The components of income tax expense are summarized below:
Current income tax expense
Deferred income tax benefit (expense)
Total income tax benefit (expense)
2014
Year Ended December 31,
2013
(In thousands)
2012
$
$
(5,361) $
306,010
300,649 $
(7,947) $
2,783
(5,164) $
(5,357)
(575)
(5,932)
The differences between the income tax expense applicable to income before the provision for income taxes and the
amount computed by applying the statutory tax rate in Puerto Rico were as follows:
2014
2013
2012
Year Ended December 31,
Amount
% of Pretax
Income
% of Pretax
Income
Amount
(Dollars in thousands)
Amount
% of Pretax
Income
Computed income tax at
statutory rate
Federal and state taxes
Adjustment in deferred tax due
to change in tax rate
Benefit of net exempt income
National receipts tax, net
Nontax deductible expenses
(Decrease) increase in
unrecognized tax benefits,
including interest
Deferred tax valuation allowance
Other-net
Total income tax
benefit (expense)
$
(35,738)
(117)
(39.0)%
(0.1)%
$
62,136
(136)
(346)
15,202
628
(193)
1,763
318,380
1,070
(0.4)%
17.0%
0.7%
(0.2)%
2.0%
347.0%
1.2%
39.0%
(0.0)%
67.0%
(8.4)%
0.3%
(0.1)%
106,717
(13,320)
552
(146)
(3,218)
(157,449)
(300)
(2.0)%
(98.8)%
(0.2)%
$
(10,714)
-
-
(3,627)
-
(2,417)
(238)
9,602
1,462
(30.0)%
-
-
(10.1)%
-
(6.8)%
(0.7)%
26.9%
4.1%
$
300,649
328.2%
$
(5,164)
(3.2)%
$
(5,932)
(16.6)%
226
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation's deferred tax
assets and liabilities as of December 31, 2014 and 2013 were as follows:
December 31,
2014
2013
(In thousands)
$
Deferred tax asset:
Net operating loss and charitable contribution carryforward available
Allowance for loan and lease losses
Tax credits available for carryforward
Unrealized loss on OREO valuation
Unrealized net loss on equity investment
Settlement payment-closing agreement
Legal reserve
Impairment on investment
Reserve for insurance premium cancellations
Unrealized losses on derivatives activities
Unrealized loss on available-for-sale securities, net
Other
Gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Unrealized gain on available-for-sale securities, net
Differences between the assigned values and tax bases of asset
and liabilities recognized in purchase business combinations
Unrealized gain on other investments
Other
Gross deferred tax liabilities
387,388 $
85,048
11,659
11,517
7,752
7,313
3,239
3,212
560
58
-
9,848
527,594
(204,587)
323,007
1,091
811
468
7,593
9,963
Net deferred tax assets
$
313,044 $
373,253
108,811
7,616
13,104
12,273
7,313
3,285
2,409
687
1,415
337
8,736
539,239
(522,708)
16,531
-
1,034
625
7,228
8,887
7,644
For 2014, the Corporation recorded an income tax benefit of $300.6 million compared to an income tax expense of $5.2 million for
2013. The income tax benefit for 2014 primarily reflects a $302.9 million reversal of the valuation allowance of FirstBank’s deferred
tax assets. In addition, the variance includes a net change of $3.7 million related to adjustments to the reserve for uncertain tax
positions, partially offset by the impact in 2013 of a net benefit of approximately $1.3 million related to the increase in the deferred
tax asset of profitable subsidiaries due to changes in statutory tax rates.
As a result of the partial reversal, the Corporation’s net deferred tax assets amounted to $313.0 million as of December 31, 2014,
net of a valuation allowance of $204.6 million.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their
deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be
realized.
227
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Management assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of
whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation of
positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available
to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income
forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning
strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking
into account statutory, judicial, and regulatory guidance.
In 2010, the Corporation established a valuation allowance for substantially all of the deferred tax assets of its banking subsidiary,
FirstBank, primarily due to the realization of significant losses driven by charges to the provision for loan losses, a three-year
cumulative loss position as of the end of year 2010, and uncertainty regarding the amount of future taxable income that the Bank could
forecast. Prior to the fourth quarter of 2014, based on the assessment of all positive and negative evidence, management concluded
that there was no sufficient evidence to conclude that it was more likely than not that FirstBank would realize the benefits associated
with deferred tax assets; accordingly the Corporation maintained a valuation allowance for substantially all of FirstBank’s deferred tax
assets.
After completion of the deferred tax asset valuation allowance analysis for the fourth quarter 2014, management concluded that, as
of December 31, 2014, it is more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL
carry-forward periods to realize $313.0 million of its deferred tax assets and, therefore, reversed $302.9 million of the valuation
allowance. This conclusion was reached after weighting all of the evidence and determining that the positive evidence outweighted the
negative evidence. The positive evidence considered by management in arriving at its conclusion to partially reverse the valuation
allowance includes factors such as the completion of a sixth consecutive quarter of profitability, forecasts of future profitability under
several potential scenarios that support the partial utilization of NOLs prior to their expiration between 2021 through 2024, sustained
pre-tax, pre-provision income, which demonstrate demand for FirstBank’s products and services, and improvements in credit quality
measures and credit policy enhancements that have resulted in reduced credit exposures and improve both the sustainability of
profitability and management’s ability to forecast future credit losses, among others. The negative evidence considered by
management includes the fact that the Bank remains in a three-year cumulative pre-tax loss position of $51.8 million due to significant
charges to the provision for loan losses as a result of the bulk sales of adversely classified and non-performing assets in 2013,
however, this loss position is significantly down from the three-year cumulative pre-tax loss position of $860.3 million as of
December 31, 2010. Additional negative evidence considered was the still elevated levels of non-performing assets, Puerto Rico’s
current economic conditions, and the FDIC Consent Order.
In determining whether management’s projections of future taxable income used to determine the valuation allowance reversal are
reliable, management considered objective evidence supporting the forecast’s assumptions as well as recent experience to conclude as
to Bank’s ability to reasonably project future results of operations. The analysis included the evaluation of multiple financial
scenarios, including scenarios where credit losses remain elevated. Further, while Puerto Rico’s economy is expected to remain
challenging due to inherent uncertainties, the Corporation believes that it can reasonably forecast future taxable income at sufficient
levels over the future period of time that FirstBank has available to realize part of the December 31, 2014 net deferred tax asset as
further described below.
The Corporation expects to realize approximately $188.4 million of deferred tax assets associated with FirstBank’s NOLs prior to
their expiration periods. In addition, as of December 31, 2014, approximately $124.6 million of the net deferred tax assets are
attributable to temporary differences or tax credit carry-forwards that have no expiration date. Approximately $10.7 million of other
non-NOL related deferred tax assets are fully reserved with a valuation allowance given limitations and uncertainties as to their future
utilization. As a result of the partial reversal, the Corporation’s deferred tax assets amounted to $313.0 million as of December 31,
2014, net of a valuation allowance of $204.6 million. The ability to recognize the remaining deferred tax assets that continue to be
subject to a valuation allowance will be evaluated on a quarterly basis to determine if there are any significant events that would affect
the ability to utilize these deferred tax assets.
228
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Management’s conclusion that it more likely than not that $313.0 million of net deferred tax assets will be realized is based, among
other things, on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on
internal projections which consider historical performance, multiple internal scenarios and assumptions, as well as external data that
management believes is reasonable. If events are identified that affect the Corporation’s ability to utilize its deferred tax assets, the
analysis will be updated to determine if any adjustments to the valuation allowance are required. If actual results differ significantly
from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation
allowance may need to be increased. Such an increase could have a material adverse effect on the Corporation’s financial condition
and results of operations. Conversely, better than expected results and continued positive results and trends could result in further
releases to the deferred tax valuation allowance, any such decreases could have a material positive effect on the Corporation’s
financial condition and results of operations.
In February 2015, the Governor of Puerto Rico announced a proposal for a new tax code that would, among other things, replace
the current 7% sales and use tax with a 16% value-added tax, while lowering income taxes. While legislation for the new tax code has
been introduced, it is too early to determine what changes will be made during the legislative process. Legislative changes in tax laws,
could adversely impact the results of operations.
The authoritative accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns.
Under this guidance, income tax benefits are recognized and measured based upon a two-step analysis: 1) a tax position must be more
likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the
largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit
recognized under this analysis and the tax benefit claimed on a tax return is referred to as an UTB.
The following table reconciles the balance of UTBs:
Balance at January 1,
(Decrease) increase related to positions taken during
prior years
Decrease related to settlement with taxing authorities
Balance at December 31,
2014
2013
(In thousands)
2012
4,310 $
2,374 $
2,374
(1,763)
(2,547)
- $
1,936
-
4,310 $
-
-
2,374
$
$
As of December 31, 2014, the Corporation did not have UTBs recorded on its books. The years 2007 through 2009 were examined
by the IRS and disputed issues, primarily related to the disallowance of certain expenses, were taken to administrative appeals during
2011. As a result of a final settlement with the IRS Appeals office during 2014, the Corporation released a portion of its reserve for
uncertain tax positions resulting in a tax benefit of $1.8 million and paid $2.5 million to settle the tax liability resulting from the audit.
Such settlement did not have an impact on the effective tax rate.
The Corporation’s liability for income taxes includes the estimate of interest not yet paid related to the settlement reached with the
IRS to close the tax years 2007 through 2009. The Corporation classifies all interest and penalties, if any, related to tax uncertainties
as income tax expense. As of December 31, 2014, the Corporation’s accrued interest that relates to the IRS examination amounted to
$1.4 million and there was no need to accrue for the payment of penalties. Audit periods remain open for review until the statute of
limitations has passed. The statute of limitations under the 2011 PR Code is 4 years; the statutes of limitations for Virgin Islands and
U.S. income tax purposes are each three years after a tax return is due or filed, whichever is later. The completion of an audit by the
taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the
Corporation’s liability for income taxes. Any such adjustment could be material to results of operations for any given quarterly or
annual period based, in part, upon the results of operations for the given period. For Virgin Islands and U.S. income tax purposes, all
tax years subsequent to 2010 remain open to examination. The 2012 tax year is currently under examination by the IRS. For Puerto
Rico purposes, all tax years subsequent to 2010 remain open to examination as the Puerto Rico Department of Treasury concluded its
examination of the 2010 tax year.
229
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In 2013, the Puerto Rico Government approved Act No. 40, (“Act 40”), known as the “Tax Burden Adjustment and Redistribution
Act,” which amended the 2011 PR Code. One of the main provisions of Act 40 that impacted financial institutions was the national
gross receipts tax. The national gross receipts tax for financial institutions is computed on the basis of 1% of gross income, net of
allowable exclusions. Subject to certain limitations, a financial institution is able to claim a credit of 0.5% of its gross income against
its regular income tax or the alternative minimum tax (“AMT”). The Corporation’s national gross receipts tax expense for the year
ended December 31, 2014 amounted to $5.7 million compared to $5.9 million recorded for 2013. This expense is included as part of
“Taxes, other than income taxes” in the consolidated statement of income (loss). In 2014, the Corporation recorded a $2.9 million
benefit related to this credit as a reduction to the provision for income taxes compared to a benefit of $3.0 million recorded in 2013.
On December 22, 2014, the Governor of Puerto Rico signed Act No. 238, which amended the 2011 PR Code. Act No. 238 clarifies
that the national gross receipts tax will not be applicable to taxable years starting after December 31, 2014.
NOTE 25 – LEASE COMMITMENTS
As of December 31, 2014, certain premises are leased with terms expiring through the year 2036. The Corporation has the option to
renew or extend certain leases beyond the original term. Some of these leases require the payment of insurance, increases in property
taxes, and other incidental costs. As of December 31, 2014, the obligation under various leases is as follows:
2015
2016
2017
2018
2019
2020 and later years
Total
Amount
(In thousands)
$
$
8,683
8,097
7,261
6,744
5,936
31,238
67,959
Rental expense included in occupancy and equipment expense was $10.6 million in 2014 (2013 - $10.2 million; 2012- $9.7 million).
230
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 26 – FAIR VALUE
Fair Value Measurement
The FASB authoritative guidance for fair value measurement 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. This guidance also establishes a fair value hierarchy for classifying
financial instruments. The hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are
observable or unobservable. Three levels of inputs may be used to measure fair value:
Level 1 Valuations of Level 1 assets and liabilities are obtained from readily available pricing sources for market transactions
involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that trade in an active
exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate
debt securities that are traded by dealers or brokers in active markets.
Level 2 Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-
backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt
securities with quoted prices that are traded less frequently than exchange-traded instruments, and (iii) derivative
contracts whose value is determined using a pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data.
Level 3 Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market
activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models for which the determination of fair value requires
significant management judgment or estimation.
For 2014, there have been no transfers into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy.
Financial Instruments Recorded at Fair Value on a Recurring Basis
Investment securities available for sale
The fair value of investment securities was the market value based on quoted market prices (as is the case with equity securities,
Treasury notes, and non-callable U.S. Agency debt securities), when available (Level 1), or market prices for identical or comparable
assets (as is the case with MBS and callable U.S. agency debt) 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 (Level 2). 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, as is the
case with certain private label mortgage-backed securities held by the Corporation (Level 3).
Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States; the interest
rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted average coupon of the underlying collateral. The
market valuation 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 based on a nonrated security. The market
valuation is derived from a model that utilizes relevant assumptions such as the prepayment rate, default rate, and loss severity on a
loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis
according to collateral attributes of the underlying mortgage pool (i.e., loan term, current balance, note rate, rate adjustment type, rate
adjustment frequency, rate caps, and others) in combination with prepayment forecasts obtained from a commercially available
prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss
assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics
(loan-to-value, state, origination date, property type, occupancy, loan purpose, documentation type, debt-to-income ratio, and other) to
provide an estimate of default and loss severity.
231
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Refer to the table below for further information regarding qualitative information for all assets and liabilities measured at fair value
using significant unobservable inputs (Level 3).
Derivative instruments
The fair value of most of the Corporation’s derivative instruments is based on observable market parameters and takes into
consideration the credit risk component of paying counterparties when appropriate, except when collateral is pledged. That is, on
interest rate swaps, the credit risk of both counterparties is included in the valuation; and, on options and caps, only the seller's credit
risk is considered. The derivative instruments, namely swaps and caps, were valued using a discounted cash flow approach using the
related LIBOR and swap rate for each cash flow. Derivatives include interest rate swaps used for protection against rising interest
rates. For these interest rate swaps, a credit component was not considered in the valuation since the Corporation has fully
collateralized with investment securities any mark-to-market loss with the counterparty and, if there were market gains, the
counterparty had to deliver collateral to the Corporation.
Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in
full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments in 2014, 2013 and 2012 was
immaterial.
Assets and liabilities measures at fair value on a recurring basis are summarized below:
(In thousands)
Level 1
Level 2
Level 3
Assets/Liabilities
at Fair Value
Level 1
Level 2
Level 3
Assets/Liabilities
at Fair Value
As of December 31, 2014
Fair Value Measurements Using
As of December 31, 2013
Fair Value Measurements Using
Assets:
Securities available for sale :
Equity securities
U.S. Treasury Securities
Noncallable U.S. agency debt
Callable U.S. agency debt and MBS
Puerto Rico government obligations
Private label MBS
Derivatives, included in assets:
Interest rate swap agreements
Purchased interest rate cap agreements
Forward contracts
Liabilities:
Derivatives, included in liabilities:
Interest rate swap agreements
Written interest rate cap agreement
Forward contracts
$
- $
7,499
-
-
-
-
-
-
-
-
-
-
- $
-
228,157
1,653,140
40,658
-
- $
-
-
-
2,564
33,648
- $
33 $
7,499
228,157
1,653,140
43,222
33,648
7,499
-
-
-
-
- $
-
200,903
1,677,651
48,904
-
- $
-
-
-
2,426
40,866
33
7,499
200,903
1,677,651
51,330
40,866
33
6
-
33
6
148
-
-
-
-
-
-
33
6
-
33
6
148
-
-
-
-
-
-
162
58
174
3,965
58
-
-
-
-
-
-
-
162
58
174
3,965
58
-
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2014, 2013, and 2012:
Level 3 Instruments Only
(In thousands)
Beginning balance
Total gain (losses) (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases
Sales
Principal repayments and amortization
Ending balance
2014
Securities Available
for Sale (1)
2013
Securities Available
for Sale (1)
2012
Securities Available
for Sale (1)
$
$
43,292 $
54,617 $
(388)
2,404
5,123
(4,855)
(9,364)
36,212 $
(117)
2,795
-
-
(14,003)
43,292 $
65,463
(2,002)
6,036
-
(1,450)
(13,430)
54,617
___________________
(1) Amounts mostly related to private label mortgage-backed securities.
232
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The table below presents qualitative information for all assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as of December 31, 2014:
(In thousands)
Fair Value
Valuation Technique
Unobservable Input
Range
December 31, 2014
Investment securities available for sale:
Private label MBS
$
33,648 Discounted cash flows
Discount rate
Prepayment rate
Projected Cumulative Loss Rate
14.5%
19.89% -100% (Weighted
Average 32%)
0.64% - 80.0% (Weighted
Average 7.9%)
Puerto Rico Government Obligations
2,564 Discounted cash flows
Prepayment rate
5.61%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption
and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default,
loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the
instruments. Meaningful and possible shifts of each input were modeled to assess the effect on the fair value estimation.
Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed
prepayment rate. A significant increase (decrease) in the assumed rate would lead to a higher (lower) fair value estimate. Loss severity
and probability of default are not included as significant unobservable variables because the note is guaranteed by the Puerto Rico
Housing Finance Authority (“PRHFA”). The PRHFA credit risk is modeled by discounting the cash flows using a curve appropriate to
the PRHFA credit rating.
The table below summarizes changes in unrealized gains and losses recorded in earnings for the years ended December 31, 2014,
2013, and 2012 for Level 3 assets and liabilities that are still held at the end of each year:
Level 3 Instruments Only
(In thousands)
Changes in unrealized losses relating to assets
still held at reporting date:
Net impairment losses on available-for-sale investment
securities (credit component)
Changes in
Unrealized Losses
(Year Ended
December 31, 2014)
Securities Available
for Sale
Changes in
Unrealized Losses
(Year Ended
December 31, 2013)
Securities Available
for Sale
Changes in
Unrealized Losses
(Year Ended
December 31, 2012)
Securities Available
for Sale
$
(388) $
(117) $
(2,002)
Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value
usually result from the application of lower-of-cost or market accounting (e.g., loans held for sale carried at the lower-of-cost or fair
value and repossessed assets) or write-downs of individual assets (e.g., goodwill, loans).
233
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2014, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-
recurring basis as shown in the following table:
Carrying value as of December 31, 2014
Level 2
Level 3
Level 1
(In thousands)
(Losses) Gain recorded for the Year
Ended December 31, 2014
Loans receivable (1)
OREO (2)
Mortgage servicing rights (3)
Loans Held for Sale (4)
$
- $
-
-
-
- $
-
-
-
446,816 $
124,003
22,838
54,641
(43,318)
(9,656)
(228)
-
(1) Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the
collateral. The fair values were derived from external appraisals that take into consideration prices in observed transactions
involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral
(e.g., absorption rates), which are not market observable.
(2) The fair value was derived from appraisals that take into consideration prices in observed transactions involving similar
assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption
rates and net operating income of income producing properties), which are not market observable. Losses
were related to market valuation adjustments after the transfer of the loans to the OREO portfolio.
(3) Fair value adjustments to mortgage servicing rights were mainly due to assumptions associated with mortgage
prepayment rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at
fair value on a non-recurring basis. Assumptions for the value of mortgage servicing rights include: Prepayment rate
9.74%, Discount rate 10.60%.
(4) The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans, and for
loans with signed sale agreements, the value was determined based on the sales price on such agreements.
As of December 31, 2013, impairment or valuation adjustments were recorded for assets recognized at fair value on a nonrecurring
basis as shown in the following table:
Carrying value as of December 31, 2013
Level 3
Level 2
Level 1
(In thousands)
(Losses) Gain recorded for the Year
Ended December 31, 2013
Loans receivable (1)
OREO (2)
Mortgage servicing rights (3)
Loans Held For Sale (4)
$
- $
-
-
-
- $
-
-
-
465,191 $
160,193
21,987
54,801
(13,928)
(25,698)
460
(338)
(1) Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the
collateral. The fair values were derived from external appraisals that take into consideration prices in observed transactions
involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g.,
absorption rates), which are not market observable.
(2) The fair value was derived from appraisals that take into consideration prices in observed transactions involving similar assets in
similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating
income of income producing properties), which are not market observable. Losses were related to market valuation adjustments
after the transfer of the loans to the OREO portfolio.
(3) Fair value adjustments to the mortgage servicing rights were mainly due to assumptions associated with mortgage prepayments
rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-
recurring basis. Assumptions for the value of mortgage servicing rights include: Prepayment rate 8.90%, Discount rate 10.60%.
(4) The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans, and for loans
with signed sale agreements, the value was determined based on the sales price on such agreements.
234
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2012, impairment or valuation adjustments were recorded for assets recognized at fair value on a nonrecurring
basis as shown in the following table:
Carrying value as of December 31, 2012
Level 2
Level 3
Level 1
(In thousands)
(Losses) Gain recorded for the Year
Ended December 31, 2012
Loans receivable (1)
OREO (2)
Mortgage servicing rights (3)
Loans Held For Sale (4)
$
- $
-
-
-
- $
-
-
-
757,152 $
185,764
17,524
2,641
(110,457)
(8,851)
(394)
(2,168)
(1) Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the
collateral. The fair values were derived from external appraisals that take into consideration prices in observed transactions
involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g.,
absorption rates), which are not market
observable.
(2) The fair value was derived from appraisals that take into consideration prices in observed transactions involving similar assets in
similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating
income of income producing properties), which are not market observable. Losses were related to market valuation adjustments
after the transfer of the loans to the OREO portfolio.
(3) Fair value adjustments to the mortgage servicing rights were mainly due to assumptions associated with mortgage prepayments
rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-recurring
basis. Assumptions for the value of mortgage servicing rights include: Prepayment rate 11.15%, Discount rate 12.08%.
(4) Relates to $5.2 million Commercial and Industrial and Commercial Mortgage Loans transferred to held for sale during the fourth
quarter of 2012, which were recorded at a value of $2.6 million.
Qualitative information regarding the fair value measurements for Level 3 financial instruments are as follows:
Loans
OREO
Method
Income, Market, Comparable
Sales, Discounted Cash Flows
Income, Market, Comparable
Sales, Discounted Cash Flows
December 31, 2014
Inputs
External appraised values; probability weighting of broker price
opinions; management assumptions regarding market trends or other
relevant factors
External appraised values; probability weighting of broker price
opinions; management assumptions regarding market trends or other
relevant factors
Mortgage servicing rights Discounted Cash Flows
Weighted average prepayment rate of 9.74%; weighted average discount
rate of 10.60%
The following is a description of the valuation methodologies used for instruments that are not measured or reported at fair value on
a recurring basis or reported at fair value on a non-recurring basis. The estimated fair value was calculated using certain facts and
assumptions, which vary depending on the specific financial instrument.
Cash and due from banks and money market investments
The carrying amounts of cash and due from banks and money market investments are reasonable estimates of their fair value.
Money market investments include held-to-maturity securities, which have a contractual maturity of three months or less. The fair
value of these securities is based on quoted market prices in active markets that incorporate the risk of nonperformance.
Other equity securities
Equity or other securities that do not have a readily available fair value are stated at their net realizable value, which management
believes is a reasonable proxy for their fair value. This category is principally composed of stock that is owned by the Corporation to
comply with FHLB regulatory requirements. The realizable value of the FHLB stock equals its cost as this stock can be freely
redeemed at par.
235
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Loans receivable, including loans held for sale
The fair value of loans held for investment and of mortgage loans held for sale was estimated using discounted cash flow analyses,
based on interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the
Corporation’s management believes a market participant would consider in determining fair value. Loans were classified by type, such
as commercial, residential mortgage, and automobile. These asset categories were further segmented into fixed-and adjustable-rate
categories. Valuations are carried out based on categories and not on a loan-by-loan basis. The fair values of performing fixed-rate
and adjustable-rate loans were calculated by discounting expected cash flows through the estimated maturity date. This fair value is
not currently an indication of an exit price as that type of assumption could result in a different fair value estimate. The fair value of
credit card loans was estimated using a discounted cash flow method and excludes any value related to a customer account
relationship. Other loans with no stated maturity, like credit lines, were valued at book value. Prepayment assumptions were
considered for non-residential loans. For residential mortgage loans, prepayment estimates were based on a prepayments model that
combined both a historical calibration and current market prepayment expectations. Discount rates were based on the U.S. Treasury
and LIBOR/Swap Yield Curves at the date of the analysis, and included appropriate adjustments for expected credit losses and
liquidity. For impaired collateral dependent loans, the impairment was primarily measured based on the fair value of the collateral,
which is derived from appraisals that take into consideration prices in observable transactions involving similar assets in similar
locations. The market valuation of the loans acquired from Doral in the second quarter of 2014 was derived from a model that utilizes
relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The cash flows were modeled using
a static cash flow analysis discounted by yields observed in the secondary market and in combination with prepayment forecasts. Loss
assumptions were driven by a combination of default and loss severity estimates, taking into account loan credit characteristics (loan-
to-value, Puerto Rico market, loan type, delinquency status, loan terms, and other), with higher default rates applied to loans acquired
with evidence of credit deterioration.
Deposits
The estimated fair value of demand deposits and savings accounts, which are deposits with no defined maturities, equals the amount
payable on demand at the reporting date. The fair values of retail fixed-rate time deposits, with stated maturities, are based on the
present value of the future cash flows expected to be paid on the deposits. The cash flows were based on contractual maturities; no
early repayments were assumed. Discount rates were based on the LIBOR yield curve.
The estimated fair value of total deposits excludes the fair value of core deposit intangibles, which represent the value of the
customer relationship measured by the value of demand deposits and savings deposits that bear a low or zero rate of interest and do
not fluctuate in response to changes in interest rates. The fair value of brokered CDs, which are included within deposits, is
determined using discounted cash flow analyses over the full term of the CDs.
The fair value of the CDs is computed using the outstanding principal amount. The discount rates used were based on brokered CD
market rates as of the end of the year. The fair value does not incorporate the risk of nonperformance, since interests in brokered CDs
are generally sold by brokers in amounts of less than $250,000 and, therefore, insured by the FDIC.
Securities sold under agreements to repurchase
Some repurchase agreements reprice at least quarterly, and their outstanding balances are estimated to be their fair value. Where
longer commitments are involved, fair value is estimated using exit price indications of the cost of unwinding the transactions as of the
end of the reporting period. The brokers who are the counterparties provide these indications. Securities sold under agreements to
repurchase are fully collateralized by investment securities.
Advances from FHLB
The fair value of advances from the FHLB with fixed maturities is determined using discounted cash flow analyses over the full
term of the borrowings, using indications of the fair value of similar transactions. The cash flows assume no early repayment of the
borrowings. Discount rates are based on the LIBOR yield curve. Advances from the FHLB are fully collateralized by mortgage loans
and, to a lesser extent, investment securities.
236
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Other borrowings
Other borrowings consist of junior subordinated debentures. Projected cash flows from the debentures were discounted using the
Bloomberg BB Finance curve plus a credit spread. This credit spread was estimated 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 debentures.
The following table presents the estimated fair value and carrying value of financial instruments as of December 31, 2014 and
2013:
Total Carrying Amount in
Statement of Financial Condition
December 31, 2014
Fair Value Estimate
December 31, 2014
(In thousands)
Level 1
Level 2
Level 3
$
$
Assets:
Cash and due from banks and money
market investments
Investment securities available
for sale
Other equity securities
Loans held for sale
Loans, held for investment
Less: allowance for loan and lease losses
Loans held for investment, net of
allowance
Derivatives included in assets
Liabilities:
Deposits
Securities sold under agreements to
repurchase
Advances from FHLB
Other borrowings
Derivatives included in liabilities
796,108 $
796,108 $
796,108 $
- $
-
1,965,666
25,752
77,888
7,499
-
-
1,921,955
25,752
23,247
36,212
-
54,641
1,965,666
25,752
76,956
9,262,436
(222,395)
9,040,041
39
8,844,659
39
9,483,945
9,486,325
900,000
325,000
231,959
187
958,715
324,376
162,344
187
-
-
-
-
-
-
-
-
39
8,844,659
-
9,486,325
-
958,715
324,376
-
187
-
-
162,344
-
$
$
Assets:
Cash and due from banks and money
market investments
Investment securities available
for sale
Other equity securities
Loans held for sale
Loans, held for investment
Less: allowance for loan and lease
losses
Loans held for investment, net of
allowance
Derivatives included in assets
Liabilities:
Deposits
Securities sold under agreements to
repurchase
Advances from FHLB
Other borrowings
Derivatives included in liabilities
Total Carrying Amount in
Statement of Financial Condition
December 31, 2013
Fair Value Estimate
December 31, 2013
(In thousands)
Level 1
Level 2
Level 3
655,671 $
655,671 $
655,671 $
- $
-
1,978,282
28,691
76,684
7,532
-
-
1,927,458
28,691
21,883
43,292
-
54,801
1,978,282
28,691
75,969
9,636,170
(285,858)
9,350,312
394
9,127,234
394
9,879,924
9,898,615
900,000
300,000
231,959
4,023
976,151
297,523
106,772
4,023
237
-
-
-
-
-
-
-
-
394
9,127,234
-
9,898,615
-
976,151
297,523
-
4,023
-
-
106,772
-
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 27 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
Cash paid for:
Interest on borrowings
Income tax
Non-cash investing and financing activities:
Additions to other real estate owned
Additions to auto and other repossessed assets
Capitalization of servicing assets
Loan securitizations
Loans held for investment transferred to held for sale
Property plant and equipment transferred to other assets
Preferred stock exchanged for new common stock issued:
Preferred stock exchanged (Series A through E)
New common stock issued
2014
Year Ended December 31,
2013
(In thousands)
2012
$
102,402 $
7,751
119,312 $
4,447
164,364
8,603
48,601
92,266
4,321
198,712
-
-
26,022
24,363
104,144
69,069
7,649
355,506
181,620
2,225
169,432
48,910
6,348
239,766
2,641
-
-
-
-
-
NOTE 28 – REGULATORY MATTERS, COMMITMENTS, AND CONTINGENCIES
The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation’s capital amounts and classifications are also subject to qualitative judgment and adjustment by the
regulators with respect to minimum capital requirements, components, risk weightings, and other factors.
Capital standards established by regulations require the Corporation to maintain minimum amounts and ratios for Leverage (Tier 1
capital to average total assets) and ratios of Tier 1 Capital to Risk-Weighted Assets and Total Capital to Risk-Weighted Assets as
defined in the regulations. The total amount of risk-weighted assets is computed by applying risk-weighting factors to the
Corporation’s assets and certain off-balance sheet items, which generally vary from 0% to 100% depending on the nature of the asset.
As discussed below in this note, the regulatory capital requirements changed on January 1, 2015.
Effective June 2, 2010, FirstBank, by and through its Board of Directors, entered into a Consent Order (the “FDIC Order”) with the
FDIC and OCIF. The FDIC Order provides for various things, including (among other things) the following: (1) having and retaining
qualified management; (2) increased participation in the affairs of FirstBank by its Board of Directors; (3) development and
implementation by FirstBank of a capital plan to attain a leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10%
and a total risk-based capital ratio of at least 12%; (4) adoption and implementation of strategic, liquidity, and fund management and
profit and budget plans and related projects within certain timetables set forth in the FDIC Order and on an ongoing basis; (5) adoption
and implementation of plans for reducing FirstBank’s positions in certain classified assets and delinquent and non-accrual loans within
timeframes set forth in the FDIC Order; (6) refraining from lending to delinquent or classified borrowers already obligated to
FirstBank on any extensions of credit so long as such credit remains uncollected, except where FirstBank’s failure to extend further
credit to a particular borrower would be detrimental to the best interests of FirstBank, and any such additional credit is approved by
FirstBank’s Board of Directors; (7) refraining from accepting, increasing, renewing, or rolling over brokered CDs without the prior
written approval of the FDIC; (8) establishment of a comprehensive policy and methodology for determining the allowance for loan
and lease losses and the review and revision of FirstBank’s loan policies, including the non-accrual policy; and (9) adoption and
implementation of adequate and effective programs of independent loan review, appraisal compliance, and an effective policy for
managing FirstBank’s sensitivity to interest rate risk. The foregoing summary is not complete and is qualified in all respects by
reference to the actual language of the FDIC Order. Although all of FirstBank’s regulatory capital ratios exceeded the minimum
capital ratios for “well-capitalized” levels, as well as the minimum capital ratios required by the FDIC Order, as of December 31,
2014, FirstBank cannot be treated as a “well-capitalized” institution under regulatory guidance while operating under the FDIC Order.
238
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Effective June 3, 2010, First BanCorp. entered into the Written Agreement with the New York FED. The Written Agreement
provides, among other things, that the holding company must serve as a source of strength to FirstBank, and that, except with the
consent generally of the New York FED and the Federal Reserve Board, (1) the holding company may not pay dividends to
stockholders or receive dividends from FirstBank, (2) the holding company and its nonbank subsidiaries may not make payments on
trust-preferred securities or subordinated debt, and (3) the holding company cannot incur, increase, or guarantee debt or repurchase
any capital securities. The Written Agreement also requires that the holding company submit a capital plan that reflects sufficient
capital at First BanCorp. on a consolidated basis, which must be acceptable to the New York FED, and follow certain guidelines with
respect to the appointment or change in responsibilities of senior officers. The foregoing summary is not complete and is qualified in
all respects by reference to the actual language of the Written Agreement.
The Corporation submitted its Capital Plan setting forth how it plans to improve capital positions to comply with the FDIC Order
and the Written Agreement over time.
In addition to the Capital Plan, the Corporation submitted to its regulators a liquidity and brokered CD plan, including a
contingency funding plan, a non-performing asset reduction plan, a budget and profit plan, a strategic plan, and a plan for the
reduction of classified and special mention assets. As of December 31, 2014, the Corporation had completed all of the items included
in the Capital Plan and is continuing to work on reducing non-performing loans. The Regulatory Agreements also require the
submission to the regulators of quarterly progress reports.
The FDIC Order imposes no other restrictions on FirstBank’s products or services offered to customers, nor does it or the Written
Agreement impose any type of penalties or fines upon FirstBank or the Corporation. Concurrent with the FDIC Order, the FDIC has
granted FirstBank temporary waivers to enable it to continue accessing the brokered CD market through March 31, 2015. FirstBank
will request approvals for future periods, although no assurance can be given that future approvals will be given.
In July 2013, U.S. banking regulators approved a revised regulatory capital framework for U.S. banking organizations (the “Basel
III rules”) that is based on international regulatory capital requirements adopted by the Basel Committee on Banking Supervision over
the past several years. The Basel III rules introduce new minimum capital ratios and capital conservation buffer requirements, change
the composition of regulatory capital, require a number of new adjustments to and deductions from regulatory capital, and introduce a
new “Standardized Approach” for the calculation of risk-weighted assets that will replace the risk-weighting requirements under the
current U.S. regulatory capital rules. The new minimum regulatory capital requirements and the Standardized Approach for the
calculation of risk-weighted assets became effective for the Corporation and FirstBank on January 1, 2015. The capital conservation
buffer requirements, and the regulatory capital adjustments and deductions under the Basel III rules will be phased-in over several
years ending on December 31, 2018.
Basel III rules introduce a new and separate ratio of Common Equity Tier 1 capital (“CET1”) to risk-weighted assets. CET1, a
narrower subcomponent of total Tier 1 capital, generally consists of common stock and related surplus, retained earnings, accumulated
other comprehensive income, and qualifying minority interests. Certain banking organizations, however, including the Corporation
and FirstBank, will be allowed to make a one-time permanent election in early 2015 to exclude AOCI items. The Corporation and
FirstBank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of
interest rate fluctuations on the fair value of the securities portfolio. In addition, the Basel III rules also will require the Corporation to
maintain an additional CET1 capital conservation buffer of 2.5%. Under the rules, the Corporation will be required to maintain: (i) a
minimum CET1 to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required
minimum CET1 ratio of at least 7% upon full implementation, (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at
least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5% upon full
implementation, (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital
conservation buffer, resulting in a required minimum total capital ratio of 10.5% upon full implementation, and (iv) a required
minimum leverage ratio of 4% (as contrasted to the legacy 3% requirement), calculated as the ratio of Tier 1 capital to average on-
balance sheet (non-risk adjusted) assets. The new basis minimum risk-based and leverage capital requirements were effective for the
Corporation on January 1, 2015. The phase-in of the capital conservation buffer will begin on January 1, 2016 with a first year
requirement of 0.625% of additional CET1, which will be progressively increased over a four-year period, increasing by that same
percentage amount on each subsequent January 1 until it reaches the fully-phased in 2.5% CET1 requirement on January 1, 2019.
239
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In addition, the Basel III rules require a number of new deductions from and adjustments to CET1, including deductions from
CET1 for mortgage servicing rights, and deferred tax assets dependent upon future taxable income; these adjustments generally will
be phased in over a four-year period beginning on January 1, 2015. In the case of mortgage servicing assets and deferred tax assets
attributable to temporary differences, among others, these items would be required to be deducted to the extent that any one such
category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
In addition, the Federal Reserve Board’s Basel III rules require that certain non-qualifying capital instruments, including
cumulative preferred stock and Trust preferred securities (“TRuPs”), be excluded from Tier 1 capital. In general, banking
organizations such as the Corporation and the Bank, that are not advanced approaches banks, must begin to phase out TRuPs from
Tier 1 capital on January 1, 2015. The Corporation will be allowed to include 25% of the $225 million outstanding qualifying TRuPs
as Tier 1 capital in 2015 and the TRuPs must be fully phased out from Tier 1 capital by January 1, 2016. However, the Corporation’s
TRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.
The Basel III rules also revise the “prompt corrective action” (“PCA”) regulations that apply to depository institutions, including
FirstBank, pursuant to Section 38 of the Federal Deposit Insurance Act by (i) introducing a separate CET1 ratio requirement for each
PCA capital category (other than critically undercapitalized) with the required CET1 ratio being 6.5% for well-capitalized status; (ii)
increasing the minimum Tier 1 capital ratio requirement for each PCA capital category with the minimum Tier 1 capital ratio for well-
capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that allows a bank with a
composite supervisory rating of 1 to have a 3% leverage ratio and still be adequately capitalized and maintaining the minimum
leverage ratio for well-capitalized status at 5%. The Basel III rules do not change the total risk-based capital requirement (10% for
well-capitalized status) for any PCA capital category. The new PCA requirements became effective on January 1, 2015.
Under the legacy Federal Reserve Board risk based capital requirements, a bank holding company’s assets are adjusted to take into
account different risk characteristics, with the categories generally ranging from 0% (requiring no additional capital) for assets such as
cash to 100% assets, including commercial mortgage loans, commercial and industrial loans, and consumer loans. Off-balance sheet
items also are adjusted to take into account certain risk characteristics. The Basel III rules supersede this framework and establish a
“standardized approach” for risk-weightings that expands the risk-weighting categories from the four major risk-weighting categories
under the current regulatory capital rules (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of categories,
depending on the nature of the assets. In a number of cases, the Standardized Approach will result in higher risk weights for a variety
of asset categories. Specific changes to the risk-weightings of assets under the current regulatory capital rules include, among other
things: (i) applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition,
development and construction loans, (ii) assigning a 150% risk weight to exposures that are 90 days past due (other than qualifying
residential mortgage exposures, which remain at an assigned risk-weighting of 100%), and (iii) establishing a 20% credit conversion
factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, in
contrast to the 0% risk-weighting under the prior rules.
240
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation's and its banking subsidiary's regulatory capital positions as of December 31, 2014 and 2013 were as follows:
Actual
For Capital Adequacy
Purposes
To be Well-Capitalized-
Regular Thresholds
Consent Order Capital
requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Regulatory Requirements
(Dollars in thousands)
At December 31, 2014
Total Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Tier I Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Leverage ratio
First BanCorp.
FirstBank
At December 31, 2013
Total Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Tier I Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Leverage ratio
First BanCorp.
FirstBank
$
$
$
$
$
$
$
$
$
$
$
$
1,748,120
19.70%
1,717,432
19.37%
1,636,004
18.44%
1,605,367
18.10%
1,636,004
13.27%
1,605,367
13.04%
1,604,548
17.06%
1,567,232
16.67%
1,484,490
15.78%
1,447,262
15.40%
1,484,490
11.71%
1,447,262
11.44%
$
$
$
$
$
$
$
$
$
$
$
$
709,723
709,395
354,861
354,698
493,159
492,468
752,464
751,978
376,232
375,989
506,878
506,210
8%
8%
4%
4%
4%
4%
8%
8%
4%
4%
4%
4%
N/A
$
886,744
N/A
$
532,046
N/A
$
615,585
N/A
$
939,972
N/A
$
563,983
N/A
$
632,763
N/A
10%
N/A
6%
N/A
5%
N/A
10%
N/A
6%
N/A
5%
N/A
$
1,064,093
N/A
$
886,744
N/A
$
984,937
N/A
$
1,127,966
N/A
$
939,972
N/A
$
1,012,420
N/A
12%
N/A
10%
N/A
8%
N/A
12%
N/A
10%
N/A
8%
241
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents a detail of commitments to extend credit and standby letters of credit, and commitments to sell
loans:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
Unused personal lines of credit
Commercial lines of credit
Commercial letters of credit
Standby letters of credit
Commitments to sell loans
December 31,
2014
2013
(In thousands)
$
$
76,235
682,994
383,015
38,555
3,791
129,369
65,184
735,331
386,941
41,081
10,527
123,925
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument on
commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management
uses the same credit policies and approval process in entering into commitments and conditional obligations as it does for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in
the contract. Commitments generally have fixed expiration dates or other termination clauses. 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. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time
and without cause. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with
prospective borrowers. The amount of any collateral obtained if deemed necessary by the Corporation upon an extension of credit is
based on management’s credit evaluation of the borrower. Rates charged on loans that are finally disbursed are the rates being offered
at the time the loans are closed; therefore, no fee is charged on these commitments.
In general, commercial and standby letters of credit are issued to facilitate foreign and domestic trade transactions. Normally,
commercial and standby letters of credit are short-term commitments used to finance commercial contracts for the shipment of goods.
The collateral for these letters of credit includes cash or available commercial lines of credit. The fair value of commercial and
standby letters of credit is based on the fees currently charged for such agreements, which, as of December 31, 2014 and 2013, was
not significant.
The Corporation obtained from GNMA commitment authority to issue GNMA mortgage-backed securities. Under this program, for
2014, the Corporation securitized approximately $198.7 million of FHA/VA mortgage loan production into GNMA mortgage-backed
securities.
As of December 31, 2014, First BanCorp. and its subsidiaries were defendants in various legal proceedings arising in the ordinary
course of business. Management believes that the final disposition of these matters, to the extent not previously provided for, will not
have a material adverse effect, individually or in the aggregate, on the Corporation’s financial position, results of operations or cash
flows.
242
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 29 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result
in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment
portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk
management activities is to reduce the variability of earnings caused by changes in interest rates.
The Corporation designates a derivative as a fair value hedge, a cash flow hedge or an economic undesignated hedge when it enters
into the derivative contract. As of December 31, 2014 and 2013, all derivatives held by the Corporation were considered economic
undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current
earnings.
The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:
Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a
contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for
protection from rising interest rates.
Interest rate swaps - Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment
obligations without the exchange of the underlying notional principal amount. As of December 31, 2014 and 2013, most of the
interest rate swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising
from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest
expense depending on whether an asset or liability is being economically hedged.
Forward Contracts - Forward contracts are sales of to-be-announced (“TBA”) mortgage-backed securities that will settle over the
standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no
net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the
time generally established by regulations or conventions in the market place or exchange in which the transaction is being executed.
The forward sales are considered derivative instruments that need to be marked to market. These securities are used to
economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains
(losses) are recognized as part of mortgage banking activities in the consolidated statement of income (loss).
To satisfy the needs of its customers, the Corporation may enter into nonhedging transactions. On these transactions, generally, the
Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and
conditions.
In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these
are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair
value, and designated as a trading or nonhedging derivative instrument.
243
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes the notional amounts of all derivative instruments:
Undesignated economic hedges:
Interest rate contracts:
Interest rate swap agreements
Written interest rate cap agreements
Purchased interest rate cap agreements
Forward Contracts:
Sale of TBA GNMA MBS pools
Notional Amounts
December 31, December 31,
2014
2013
(In thousands)
$
5,440 $
37,132
37,132
31,080
38,391
38,391
19,000
98,704 $
25,000
132,862
$
Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.
The following table summarizes the fair value of derivative instruments and the location of the derivative instruments in the statement
of financial condition:
Undesignated economic hedges:
Interest rate contracts:
Interest rate swap agreements
Written interest rate cap agreements
Purchased interest rate cap agreements
Forward Contracts:
Sales of TBA GNMA MBS pools
Statement of
Financial
Condition
Location
Asset Derivatives
December 31, December 31,
2014
Fair
Value
2013
Fair
Value
Liability Derivatives
Statement of Financial Condition
Location
(In thousands)
December 31, December 31,
2014
Fair
Value
2013
Fair
Value
Other assets
Other assets
Other assets
Other assets
$
$
33 $
-
6
-
39 $
162 Accounts payable and other liabilities $
- Accounts payable and other liabilities
58 Accounts payable and other liabilities
174 Accounts payable and other liabilities
$
394
33 $
6
-
148
187 $
3,965
58
-
-
4,023
The following table summarizes the effect of derivative instruments on the statement of income (loss):
Undesignated economic hedges:
Interest rate contracts:
Interest rate swap agreements
Written and purchased interest rate cap agreements
Forward contracts:
Sales of TBA GNMA MBS pools
Total gain on derivatives
Location of Gain (or loss)
Recognized in Income on
Derivatives
Interest income - Loans
Interest income - Loans
Mortgage Banking Activities
Gain (or Loss) Year ended
December 31,
2013
(In thousands)
2012
2014
$
1,258 $
-
1,685 $
10
901
-
(322)
936 $
176
1,871 $
166
1,067
$
Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market
value of derivative instruments is largely a function of the financial market’s 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, the level of interest rates, as well as the expectations for rates in
the future.
In the fourth quarter of 2014, the Corporation collected a $2.5 million contractual prepayment penalty on a commercial mortgage
loan paid by the borrower to compensate for the economic loss sustained by the Corporation in the early termination of an interest rate
swap agreement that provided an economic hedge of the cash flows associated with this loan. Such loss equals the mark-to-market
unrealized losses recorded by the Corporation in prior periods for the terminated interest rate swap.
244
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A summary of interest rate swaps is as follows:
Pay fixed/receive floating:
Notional amount
Weighted average receive rate at period-end
Weighted average pay rate at period-end
December 31, December 31,
2014
2013
(Dollars in thousands)
$
5,440 $
2.03%
3.45%
31,080
1.85%
6.77%
As of December 31, 2014, the Corporation has not entered into any derivative instrument containing credit-risk-related contingent
features.
Credit and Market Risk of Derivatives
The Corporation uses derivative instruments to manage interest rate risk. By using derivative instruments, the Corporation is
exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Corporation’s fair value
gain in the derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty
owes the Corporation and, therefore, creates a credit risk for the Corporation. When the fair value of a derivative instrument contract is
negative, the Corporation owes the counterparty and, therefore, it has no credit risk. The Corporation minimizes the credit risk in
derivative instruments by entering into transactions with reputable broker dealers (financial institutions) that are reviewed periodically
by the Corporation’s Management’s Investment and Asset Liability Committee and by the Board of Directors. The Corporation also
maintains a policy of requiring that all derivative instrument contracts be governed by an International Swaps and Derivatives
Association Master Agreement, which includes a provision for netting; most of the Corporation’s agreements with derivative
counterparties include bilateral collateral arrangements. The bilateral collateral arrangement permits the counterparties to perform
margin calls in the form of cash or securities in the event that the fair market value of the derivative favors either counterparty. The
book value and aggregate market value of securities pledged as collateral for interest rate swaps as of December 31, 2014 was $2.6
million and $2.9 million, respectively (2013 — $4.0 million and $4.3 million, respectively). The Corporation has a policy of
diversifying derivatives counterparties to reduce the consequences of counterparty default.
The Corporation has credit risk of $39 thousand as of December 31, 2014 (2013 — $0.4 million) related to derivative instruments
with positive fair values. The credit risk does not consider the value of any collateral and the effects of legally enforceable master
netting agreements. There were no credit losses associated with derivative instruments recognized in 2014, 2013, or 2012. As of
December 31, 2014, the Corporation had a total net interest settlement payable of $11 thousand (2013 — net interest settlement
payable of $0.1 million) related to the swap transactions. The net settlements receivable and net settlements payable on interest rate
swaps are included as part of “Other Assets” and “Accounts payable and other liabilities,” respectively, on the consolidated statements
of financial condition.
Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument.
The Corporation manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types
and degree of risk that may be undertaken.
The Corporation’s derivative activities are monitored by the MIALCO as part of its risk-management oversight of the
Corporation’s treasury functions.
245
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 30 – OFFSETTING OF ASSETS AND LIABILITIES
The Corporation enters into master agreements with counterparties that may allow for netting of exposures in the event of default,
primarily related to derivatives and repurchase agreements. In an event of default each party has a right of set-off against the other
party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or
transaction between them. The following table presents information about the offsetting of financial assets and liabilities as well as
derivative assets and liabilities:
Offsetting of Financial Assets and Derivative Assets
As of December 31, 2014
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Assets Presented in
the Statement of
Financial Position
Gross Amounts Not Offset
in the Statement of
Financial Position
Cash
Financial
Instruments
Collateral
Net Amount
Description
Derivatives
As of December 31, 2013
Description
Derivatives
(In thousands)
$
6 $
- $
6 $
(6) $
- $
-
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Assets Presented in
the Statement of
Financial Position
Gross Amounts Not Offset
in the Statement of
Financial Position
Cash
Financial
Instruments
Collateral
Net Amount
(In thousands)
$
58 $
- $
58 $
(58) $
- $
-
246
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Offsetting of Financial Liabilities and Derivative Liabilities
As of December 31, 2014
Gross
Amounts of
Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Liabilities
Presented in the
Statement of
Financial Position
Gross Amounts Not
Offset in the Statement of
Financial Position
Financial
Instruments
Cash
Collateral
Net Amount
(In thousands)
$
$
33 $
600,000
600,033 $
- $
-
- $
33 $
(33) $
600,000 (600,000)
600,033 $ (600,033) $
- $
-
- $
-
-
-
Gross
Amounts of
Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Liabilities
Presented in the
Statement of
Financial Position
Gross Amounts Not
Offset in the Statement of
Financial Position
Financial
Instruments
Cash
Collateral
Net Amount
(In thousands)
$
$
3,965 $
600,000
603,965 $
- $
-
- $
3,965 $
600,000
603,965 $
(3,965) $
(600,000)
(603,965) $
- $
-
- $
-
-
-
Description
Derivatives
Repurchase agreements
Total
As of December 31, 2013
Description
Derivatives
Repurchase agreements
Total
247
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 31 – SEGMENT INFORMATION
Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the
Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s lines of
business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of
Puerto Rico. As of December 31, 2014, the Corporation had six reportable segments: Commercial and Corporate Banking; Mortgage
Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to
allocate resources. Others factors such as the Corporation’s organizational chart, nature of the products, distribution channels, and the
economic characteristics of the product were also considered in the determination of the reportable segments.
The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers
represented by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers
commercial loans, including commercial real estate and construction loans, and floor plan financings, as well as other products, such
as cash management and business management services. The Mortgage Banking segment consists of the origination, sale, and
servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires and sells mortgages in the
secondary markets. In addition, the Mortgage Banking segment includes mortgage loans purchased from other local banks and
mortgage bankers. The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking
activities conducted mainly through its branch network and loan centers. The Treasury and Investments segment is responsible for the
Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment lends funds to the
Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending activities
and borrows from those segments and from the United States Operations segment. The Consumer (Retail) Banking and the United
States Operations segments also lend funds to other segments. The interest rates charged or credited by Treasury and Investments, the
Consumer (Retail) Banking, and the United States Operations segments are allocated based on market rates. The difference between
the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding
costs is reported in the Treasury and Investments segment. The United States Operations segment consists of all banking activities
conducted by FirstBank in the United States mainland, including commercial and retail banking services. The Virgin Islands
Operations segment consists of all banking activities conducted by the Corporation in the USVI and BVI, including commercial and
retail banking services.
The accounting policies of the segments are the same as those referred to in Note 1- “Nature of Business and Summary of
Significant Accounting Policies.”
The Corporation evaluates the performance of the segments based on net interest income, the estimated provision for loan and lease
losses, non-interest income, and direct non-interest expenses. The segments are also evaluated based on the average volume of their
interest-earning assets less the allowance for loan and lease losses.
The following table presents information about the reportable segments:
For the year ended December 31, 2014:
Interest income
Net (charge) credit for transfer of funds
Interest expense
Net interest income
(Provision) release for loan and lease losses
Non-interest income (loss)
Direct non-interest expenses
Segment income
Average earnings assets
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
(In thousands)
United States
Operations
Virgin Islands
Operations
Total
$
$
$
115,997 $
(37,375)
-
78,622
(17,605)
13,515
(39,444)
35,088 $
215,170 $
17,629
(24,445)
208,354
(79,932)
40,018
(126,290)
42,150 $
163,242 $
(12,364)
-
150,878
(40,084)
5,241
(46,963)
69,072 $
54,223 $
20,463
(68,517)
6,169
-
264
(5,368)
1,065 $
44,882 $
11,647
(19,273)
37,256
27,650
2,450
(26,596)
40,760 $
40,435 $
-
(3,641)
36,794
441
7,139
(39,319)
5,055 $
633,949
-
(115,876)
518,073
(109,530)
68,627
(283,980)
193,190
2,142,122 $
1,967,202 $
3,613,354 $
2,691,906 $
976,151 $
656,197 $
12,046,932
248
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the year ended December 31, 2013:
Interest income
Net (charge) credit for transfer of funds
Interest expense
Net interest income
(Provision) release for loan and lease losses
Non-interest income (loss)
Direct non-interest expenses
Segment (loss) income
Average earnings assets
For the year ended December 31, 2012:
Interest income
Net (charge) credit for transfer of funds
Interest expense
Net interest income (loss)
(Provision) release for loan and lease losses
Non-interest income (loss)
Direct non-interest expenses
Segment (loss) income
Average earnings assets
$
$
$
$
$
$
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
(In thousands)
United States
Operations
Virgin Islands
Operations
Total
109,074 $
(37,611)
-
71,463
(89,439)
15,826
(48,941)
(51,091) $
231,077 $
1,549
(27,834)
204,792
(54,240)
38,968
(122,560)
66,960 $
171,972 $
(14,280)
-
157,692
(101,971)
3,904
(64,611)
(4,986) $
55,075 $
41,074
(77,366)
18,783
-
(66,635)
(10,629)
(58,481) $
36,999 $
9,268
(21,748)
24,519
10,709
1,284
(28,554)
7,958 $
41,591 $
-
(3,895)
37,696
(8,810)
7,855
(45,680)
(8,939) $
645,788
-
(130,843)
514,945
(243,751)
1,202
(320,975)
(48,579)
2,030,120 $
1,954,307 $
4,068,942 $
2,698,559 $
748,209 $
664,051 $
12,164,188
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
(In thousands)
United States
Operations
Virgin Islands
Operations
Total
110,164 $
(48,830)
-
61,334
(36,553)
18,080
(43,058)
(197) $
207,001 $
474
(30,904)
176,571
(32,924)
33,362
(102,364)
74,645 $
187,860 $
(23,706)
-
164,154
(42,940)
10,140
(50,364)
80,990 $
46,313 $
59,970
(111,209)
(4,926)
-
(1,623)
(6,296)
(12,845) $
37,376 $
12,092
(29,340)
20,128
9,061
1,803
(27,734)
3,258 $
49,063 $
-
(4,619)
44,444
(17,143)
6,885
(37,751)
(3,565) $
637,777
-
(176,072)
461,705
(120,499)
68,647
(267,567)
142,286
2,067,304 $
1,637,729 $
4,571,779 $
2,426,091 $
727,556 $
805,720 $
12,236,179
249
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:
Net income (loss) :
Total income (loss) for segments and other
Other non-interest loss (1)
Other operating expenses (2)
Income (loss) before income taxes
Income tax benefit (expense)
Total consolidated net income (loss)
Average assets:
Total average earning assets for segments
Other average earning assets (1)
Average non-earning assets
Total consolidated average assets
2014
Year Ended December 31,
2013
(In thousands)
2012
$
$
$
$
193,190 $
(7,279)
(94,273)
91,638
300,649
392,287 $
(48,579) $
(16,691)
(94,053)
(159,323)
(5,164)
(164,487) $
142,286
(19,256)
(87,316)
35,714
(5,932)
29,782
12,046,932 $
1,943
598,570
12,647,445 $
12,164,188 $
18,089
630,184
12,812,461 $
12,236,179
36,706
693,489
12,966,374
(1) The activities related to the Bank's equity interest in CPG/GS are presented as an Other non-interest loss and as Other
average earning assets in the table above.
(2) Expenses pertaining to corporate administrative functions that support the operating segments but are not specifically
attributable to or managed by any segment are not included in the reported financial results of the operating segments.
The unallocated corporate expenses include certain general and administrative expenses and related depreciation and
amortization expenses.
The following table presents revenues (interest income plus non-interest income) and selected balance sheet data by geography
based on the location in which the transaction is originated:
Revenues:
Puerto Rico
United States
Virgin Islands
Total consolidated revenues
Selected Balance Sheet Information:
Total assets:
Puerto Rico
United States
Virgin Islands
Loans:
Puerto Rico
United States
Virgin Islands
Deposits:
Puerto Rico (1)
United States
Virgin Islands
2014
2013
(In thousands)
2012
588,744 $
58,979
47,574
695,297 $
533,302 $
47,551
49,446
630,299 $
579,949
51,271
55,948
687,168
10,969,305 $
1,072,962
685,568
10,993,743 $
940,590
722,592
11,421,073
913,831
764,837
7,706,866 $
982,713
649,813
6,687,844 $
1,836,430
959,671
8,173,873 $
865,414
672,852
7,053,053 $
1,895,394
931,477
8,706,428
714,234
718,846
7,004,301
1,921,066
939,179
$
$
$
$
$
(1) For 2014, 2013, and 2012, includes $2.9 billion, $3.1 billion, and $3.4 billion, respectively, of brokered CDs allocated to Puerto Rico operations.
250
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 32- FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
The following condensed financial information presents the financial position of the Holding Company only as of December 31,
2014 and 2013, and the results of its operations and cash flows for the years ended on December 31, 2014, 2013, and 2012:
Statements of Financial Condition
Assets
Cash and due from banks
Money market investments
Investment securities available for sale, at market:
Equity investments
Other investment securities
Loans held for investment, net
Investment in First Bank Puerto Rico, at equity
Investment in First Bank Insurance Agency, at equity
Investment in FBP Statutory Trust I
Investment in FBP Statutory Trust II
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Other borrowings
Accounts payable and other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
As of December 31,
2014
2013
(In thousands)
30,380 $
6,111
-
285
322
1,866,090
11,890
3,093
3,866
4,357
1,926,394 $
31,957
6,111
33
285
356
1,403,612
9,834
3,093
3,866
4,101
1,463,248
231,959 $
22,692
254,651
231,959
15,431
247,390
1,671,743
1,926,394 $
1,215,858
1,463,248
$
$
$
$
251
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Statements of Income (Loss)
2014
Year Ended December 31,
2013
(In thousands)
2012
Income
Interest income on money market investments
Interest income on other investments
Other income
$
Expense
Notes payable and other borrowings
Other operating expenses
Loss on sale and impairment on equity securities
Loss before income taxes and equity in undistributed earnings
(losses) of subsidiaries
Equity in undistributed earnings (losses) of subsidiaries
Net Income (loss)
Other comprehensive income (loss) , net of tax
20 $
-
220
240
7,199
2,614
9,813
(29)
22 $
-
88
110
7,092
5,813
12,905
(42)
(9,602)
401,889
392,287
(12,837)
(151,650)
(164,487)
60,385
(107,168)
Comprehensive income (loss)
$
452,672 $
(271,655) $
17
6
220
243
7,342
3,398
10,740
-
(10,497)
40,279
29,782
9,234
39,016
252
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Statements of Cash Flows
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation
Equity in undistributed (earnings) losses of subsidiaries
Loss on sales/impairment of investment securities
Accretion of discount on loans
Net (increase) decrease in other assets
Net increase in other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Principal collected on loans
Proceeds from sales of available-for-sale securities
Proceeds from sale/redemption of other investment securities
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from common stock issued, net of costs
Repurchase of common stock
Issuance costs of common stock issued in exchange for preferred
stock Series A through E
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of year
Cash and cash equivalents include:
Cash and due from banks
Money market instruments
2014
Year Ended December 31,
2013
(In thousands)
2012
$
392,287 $
(164,487) $
29,782
1,962
(401,889)
29
(3)
(260)
7,261
(613)
38
6
-
44
-
(946)
1,471
151,650
186
-
774
7,146
(3,260)
-
-
533
533
-
(455)
(62)
(1,008)
(1,577)
38,068
36,491 $
30,380 $
6,111
36,491 $
-
(455)
(3,182)
41,250
38,068 $
31,957 $
6,111
38,068 $
$
$
$
155
(40,279)
-
-
(1,403)
7,166
(4,579)
-
-
-
-
1,037
-
-
1,037
(3,542)
44,792
41,250
35,139
6,111
41,250
253
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 33 – SUBSEQUENT EVENTS
Effective at the close of business on Friday, February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank’s,
assumed approximately $625 million in deposits related to such branches and purchased approximately $325 million in performing
residential mortgage loans through an alliance with Banco Popular of Puerto Rico (“Popular”) who was the successful lead bidder
with the FDIC on the failed Doral Bank.
Under the FDIC’s bidding format, Popular was the lead bidder and party to the purchase and assumption agreement with the FDIC
covering all assets and deposits to be acquired by Popular and its alliance co-bidders. Popular entered into back to back purchase and
assumption agreements with the alliance co-bidders, including FirstBank, for the transferred assets and deposits. Pursuant to the terms
of the purchase and assumption agreement, FirstBank purchased the loans at an aggregate discount of 9.0%, or approximately $29
million, and assumed the deposits at a premium of 1.6%, or approximately $10 million. These numbers, which are as of December 31,
2014, are subject to post-closing adjustments based on closing date totals and purchase accounting adjustments. There is no loss-share
with the FDIC related to the acquired assets.
FirstBank entered into a transition services agreement with Popular that enables FirstBank to receive services reasonably necessary
to operate the acquired branches during the transition period in a manner consistent with market practice, including the servicing of
residential mortgage loans until the acquired assets are converted to FirstBank’s operating system, which is anticipated to occur within
the next 6 months. Upon completion of the acquisition, the Corporation and FirstBank remained well in excess of “well capitalized”
under the applicable regulatory standards, with no additional capital required to support this transaction. The transaction is expected to
be accretive to earnings.
The Corporation has performed an evaluation of all other events occurring subsequent to December 31, 2014; management has
determined there are no additional events occurring in this period that required disclosure in or adjustment to the accompanying
financial statements.
254
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
First BanCorp.’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of First BanCorp.’s disclosure controls and procedures as such term is defined in Rules 13a-
15(e) and 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K.
Based on this evaluation, our CEO and CFO concluded that, as of December 31, 2014, the Corporation’s disclosure controls and
procedures were effective and provide reasonable assurance that the information required to be disclosed by the Corporation in reports
that the Corporation files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms and is accumulated and reported to the Corporation’s management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management’s report on Internal Control over Financial Reporting is included in Item 8 and incorporated herein by reference.
Management has conducted an assessment of the Corporation’s internal control over financial reporting at December 31, 2014 based
on the criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based upon that assessment, Management concluded that the Corporation’s internal control
over financial reporting was effective at December 31, 2014.
On May 14, 2013, COSO issued an updated version of its Internal Control – Integrated Framework (the “2013 Framework”).
Updates to the Framework were intended to clarify internal control concepts and simplify their use and application. The COSO Board
announced that it would continue to make the original 1992 Framework available until December 15, 2014. After that date, COSO
considers the 1992 Framework suspended. Concurrent with the 2013 Framework release, COSO indicated that organizations reporting
externally should clearly disclose whether the original Framework or the updated Framework was utilized. The Corporation is
currently transitioning to the 2013 Framework as it relates to Internal Controls over Financial Reporting.
The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report included in Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes to the Corporation’s internal control over financial reporting during our most recent quarter ended
December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over
financial reporting.
Item 9B. Other Information.
None.
255
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information in response to this Item is incorporated herein by reference from the sections entitled “Information with Respect to
Nominees Standing for Election as Directors and with respect to Executive Officers of the Corporation,” “Corporate Governance and
Related Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in First BanCorp.’s definitive Proxy
Statement for use in connection with its 2015 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the SEC
within 120 days of the close of First BanCorp.’s 2014 fiscal year.
Item 11. Executive Compensation.
Information in response to this Item is incorporated herein by reference from the sections entitled “Compensation Committee
Interlocks and Insider Participation,” “Compensation of Directors,” “Compensation Discussion and Analysis,” “Executive
Compensation Disclosure” and “Compensation Committee Report” in First BanCorp.’s Proxy Statement to be filed with the SEC
within 120 days of the close of First BanCorp.’s 2014 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information in response to this Item is incorporated herein by reference from the section entitled “Security Ownership of Certain
Beneficial Owners and Management” in First BanCorp.’s Proxy Statement to be filed with the SEC within 120 days of the close of
First BanCorp.’s 2014 fiscal year and by reference to the section entitled “Securities authorized for issuance under equity
compensation plans” in Part II, Item 5 of this Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information in response to this Item is incorporated herein by reference from the sections entitiled “Certain Relationships and
Related Person Transactions” and “Corporate Governance and Related Matters” in First BanCorp.’s Proxy Statement to be filed with
the SEC within 120 days of the close of First BanCorp.’s 2014 fiscal year.
Item 14. Principal Accounting Fees and Services.
Audit Fees
Information in response to this Item is incorporated herein by reference from the section entitled “Audit Fees” and “Audit
Committee Report” in First BanCorp.’s Proxy Statement to be filed with the SEC within 120 days of the close of First BanCorp.’s
2014 fiscal year.
256
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report.
(1) Financial Statements.
The following consolidated financial statements of First BanCorp., together with the report thereon of First BanCorp.’s
independent registered public accounting firm, KPMG LLP, dated March 16, 2015, are included in Item 8 of this report:
– Report of KPMG LLP, Independent Registered Public Accounting Firm.
–Attestation Report of KPMG LLP, Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
–Consolidated Statements of Financial Condition as of December 31, 2014 and 2013.
–Consolidated Statements of Income (Loss) for Each of the Three Years in the Period Ended December 31, 2014.
– Consolidated Statements of Comprehensive Income (Loss) for each of the Three Years in the Period Ended December 31,
2014.
– Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2014.
– Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31,
2014.
– Notes to the Consolidated Financial Statements.
(2) Financial statement schedules.
All financial schedules have been omitted because they are not applicable or the required information is shown in the financial
statements or notes thereto.
(b) Exhibits listed below are filed herewith as part of this Form 10-K or are incorporated herein by reference.
(c) The separate financial statements of CPG/GS PR NPL, LLC as of December 31, 2014 and 2013 and for the fiscal years ended
December 31, 2014, 2013, and 2012, required to be filed pursuant to Rule 3-09 of Regulation S-X, are filed as Exhibit 99.3
hereto.
257
EXHIBIT INDEX
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1
10.2
10.3
10.4
10.5
10.6
Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registration Statement on Form S-1/A
filed by First BanCorp on October 20, 2011.
By-Laws, incorporated by reference from Exhibit 3.2 of the Registration Statement on Form S-1/A filed by First BanCorp
on October 20, 2011.
Certificate of Designation creating the 7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A,
incorporated by reference from Exhibit 4(B) to the Form S-3 filed by First BanCorp on March 30, 1999.
Certificate of Designation creating the 8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B,
incorporated by reference from Exhibit 4(B) to Form S-3 filed by First BanCorp on September 8, 2000.
Certificate of Designation creating the 7.40% Noncumulative Perpetual Monthly Income Preferred Stock, Series C,
incorporated by reference from Exhibit 4(B) to the Form S-3 filed by First BanCorp on May 18, 2001.
Certificate of Designation creating the 7.25% Noncumulative Perpetual Monthly Income Preferred Stock, Series D,
incorporated by reference from Exhibit 4(B) to the Form S-3/A filed by First BanCorp on January 16, 2002.
Certificate of Designation creating the 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E,
incorporated by reference from Exhibit 4.2 to the Form 8-K filed by First BanCorp on September 5, 2003.
Certificate of Designation creating the fixed-rate cumulative perpetual preferred stock, Series F, incorporated by reference
from Exhibit 3.1 of the Form 8-K filed by the Corporation on January 20, 2009.
Certificate of Designation creating the fixed-rate cumulative perpetual preferred stock, Series G, incorporated by reference
from Exhibit 10.3 to the Form 8-K filed by First BanCorp on July 7, 2010.
First Amendment to Certificate of Designation creating the Fixed-Rate Cumulative Mandatorily Convertible Preferred
Stock, Series G, incorporated by reference from Exhibit 3.1 to the Form 8-K filed by First BanCorp on December 2, 2010.
Second Amendment to Certificate of Designation creating the Fixed-Rate Cumulative Mandatorily Convertible Preferred
Stock, Series G, incorporated by reference from Exhibit 3.1 to the Form 8-K filed by First BanCorp on April 15, 2011.
Form of Common Stock Certificate, incorporated by reference from Form 8-A/A filed by First BanCorp on May 3, 2012.
Form of Stock Certificate for 7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A, incorporated
by reference from Exhibit 4(A) to the Form S-3 filed by First BanCorp on March 30, 1999.
Form of Stock Certificate for 8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B, incorporated by
reference form Exhibit 4(A) to the Form S-3 filed by First BanCorp on September 8, 2000.
Form of Stock Certificate for 7.40% Noncumulative Perpetual Monthly Income Preferred Stock, Series C, incorporated by
reference from Exhibit 4(A) to the Form S-3 filed by First BanCorp on May 18, 2001.
Form of Stock Certificate for 7.25% Noncumulative Perpetual Monthly Income Preferred Stock, Series D, incorporated by
reference from Exhibit 4(A) to the Form S-3/A filed by First BanCorp on January 16, 2002.
Form of Stock Certificate for 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E, incorporated by
reference from Exhibit 4.1 to the Form 8-K filed by First BanCorp on September 5, 2003.
Warrant dated January 16, 2009 to purchase shares of First BanCorp, incorporated by reference from Exhibit 4.1 to the
Form 8-K filed by First BanCorp on January 20, 2009.
Amended and Restated Warrant, Annex A to the Exchange Agreement by and between First BanCorp and the United States
Treasury dated as of July 7, 2010, incorporated by reference from Exhibit 10.2 of the Form 8-K filed on July 7, 2010.
Letter Agreement, dated January 16, 2009, including Securities Purchase Agreement — Standard Terms attached thereto as
Exhibit A, between First BanCorp and the United States Department of the Treasury, incorporated by reference from
Exhibit 10.1 to the Form 8-K filed by First BanCorp on January 20, 2009.
FirstBank’s 1997 Stock Option Plan, incorporated by reference from the Form 10-K for the year ended December 31, 1998
filed by First BanCorp on March 26, 1999.
First BanCorp’s 2008 Omnibus Incentive Plan, as amended, incorporated by reference from Exhibit 99.1 to the Form S-8
filed by First BanCorp on May 4,2012.
Investment Agreement between The Bank of Nova Scotia and First BanCorp dated February 15, 2007, including the Form
of Stockholder Agreement, incorporated by reference from Exhibit 10.01 to the Form 8-K filed by First BanCorp on
February 22, 2007.
Amendment No. 1 to Stockholder Agreement, dated as of October 13, 2010, by and between First BanCorp and The Bank
of Nova Scotia, incorporated by reference to Exhibit 10.1 to the Form 8-K filed on November 24, 2010.
Employment Agreement—Aurelio Alemán, incorporated by reference from the Form 10-K for the year ended December
31, 1998 filed by First BanCorp on March 26, 1999.
Amendment No. 1 to Employment Agreement—Aurelio Alemán, incorporated by reference from the Form 10-Q for the
quarter ended March 31, 2009 filed by First BanCorp on May 11, 2009.
258
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Amendment No. 2 to Employment Agreement—Aurelio Alemán, incorporated by reference from Exhibit 10.6 of the Form
10-K for the year ended December 31, 2009 filed by First BanCorp on March 2, 2010.
Employment Agreement—Lawrence Odell, incorporated by reference from the Form 10-K for the year ended December
31, 2005 filed by First BanCorp on February 9, 2007.
Amendment No. 1 to Employment Agreement—Lawrence Odell, incorporated by reference from the Form 10-K for the
year ended December 31, 2005 filed by First BanCorp on February 9, 2007.
Amendment No. 2 to Employment Agreement—Lawrence Odell, incorporated by reference from the Form 10-Q for the
quarter ended March 31, 2009 filed by First BanCorp on May 11, 2009.
Amendment No. 3 to Employment Agreement—Lawrence Odell, incorporated by reference from Exhibit 10.13 of the
Form 10-K for the year ended December 31, 2009 filed by First BanCorp on March 2, 2010.
Amended and Restated Employment Agreement—Lawrence Odell, incorporated by reference from Exhibit 10.1 of the
Form 10-Q for the quarter ended June 30, 2012 filed by First BanCorp on August 9, 2012.
Employment Agreement—Victor Barreras, incorporated by reference from Exhibit 10.2 of the Form 10-Q for the quarter
ended June 30, 2012 filed by First BanCorp on August 9, 2012.
Employment Agreement—Orlando Berges, incorporated by reference from the Form 10-Q for the quarter ended June 30,
2009 filed by First BanCorp on August 11, 2009.
Service Agreement Martinez Odell & Calabria, incorporated by reference from the Form 10-K for the year ended
December 31, 2005 filed by First BanCorp on February 9, 2007.
Amendment No. 1 to Service Agreement Martinez Odell & Calabria, incorporated by reference from the Form 10-K for the
year ended December 31, 2005 filed by First BanCorp on February 9, 2007.
Amendment No. 2 to Service Agreement Martinez Odell & Calabria, incorporated by reference from Exhibit 10.17 of the
Form 10-K for the year ended December 31, 2009 filed by First BanCorp on March 2, 2010.
Amendment No. 3 to Service Agreement Martinez Odell & Calabria, incorporated by reference from Exhibit 10.20 of the
Form 10-K for the year ended December 31, 2010 filed by First BanCorp on April 15, 2011.
Consent Order, dated June 2, 1010, incorporated by reference from Exhibit 10.1 of the Form 8-K filed on June 4, 2010.
Written Agreement, dated June 3, 2010, incorporated by reference from Exhibit 10.2 of the Form 8-K filed on June 4,
2010.
Exchange Agreement by and between First BanCorp and the United States Treasury dated as of July 7, 2010, incorporated
by reference from Exhibit 10.1 of the Form 8-K filed on July 7, 2010.
First Amendment to Exchange Agreement, dated as of December 1, 2010, by and between First BanCorp and The United
States Department of the Treasury, incorporated by reference from Exhibit 10.1 to the Form 8-K filed by First BanCorp on
December 2, 2010.
Form of Restricted Stock Award Agreement incorporated by reference from Exhibit 10.23 to the Form S-1/A filed by First
BanCorp on July 16, 2010.
Form of Stock Option Agreement for Officers and Other Employees incorporated by reference from Exhibit 10.24 to the
Form S-1/A filed by First BanCorp on July 16, 2010.
Letter Agreement, dated as of January 16, 2009, and Securities Purchase Agreement, dated as of January 16, 2009, by and
between First BanCorp and the United States Department of the Treasury, incorporated by reference from Exhibit 10.1 of
the Form 8-K filed on January 20, 2009.
Amended and Restated Investment Agreement between First BanCorp and Thomas H. Lee Partners, L.P., incorporated by
reference from Exhibit 10.1 of the Form 8-K filed on July 19, 2011.
Agreement Regarding Additional Shares between First BanCorp and Thomas H. Lee Partners, L.P., incorporated by
reference from Exhibit 10.25 of the Registration Statement on Form S-1/A filed by First BanCorp on October 20, 2011.
Amended and Restated Investment Agreement between First BanCorp and Oaktree Capital Management, L.P.,
incorporated by reference from Exhibit 10.2 of the Form 8-K filed on July 19, 2011.
Agreement Regarding Additional Shares between First BanCorp and Oaktree Capital Management, L.P. dated October 26,
2011 incorporated by reference from Exhibit 10.27 of the Form S-1 filed by First BanCorp on December 20, 2011.
Investment Agreement between First BanCorp and funds advised by Wellington Management Company LLP, as amended,
incorporated by reference from Exhibit 10.2 of the Form 8-K/A filed on July 19, 2011, and Exhibit 10.3 of the Form 8-K
filed on July 19, 2011.
Amendment No. 2 to Investment Agreement between First BanCorp and funds advised by Wellington Management
Company LLP, incorporated by reference from Exhibit 10.28 to the Form S-1/A filed by First BanCorp on October 20,
2011.
Form of Subscription Agreement between First BanCorp and private placement investors, incorporated by reference from
Exhibit 10.3 of the Form 8-K filed on June 29, 2011.
Expense Reimbursement Agreement between First BanCorp and Oaktree Capital Management, L.P., incorporated by
reference from Exhibit 10.4 of the Form 8-K/A filed on July 21, 2011.
259
10.38
10.34
10.35
10.40
10.39
10.36
10.37
10.42
10.41
10.43
Expense Reimbursement Agreement between First BanCorp and Thomas H. Lee Partners, L.P., incorporated by reference
from Exhibit 10.2 of the Form 8-K/A filed on July 21, 2011.
Letter Agreement with the U.S. Department of the Treasury dated as of October 3, 2011, incorporated by reference from
Exhibit 10.1 of the Form 8-K filed on October 7, 2011.
Letter Agreement between First BanCorp. and Roberto R. Herencia, incorporated by reference from the Form 8-K filed by
First BanCorp on November 2, 2011.
Stock Purchase Agreement between First BanCorp and Roberto Herencia dated February 17, 2012, incorporated by
reference from Exhibit 10.36 of the Form 10-k for the fiscal year ended December 31, 2011 filed by First BanCorp. on
March 13, 2012.
Non – Employee Director Compensation Structure, incorporated by reference from Exhibit 10.3 of the Form 10-Q for the
quarter ended June 30, 2012 filed by First BanCorp on August 9, 2012.
Offer Letter between First BanCorp and Robert T. Gormley incorporated by reference from Exhibit 10.1 of the Form 8-K
filed on November 2, 2012.
Offer Letter between First BanCorp and David I. Matson incorporated by reference from Exhibit 10.1 of the Form 8-K filed
on October 1, 2013.
Offer Letter between First BanCorp and Juan Acosta Reboyras incorporated by reference from Exhibit 10.1 of the Form 8-
K filed on September 3, 2014.
Offer Letter between First BanCorp and Luz A. Crespo incorporated by reference from Exhibit 10.1 of the Form 8-K filed
on February 9, 2015.
Non – management Chairman of the Board Compensation Structure, incorporated by reference from Exhibit 10.1 of the
Form 10-Q for the quarter ended September 30, 2014 filed by First BanCorp on November 10, 2014.
Ratio of Earnings to Fixed Charges
Ratio of Earnings to Fixed Charges and Preference Dividends
Code of Ethics for CEO and Senior Financial Officers, incorporated by reference from Exhibit 3.2 of the Form 10-K for the
fiscal year ended December 31, 2008 filed by First BanCorp on March 2, 2009.
List of First BanCorp’s subsidiaries
Consent of KPMG LLP
Consent of PricewaterhouseCoopers LLP – Financial statements of CPG/GS PR NPL, LLC
Section 302 Certification of the CEO
Section 302 Certification of the CFO
Section 906 Certification of the CEO
Section 906 Certification of the CFO
Certification of the CEO Pursuant to Section III(b)(4) of the Emergency Stabilization Act of 2008 and 31 CFR § 30.15.
Certification of the CFO Pursuant to Section III(b)(4) of the Emergency Stabilization Act of 2008 and 31 CFR § 30.15.
Financial statements of CPG/GS PR NPL, LLC as of December 31, 2014 and 2013 and for the fiscal years ended
December 31, 2014, 2013, and 2012.
Exhibit 101.INS
XBRL Instance Document, filed herewith.
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document, filed herewith.
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith.
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document, filed herewith.
Exhibit 101.PRE
Exhibit 101.DEF
XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith.
XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith.
21.1
23.1
23.2
31.1
31.2
32.1
32.2
99.1
99.2
99.3
12.1
12.2
14.1
260
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the Corporation has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
FIRST BANCORP.
By:
/s/ Aurelio Alemán
Aurelio Alemán
President, Chief Executive Officer and Director
Date: 3/16/15
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Aurelio Alemán
Aurelio Alemán
President, Chief Executive Officer and Director
/s/ Orlando Berges
Orlando Berges, CPA
Executive Vice President and Chief Financial Officer
/s/ Roberto R. Herencia
Roberto R. Herencia,
Director and Chairman of the Board
/s/ José Menéndez-Cortada
José Menéndez-Cortada, Director
/s/ Thomas Martin Hagerty
Thomas Martin Hagerty,
Director
/s/ Robert T. Gormley
Robert T. Gormley,
Director
/s/ Michael P. Harmon
Michael P. Harmon,
Director
/s/ David Matson
David Matson,
Director
/s/ Luz A. Crespo
Luz A. Crespo
Director
/s/ Juan Acosta Reboyras
Juan Acosta Reboyras,
Director
/s/ Pedro Romero
Pedro Romero, CPA
Senior Vice President and Chief Accounting Officer
261
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Date: 3/16/15
Exhibit 99.3
CPG/GS PR NPL, LLC and Subsidiaries
Consolidated Financial Statements
For The Year Ended December 31, 2014
1
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET – DECEMBER 31, 2014
INVESTMENT IN LOANS RECEIVABLE, at fair value (cost $36,353,038)
ASSETS
REAL ESTATE
CASH AND CASH EQUIVALENTS
RESTRICTED CASH
DEFERRED FINANCING COSTS, net of accumulated amortization of $462,073
ACCOUNTS RECEIVABLE
OTHER ASSETS
Total assets
$65,158,324
83,054,104
1,373,140
5,555,874
249,165
286,344
450,795
$ 156,127,746
NOTES PAYABLE, related party
$ 58,043,769
LIABILITIES AND MEMBERS’ EQUITY
OTHER LIABILITIES:
Accounts payable and accrued liabilities
Mortgage loan escrow
Accrued interest payable, related party
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 10)
MEMBERS’ EQUITY
Total liabilities and members’ equity
4,220,304
610,819
329,183
63,204,075
92,923,671
$ 156,127,746
The accompanying notes are an integral part of these consolidated financial statements.
2
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
INCOME:
Rental Income
Straight line rent
Other
Total income
OPERATING EXPENSES:
Repairs and maintenance
Utilities
Management and administrative
Real estate taxes
Insurance
Total operating expenses
EXPENSES:
Interest
Amortization of deferred financing costs
Fair value adjustment of derivative instruments
Legal
Professional fees
Servicing fees to related parties
Other ownership
Total expenses
LOSS BEFORE REALIZED/UNREALIZED GAIN ON INVESTMENTS IN LOANS
AND REALIZED LOSS ON REAL ESTATE
NET UNREALIZED GAIN ON INVESTMENTS IN LOANS RECEIVABLE CARRIED
AT FAIR VALUE UNDER THE FAIR VALUE OPTION
NET REALIZED LOSS ON SETTLEMENT OF INVESTMENTS IN LOANS
RECEIVABLE AT FAIR VALUE UNDER THE FAIR VALUE OPTION
WRITEDOWN ON REAL ESTATE
NET GAIN ON SALE OF REAL ESTATE
NET LOSS
$ 644,000
224,497
86,345
954,842
768,753
425,425
880,253
120,025
761,833
2,956,289
2,462,321
108,579
4,000
1,599,590
492,365
2,714,562
410,883
7,792,300
(9,793,747)
(16,049,249)
7,592,058
(4,640,948)
1,880,282
$ (21,011,604)
The accompanying notes are an integral part of these consolidated financial statements.
3
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2014
PRLP Ventures, LLC
First Bank
Puerto Rico
Members’ Equity
BALANCE AT DECEMBER 31, 2013
$ 110,935,275
$ -
$ 110,935,275
Cash distributions
Net loss
3,000,000
(21,011,604)
-
-
3,000,000
21,011,604)
BALANCE AT DECEMBER 31, 2014
$ 92,923,671
$ -
$ 92,923,671
The accompanying notes are an integral part of these consolidated financial statements.
4
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred financing costs
Fair value adjustment of derivative instruments
Net gain on sale of real estate
Unrealized loss on investments in loans receivable
Write-down of loss from other real estate
Realized gain on loan settlements
Change in operating assets and liabilities:
Other assets
Accounts receivable
Accounts payable and accrued liabilities
Accrued interest payable
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate
Fundings to investments in loans receivable
Collections on loans receivable
Change in restricted cash
Purchase of interest rate derivative instruments
Net proceeds from sale of other real estate
Net cash from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributions
Proceeds from notes payable
Principal payments made on notes payable
Payment of deferred financing costs
Change in escrow liability
Net cash used in financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL DISCLOSURES:
Interest paid
Investment of loans receivable transferred to other real estate
$ (21,011,604)
108,579
4,000
(1,880.282)
16,049,249
4,640,948
(7,592,058)
(317,491)
(170,454)
(1,018,891)
142,311
(11,045,693)
(19,538,538)
(8,898,262)
35,232,490
2,496,088
(4,000)
10,994,855
20,282,633
3,000,000
27,001,396
(38,357,001)
(29,322)
(103,068)
(8,487,995)
748,945
624,195
$ 1,373,140
$ 2,320,010
$ 12,592,077
The accompanying notes are an integral part of these consolidated financial statements.
5
CPG/GS PR NPL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
1. ORGANIZATION:
CPG/GS PR NPL, LLC (the Parent Company), a Puerto Rico limited liability company, was organized effective January 20,
2011, to directly or indirectly acquire, own, hold, manage, finance, mortgage, pledge, lease and assign any assets, advance funds,
enter into such acquisition agreements, servicing agreements, leases, assignments, financing agreements, security agreements and
other instruments and agreements of any kind, enter into partnerships, limited partnerships, limited liability companies and joint
ventures, and do any and all other acts and things that may be necessary or useful for the conduct of its business or the winding
up thereof. The Parent Company owns 100% of the equity interests in CPG/GS Island Properties I, LLC, CPG/GS Island Properties II,
LLC, CPG/GS Island Properties III, LLC, CPG/GS Island Properties IV, LLC, CPG/GS Island Properties V, LLC, CPG/GS Island
Properties VI, LLC and CPG/GS Island Properties VII, LLC, (the Subsidiaries). The Subsidiaries, Puerto Rico limited liability
companies, were organized primarily to hold any real estate assets the Parent Company obtains through foreclosure of its
investments in loans receivable.
Collectively, the Parent Company and the Subsidiaries are the “Company”. The members of the Parent Company are PRLP
Ventures, LLC (PRLP) and First Bank Puerto Rico (First Bank) (collectively, the Members). The members of PRLP are FBLP
Group Holding, LLC (FBLP) and Goldman, Sachs & Co. (GS).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Parent Company and its wholly owned Subsidiaries. These
consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United
States of America and present the Company’s consolidated financial position, results of operations and cash flows. Intercompany
transactions have been eliminated in consolidation.
Basis of accounting and use of estimates
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has evaluated
subsequent events through March 9, 2015, the date which the consolidated financial statements were available to be issued.
Fair value measurements
Fair value measurements are market-based measurements, not entity-specific measurements. Fair value measurements are
determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering
market participant assumptions in fair value measurements,
6
management uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and management’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the
hierarchy).
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value
hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level
input that is significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Investments in loans receivable, at fair value
Management elected to carry the Company’s investments in loans receivable at fair value due to the fair value option being
operationally less complex for the Company to manage. Fair value is an exit price, representing the amount that would be
received to sell an asset in an orderly transaction between market participants at the measurement date. The Company’s
private investments, by their nature, have little to no price transparency.
The Company’s investments in loans receivable are either non-performing or sub-performing in relation to the original terms of
the loans. The fair value of the Company’s investments in loans receivable are determined based on an income approach that uses
cash flows at the loan level from the highest and best use of the assets by a market participant. In reaching its determination of
fair value, management considers many factors including, but not
limited to, broker quotations to support inputs used in the
valuations of the underlying collateral, the operating cash flows and financial performance of the investments considered relevant
to a market participant, taxes associated with owning the investments, trends within sectors and/or regions, historical events, the
expected hold period and strategy anticipated to be employed by a market participant and any other specific rights or terms
associated with the
investment that management believes would be a relevant factor impacting the exit price. Such investments
are classified within level 3 of the fair value hierarchy.
Management’s judgment is also required to determine the appropriate risk-adjusted discount rate for investments
that are
classified within level 3 of the fair value hierarchy. In such situations, management estimates the rates based on available market
information adjusted to rates which market participants would likely consider appropriate for risks associated with a particular
investment.
Investments in loans receivable are on nonaccrual status and all cash payments are first applied to the loans’ principal
balances. All income or loss is recognized at the valuation date in net change in unrealized appreciation/depreciation from
investments in loans receivable on the consolidated statement of operations. Interest
income on performing loans is recognized on
an accrual basis. The recognition of income on a performing loan is discontinued when interest or principal payments become 90
days past due. Cash payments subsequently received on investments in loans receivable are applied to the principal balance or
recorded as interest income, depending upon management’s assessment of the ultimate collectability of the loan.
Loan modifications and restructurings may occur when the borrower experiences financial difficulty and needs
temporary or
permanent relief from the original contractual terms of the loan and the lender grants a concession. These modifications are
structured on either a loan-by-loan or borrower group basis, and depending on the circumstances, may extend payment terms,
modify interest rates, reduce principal owed, or other concessions. When
this occurs, the loan may be considered a troubled debt
restructuring.
7
Once a loan is restructured and the borrower is not in default of the renegotiated terms and had sustained payment performance,
the Company accrues interest earned. When a loan is settled, the difference between the proceeds received and the loan basis is
recorded to gain or loss on loan settlement in the income statement.
Real estate
When real estate assets are acquired through foreclosure or repossession they are initially recorded at the fair value of the property
and included in investments in real estate in the accompanying consolidated balance sheet. Estimated
fair value is based on the
underlying collateral value which is estimated using an income approach that uses cash flows from the eventual disposition of the
collateral and the estimated cash flows during the hold period, if any.
Immediately preceding the foreclosure or repossession, any adjustments to the loan’s fair value will be reflected as a gain or loss on
investments in loans receivable carried at fair value under the fair value option on the consolidated statement of operations. With
the foreclosure, the entity changes from holding a financial asset to a hard asset, therefore, a realized event has occurred. As of
December 31, 2014, the Company had foreclosed on a total of thirteen loans held by seven borrower groups. The real estate assets
are held in the Subsidiaries of the Company.
Upon foreclosure of a loan in full satisfaction of a loan receivable, the Company accounts for those assets at their fair value less
cost to sell and the assets are classified as held for sale. In subsequent periods, such long-lived assets are measured at the lower of
carrying amount or fair value less cost to sell. As of December 31, 2014 the Company considers all foreclosed assets as long-lived
assets held for sale and are accounted for at the lower of cost or fair value less cost to sell.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less that are not restricted to be
cash equivalents. Cash equivalents are placed with reputable institutions and the balances may at times exceed federally insured
deposit levels; however, the Company has not experienced any losses in such accounts.
As cash and cash equivalents have a maturity of less than three months, the carrying value of cash equivalents approximates
fair value.
Deferred financing costs
Deferred financing costs incurred in connection with the receipt of the notes payable are capitalized and amortized over the term of
the debt using a method which approximates the interest method.
Interest rate derivative instrument
The Company’s derivative transaction consists of an interest rate cap agreement entered into to mitigate the Company’s
exposure to increasing borrowing costs in the event of a rising interest rate environment (see Note 6). The Company has elected
not to designate its interest rate cap agreement as a designated accounting hedge. Changes in the fair value of the interest
rate cap are recorded in the accompanying consolidated statement of operations.
8
The valuation of the interest rate cap is determined using widely accepted valuation techniques including discounted cash flow
analysis on the expected cash flows. This analysis reflects the contractual terms of the derivative, including the period to
maturity, and uses observable market-based inputs such as interest rate curves and volatility assumptions. The fair value of the
interest rate cap is determined using the market standard methodology of discounted future cash receipts. The cash receipts are
based on an expectation of future interest rates using a forward curve that is derived from observable market interest rate curves.
The analysis has incorporated credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance
risk in the fair value measurements. Management evaluated the counterparty’s nonperformance
risk based on the counterparty's
most recent credit rating and any changes in credit rating over the past year. In adjusting the fair value of the derivative contract
for the effect of nonperformance risk, management has considered
the impact of collateral netting and any applicable credit
enhancements. Management concluded that the nonperformance risk is insignificant, and no adjustment to the value was
necessary for this input. Therefore, all inputs used to value the derivative fall within Level 2 of the fair value hierarchy and the
derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Accounts receivable
Accounts receivable at December 31, 2014 is comprised of straight line rent receivable of $286,344.
Other Assets
Other assets at December 31, 2014 are comprised of prepaid taxes and property insurance of $450,795.
The Puerto Rico Insurance Code prohibits a lender from placing insurance on behalf of a borrower and charging the borrower for the
premium payment. However, the lender may protect its own interests without transferring the costs to the borrower. For the period
ended December 31, 2014, the Company paid property insurance premiums on certain collateral. These premiums are reflected as
insurance expense in the consolidated statement of operations.
Income taxes
Under U.S. federal income tax law and Puerto Rico income tax law, limited liability companies are not taxable entities.
Therefore, no provision has been made in the accompanying consolidated financial statements for income
taxes due by the
Company. Each member is individually responsible for reporting its share of the Company’s income or loss.
Accounting Standards Codification (ASC) 740, Income Taxes, requires management to determine whether a tax position is
more likely than not to be sustained upon examination by the applicable tax authority, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets this
recognition threshold, the position is measured to determine the amount of tax benefit or expense to be recognized. The Company
does not have any uncertain tax positions that would require accrual under ASC 740. No interest or penalty related to uncertain
taxes has been recognized on the accompanying statement of operations. Management does not expect a significant change in
uncertain tax positions during the
twelve months subsequent to December 31, 2014.
9
The Company files U.S. and Puerto Rico tax returns. In the normal course of business, the Company may be audited by either taxing
authority. As of December 31, 2014, the Company is not currently undergoing any tax examinations, nor has the Company agreed
to extend the statute of limitations beyond the prescribed expiration date. The Company remains subject to examination by various
taxing authorities for tax years beginning 2011 and upon completion of any examination, tax adjustments may be necessary.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities at December 31, 2014 are comprised of the following:
Accounts payable
Accrued servicing fees (Note 9)
Real estate tax liability
Accrued professional fees
Other liabilities
Deferred maintenance liability (Note 5)
Borrower deposits liability (Note 5)
306,836
208,930
258,676
458,406
2,798,499
151,849
37,108
$ 4,220,304
Other comprehensive income
Since there are no transactions requiring presentation in other comprehensive income, but not in net income, the Company’s net
income equates to comprehensive income.
Recent accounting and other developments
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08
Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosure of
Disposals of Components of an Entity. Under the new guidance, only a disposal of a component that represents a major strategic
shift of an organization qualifies for discontinued operations reporting. The guidance also requires expanded disclosures about
discontinued operations and new disclosures in regards to individually significant disposals that do not qualify for discontinued
operations reporting. This guidance is effective for the first annual period beginning on or after December 15, 2014. Early
adoption is permitted, but only for disposals that have not been reported in previously-issued financial statements.
The Company elected to early adopt this guidance for the period ended December 31, 2014. During the period ended December 31,
2014, the Company did not have any disposals that represented a strategic shift, nor were there any components that were
previously reported as discontinued operations.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09
will replace most existing revenue recognition guidance in GAAP when it becomes effective.
10
The standard permits the use of either the retrospective or cumulative effect transition method. The new standard is effective for
the Company on January 1, 2017, but can be delayed to January 1, 2018 as the Company is private. Early application is not
permitted. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related
disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing
financial reporting. The Company will make additional disclosures upon adoption.
In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements – Going Concern. The new guidance
establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a
going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to
continue as a going concern by incorporating and expanding upon certain principles in U.S. auditing standards. Specifically, ASU
2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the
financial statements are issued or available to be issued. It also requires certain disclosures when substantial doubt is alleviated as a
result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is
is
not alleviated. The guidance is effective for the annual periods beginning on or after December 15, 2016; early adoption
permitted. The Company has not adopted ASU 2014-15, however, the Company does not anticipate that the adoption of this
standard will have a material impact on the financial position, results of operations and related disclosures.
3.
INVESTMENTS IN LOANS RECEIVABLE, AT FAIR VALUE:
The Company’s investments in loans receivable are summarized as follows at December 31, 2014 by collateral type:
Collateral Type
Number of Loans
Unpaid Principal Balance
Condo
Hotel
Retail
Commercial
Land
Total investments
20
1
4
2
2
29
$ 114,048,609
23,482,638
13,410,798
8,543,886
6,385,071
$ 165,871,002
Fair Value
$ 29,795,768
21,953,795
6,455,910
4,362,002
2,590,849
$ 65,158,324
The concentration of the Company’s investments in loans receivable by collateral type at December 31, 2014 is 46% condo, 33%
hotel, 10% retail, 7% commercial, and 4% land.
11
The concentration of the Company’s investments in loans receivable by borrower group at December 31, 2014 is as follows:
Borrower Group
Swiss Chalet
Jorge Pulpeiro
San Geronimo Caribe
Michael Redondo
Desarrolladora Los Filtros
Expert
Ferrer
Other Borrowers
Total investments
Number of Loans
1
5
4
3
2
1
1
12
29
Unpaid Principal Balance
Fair Value
$ 23,482,638
20,328,332
21,165,593
36,508,936
4,665,557
3,529,542
3,000,000
53,190,404
$ 165,871,002
$ 21,953,795
11,680,476
10,289,780
4,824,013
1,618,239
2,362,938
2,164,377
10,264,706
$ 65,158,324
The concentration of the Company’s investment in loans receivable by borrower group at December 31, 2014 is 34% Swiss
Chalet, 18% Jorge Pulperio, 16% San Geronimo Caribe, and 32% other borrower groups.
The Company’s investments in loans receivable are all collateralized by real estate assets geographically located in Puerto Rico.
The following table sets forth the Company’s investments in loans receivable, at fair value that were measured on a recurring basis as
of December 31, 2014 by level within the fair value hierarchy (see Note 2):
Investments in loans receivable,
at fair value
Investments in Loans Receivable, at Fair Value
Level 1
Level 2
Level 3
Total
$ -
$ -
$ 65,158,324
$ 65,158,324
12
The following table sets forth a summary of changes in the fair value of the Company’s level 3 investments in loans receivable for the
year ended December 31, 2014:
Level 3 Investments in Loans Receivable, at Fair Value
Balance, beginning of year
Contractual advances
Contractual loan collections
Purchases
Sales
Unrealized fair value losses
Realized gain on loan settlement
Foreclosure into real estate owned assets
Transfers in and/or out of level 3
Balance, end of year
Net change in unrealized gains/(losses) from investments in
loans receivable still held at the reporting date
$ 112,541,820
3,398,262
(35,232,490)
5,500,000
-
(16,049,249)
7,592,058
(12,592,077)
-
$ 65,158,324
$ (4,483,113)
investment
Transfers in and/or out of level 3 represents transfers from/(to) level 2. Transfers from level 2 are the result of
valuations whose significant inputs have become unobservable, causing less transparency in prices of the
investments. Transfers to
level 2 are the result of investment dispositions or offers to purchase investments. There have been no transfers in and/or out of
level 3 for the period ended December 31, 2014.
The following table presents information about significant unobservable inputs related to the Company’s categories of Level 3
financial assets at December 31, 2014.
Inputs or
Ranges of
Inputs
10.6-18.1%
10.6%
8.5%
10.6%
9-12%
10.6%
9-12%
14.6%
Collateral
Type
Number
of Loans
Fair Value
Valuation Technique
Significant
Unobservable Inputs
Condo
Hotel
Retail
Commercial
Land
Total
investments
1
4
2
2
20
$ 29,795,768
Discounted cash flows1
21,953,795
Discounted cash flows1
6,455,910
Discounted cash flows1
4,362,002
Discounted cash flows1
Discount Rate
Discount Rate
Cap Rate
Discount Rate
Cap Rate
Discount Rate
Cap Rate
2,590,849
Discounted cash flows1
Discount Rate
29
$ 65,158,324
1
Net of servicing fees
13
The significant unobservable inputs used in the fair value measurement of the Company’s investments in loans receivable are
stated above. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher)
fair value measurement. At each valuation date, the key inputs and assumptions are updated to reflect changes in the market,
the performance of the asset and expectation of a market participant. However, there have been no fundamental changes in
valuation techniques utilized by management in estimating fair value. Because of the inherent uncertainties of valuation, the values
reflected in the accompanying consolidated
financial statements may differ materially from the value determined upon the sale of
those investments.
All net realized and unrealized gains in the table above are reflected on the accompanying consolidated statement of operations. In
prior years, fifteen borrower groups that totaled $22,071,844 of the investments in loan receivable as of December 31, 2014, were
refinanced. The original loan terms were modified granting extended terms, reduced principal, lower interest rates, and/or
deferment of interest and principal payments. In the case of some, collateral was relinquished to the Company. The restructures
were considered troubled debt restructures (TDR’s). Unfunded commitments on restructured loans considered TDR’s as of
December 31, 2014 are approximately $734,000.
4.
REAL ESTATE:
The Company holds investments in real estate that are subsequently measured at the lower of cost or fair value less costs to sell.
Accordingly, fair value measurements related to real estate are considered non-recurring. The amounts below represent balances
measured at fair value, which is less than cost, as of December 31, 2014, subsequent to foreclosure, and still held as of the
reporting date (see Note 2).
Real estate
December 31, 2014
Level 1
Level 2
Level 3
Total
$ -
$ -
$ 36,393,441
$ 36,393,441
The table below presents information, by collateral type, about significant unobservable inputs related to the Company’s non-recurring
Level 3 financial assets at December 31, 2014.
Collateral Type
Lower of Cost
or Fair Value
Valuation Technique
Unobservable Inputs
Significant
Inputs or Ranges
of Inputs
Condo
$ 44,520,266
Discounted cash flows
Commercial
34,929,686
Discounted cash flows
Discount Rate
Discount Rate
Cap Rate
10.3-16.6%
13.8-17.5%
9-12%
Land
3,604,152
Discounted cash flows
Discount Rate
14.6-19.2%
Total investments
$ 83,054,104
14
5.
RESTRICTED CASH:
As of December 31, 2014, restricted cash consists of the following:
Advance account
Servicing depository account
Deferred maintenance account
Collections account
Interest reserve account
Working capital account
Marginal account
Real estate tax reserve
$ 220
18,900
151,834
792,028
1,800,000
2,144,112
37,962
610,818
$ 5,555,874
The advance account, servicing depository account, collections account, interest reserve account and working capital account are
required and restricted by the loan agreement with First Bank.
All payments from borrowers are sent to the servicing depository account and then moved to the collections account. The funds in the
collections account are used by the Company as follows: (i) first, pays outstanding interest due on
the three notes payable facilities
(see Note 6); (ii) second, can elect to fund the interest reserve account, up to
$5,000,000; (iii) third, funds the working capital account to cover budgeted operating expenses of the Company; and (iv) fourth,
pays the outstanding principal on first the working capital line and then the acquisition loan and advance facility (see Note 6).
The marginal account is a lockbox that collects rents from certain borrowers who are in default of their loans. The real estate tax
reserve is comprised of funds collected from certain borrowers who are in default to cover real estate
tax due on loan collateral.
Accounts payable and accrued liabilities include $37,108, representing the liability to the borrowers for the marginal account.
Due to the short-term nature of the restricted cash balances, the carrying value of restricted cash approximates fair value.
6. NOTES PAYABLE:
The Company's investments are financed pursuant to a loan agreement dated February 16, 2011, with First Bank, a member of the
Company and the seller of the investments in loans receivable purchased by the Company. The notes payable are collateralized by
the assets owned by the Company. The allocation of the notes payable under the loan and security agreement as of December 31,
2014 are as follows:
Acquisition loan
Advance facility
Working capital line
Parking garage purchase note
Maturity
February 1, 2018
February 1, 2018
September 6, 2015
February 1, 2018
Balance
$ 25,186,083
30,357,686
-
2,500,000
$ 58,043,769
15
The acquisition loan is a $135,580,122 non-revolving credit facility that was used by the Company solely for the purchase of the
investments in loans receivable and related closing costs. For the year ended December 31, 2014
$18,655,148 was repaid by the Company.
The advance facility is a $66,923,343 non-revolving credit facility. The proceeds from the facility are used to fund advance
commitments to the borrowers. For the period from January 1, 2014 through December 31, 2014 an additional $23,457,466
was drawn and $18,657,923 was repaid by the Company. As of December 31, 2014, there is approximately $8,318,933 available to
fund future advance commitments.
The working capital line was a $20,000,000 revolving line of credit. The original working capital line expired in February 2013.
The second amendment to the loan agreement was signed on September 6, 2013 allowing a
$7,000,000 working capital line to be extended for an additional 24 month period. The Renewed Working Capital Line (Note 7)
matures on September 6, 2015. In 2014, an additional $1,043,930 was drawn and repaid by the Company. As of December 31,
2014 $7,000,000 was available for future working capital needs.
The notes payable accrue interest from the date of the loan with interest only due monthly, in arrears. The interest rate is equal to
one month LIBOR, plus 3% (3.154% at December 31, 2014). Interest and principal payments are made through a set of restricted
cash accounts (see Note 5).
The parking garage purchase note is a $2,500,000 non-revolving credit facility that was used by the company solely for the purchase
of the Paseo Caribe parking garage. The parking garage note payable accrues interest on a daily basis at the annual rate of 12%.
Interest and principal payments are to be repaid after the acquisition loan, advance facility and working capital line are paid in full,
and prior to any distributions to Members are made.
Principal payments are made on the loans based on available collections after the payment of interest and principal on covering
loans, interest payments on the acquisition loan, advance facility and working capital line, elected deposits into the interest
reserve account and budgeted working capital amounts. Accordingly, there are no scheduled contractual principal and interest
payments.
On March 1, 2011, the Company entered into an interest rate cap agreement with SMBC Capital Markets, Inc. (SMBC) for a
total fee of $1,005,000. The original interest rate cap agreement, which expired on March 1, 2013, was renewed for a total fee of
$4,000. The renewed agreement expires on March 1, 2015. The cumulative notional amount underlying the interest rate cap
agreement is $176,000,000 for the term of the agreement. Under the agreement, the Company has the right to receive payments
based on the notional amount of the cap to the extent that one month LIBOR exceeds 1.50%. The Company is exposed to credit-
related losses in the event of nonperformance by SMBC; however, it does not expect SMBC to fail to meet its obligations because
of the institutions reputation and history. The cap had a fair value of approximately $0 as of December 31, 2014.
The fair value of the Company’s note payable totals approximately $58,000,000 at December 31, 2014. The fair value of the
Company's notes payable has been estimated based on the discounted cash flow analysis of future expected cash flows of the
underlying loans, forward looking interest rates and using a discount rate representing the Company’s estimate of the rate that would
be used by market participants. Changes in assumptions or estimation methodologies may have a material effect on these estimated
fair values.
16
7.
CAPITAL DISTRIBUTIONS:
The Company’s limited liability agreement dictates the priority of distributable cash once the Company’s notes payable have
been repaid. The priority of distributable cash is (i) pay to Members pro rata any additional capital contributions made since the
invested capital in the amount of
initial acquisition contributions; (ii) pay to PRLP its unpaid priority return (12% of
$89,857,278); (iii) pay to PRLP its unpaid supplemental return (13.5% of invested capital); (iv), pay to PRLP its entire initial
acquisition contributions; (v) pay to the Members pro rata in the ratio of 35% to PRLP and 65% to First Bank until First Bank earns
its unpaid supplemental return (12% of invested capital of $48,384,742); (vi) pay to the Members pro rata in the ratio of 35% to
PRLP and 65% to First Bank until First Bank recovers its entire initial acquisition contributions; (vii) pay First Bank
$6,000,000; (viii) pay PRLP $4,000,000; (ix) pay remainder to the Members pro rata at that point in time.
The second amendment to the loan agreement, signed on September 6, 2013, allowed for Permitted Distributions, funds under the
Renewed Working Capital Line that can be drawn for quarterly tax liability obligations, up to $1,500,000 per fiscal year and not
to exceed $3,000,000 in draws within the two year permitted period. These draws commenced with the quarterly tax payment
applicable to the 3rd quarter of 2013. Under the terms of the second amendment to the loan agreement, these payments will be
treated as distributions to members.
No draw from the Renewed Working Capital Line was necessary in 2014.
8.
ALLOCATION OF PROFITS AND LOSSES:
The Company’s limited liability agreement dictates profit and losses for any fiscal year or portion thereof shall be allocated to the
members in such a manner so that their capital accounts at the end of such fiscal year or portion thereof will reflect as nearly as
possible the amount which each member would receive if the Company were to be liquidated as of the end of that fiscal year or
portion thereof, assuming for purposes of any hypothetical liquidation
(i) a sale of all of the assets of the Company at prices equal to their gross asset values, and (ii) the distribution of the net proceeds
thereof to the members after the payment of all actual Company indebtedness, and any other liabilities related to the Company’s
assets, limited, in the case of non-recourse liabilities, to the collateral securing or otherwise available to satisfy such liabilities
and pursuant to the priority of distributable cash (see Note 7).
The Company’s limited liability agreement does address a situation where one member’s proportionate share of allocated losses
would cause a deficit balance to their capital account. If some, but not all members, would have a deficit balance after losses are
allocated, then losses are reallocated so that the allocated loss to each member would not create a deficit capital balance to any one
member. In future years, if the Company has allocated gains, these gains will first go the members that were reallocated losses
until they are made whole. As of December 31, 2014, losses have been allocated between PRLP and First Bank so that First Bank
does not have a deficit capital balance.
9.
RELATED PARTY TRANSACTIONS:
On February 8, 2011, the Company entered into a servicing agreement with CPG Island Servicing LLC (CPG). The Company may
terminate the agreement with CPG following an event of default by CPG as defined in the servicing agreement.
17
The owner of CPG is an affiliate of FBLP Group Holdings LLC, one of the members of PRLP. A subservicing agreement
between CPG and Goldman Sachs Realty Management, L.P. (RMD), formerly known as Archon Group, L.P, was also signed on
February 8, 2011 and then amended on September 29, 2011. The owner of RMD is an affiliate of GS.
CPG is paid a monthly fee by the Company for loan asset servicing. This fee is equal to 1/12 of 1% of the aggregate principal
balance of the Company’s investments in loans receivable and loans secured by a foreclosed property on
the first day of a given
month.
Under the subservicing agreement, CPG pays RMD a fee in an amount equal to 1/12 of 0.1% of the aggregate principal balance of
the Company’s investments in loans receivable and loans secured by a foreclosed property on the first day of a given month. Total
servicing fees earned by CPG were $2,714,562 for the period ended December 31, 2014. CPG paid RMD $271,456 for the period
ended December 31, 2014.
10.
COMMITMENTS AND CONTINGENCIES:
The Company is involved in various legal proceedings and disputes in the ordinary course of business. The Company does
not believe that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position
or continuing operations on the Company.
The Company may be required to fund additional loan proceeds to borrowers pursuant to the terms of the underlying loan agreements
as a result of the acquisition of the loan portfolio. To the extent that the Company is required to perform under loan commitments
resulting from litigation existing as of the acquisition of the loan portfolio, the Company has received an indemnification from the
previous owner.
11.
SUBSEQUENT EVENTS:
On January 15, 2015, the Company foreclosed one of its investments in loans receivable and took possession of a retail mall. The
in-place value of the asset is approximately $4,700,000.
On March 5, 2015, the Company entered into a Purchase and Sale Agreement for the sale of 36 residential condominium
units in the Atlantis Condominium. The Company received $3,510,613.70 of the $7,763,048.26 sales price on March 5, 2015.
18
CPG/GS PR NPL, LLC and Subsidiaries
Consolidated Financial Statements
For The Year Ended December 31, 2013
(Not covered by report included herein)
19
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET – DECEMBER 31, 2013
(Not covered by report included herein)
INVESTMENT IN LOANS RECEIVABLE, at fair value (cost $63,457,792)
$112,541,820
REAL ESTATE
64,679,010
ASSETS
CASH AND CASH EQUIVALENTS
RESTRICTED CASH
DEFERRED FINANCING COSTS, net of accumulated amortization of $462,073
ACCOUNTS RECEIVABLE
OTHER ASSETS
Total assets
624,195
8,051,962
328,422
115,890
133,304
$ 186,474,603
LIABILITIES AND MEMBERS’ EQUITY
NOTES PAYABLE, related party
$ 69,399,374
OTHER LIABILITIES:
Accounts payable and accrued liabilities
Mortgage loan escrow
Accrued interest payable, related party
Total liabilities
5,265,217
687,865
186,872
75,539,328
COMMITMENTS AND CONTINGENCIES (Note 10)
MEMBERS’ EQUITY
110,935,275
Total liabilities and members’ equity
$186,474,603
The accompanying notes are an integral part of these consolidated financial statements.
20
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Not covered by report included herein)
INCOME:
Rental Income
Straight line rent
Other
Total income
OPERATING EXPENSES:
Repairs and maintenance
Utilities
Management and administrative
Real estate taxes
Insurance
Total operating expenses
EXPENSES:
Interest
Amortization of deferred financing costs
Fair value adjustment of derivative instruments
Legal
Professional fees
Servicing fees to related parties
Other ownership
Total expenses
LOSS BEFORE REALIZED/UNREALIZED GAIN ON INVESTMENTS IN LOANS
AND REALIZED LOSS ON REAL ESTATE
NET UNREALIZED GAIN ON INVESTMENTS IN LOANS RECEIVABLE CARRIED AT
FAIR VALUE UNDER THE FAIR VALUE OPTION
NET REALIZED LOSS ON SETTLEMENT OF INVESTMENTS IN LOANS RECEIVABLE
AT FAIR VALUE UNDER THE FAIR VALUE OPTION
WRITEDOWN ON REAL ESTATE
NET GAIN ON SALE OF REAL ESTATE
NET LOSS
The accompanying notes are an integral part of these consolidated financial statements.
21
$ 662,257
61,847
100
724,204
621,278
450,462
614,075
528,258
479,050
2,693,123
2,243,345
91,415
4,000
2,011,957
545,650
3,235,087
1,402,514
9,533,968
(11,502,887)
7,759,201
(1,000,115)
(4,007,435)
2,520,899
$ (6,230,337)
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2013
(Not covered by report included herein)
PRLP Ventures, LLC
First Bank
Puerto Rico
Members’ Equity
BALANCE AT DECEMBER 31, 2012
$ 113,893,690
$ 3,654,867
$ 117,548,557
Cash distributions
Net loss
(382,945)
(2,575,470)
-
(3,654,867)
(382,945)
(6,230,337)
BALANCE AT DECEMBER 31, 2013
$ 110,935,275
$ -
$ 110,935,275
The accompanying notes are an integral part of these consolidated financial statements.
22
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Not covered by report included herein)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred financing costs
Fair value adjustment of derivative instruments
Net gain on sale of real estate
Unrealized gain on investments in loans receivable
Write-down of loss from other real estate
Realized loss on loan settlements
Change in operating assets and liabilities:
Other assets
Accounts receivable
Accounts payable and accrued liabilities
Accrued interest payable
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate
Fundings to investments in loans receivable
Collections on loans receivable
Change in restricted cash
Net proceeds from sale of other real estate
Net cash from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions
Proceeds from notes payable
Principal payments made on notes payable
Purchase of interest rate derivative instruments
Payment of deferred financing costs
Change in escrow liability
Net cash used in financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL DISCLOSURES:
Interest paid
Investment of loans receivable transferred to other real estate
The accompanying notes are an integral part of these consolidated financial statements.
23
$ (6,230,337)
91,415
4,000
(2,520,899)
(7,759,201)
4,007,435
1,000,115
56,504
94,111
3,834,740
(30,785)
(7,452,902)
(12,098,166)
(11,234,190)
21,662,125
3,201,710
12,874,669
14,406,148
(382,945)
19,486,846
(29,490,195)
(4,000)
(72,313)
(21,520)
(10,484,127)
(3,530,811)
4,155,076
$ 624,195
$ 2,274,130
$ 15,309,921
CPG/GS PR NPL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Not covered by report included herein)
1. ORGANIZATION:
CPG/GS PR NPL, LLC (the Parent Company), a Puerto Rico limited liability company, was organized effective January 20, 2011, to
directly or indirectly acquire, own, hold, manage, finance, mortgage, pledge, lease and assign any assets, advance funds, enter into such
acquisition agreements, servicing agreements, leases, assignments, financing agreements, security agreements and other instruments and
agreements of any kind, enter into partnerships, limited partnerships, limited liability companies and joint ventures, and do any and all
other acts and things that may be necessary or useful for the conduct of its business or the winding up thereof. The Parent Company
owns 100% of the equity interests in CPG/GS Island Properties I, LLC, CPG/GS Island Properties II, LLC, CPG/GS Island Properties
III, LLC, CPG/GS Island Properties IV, LLC, CPG/GS Island Properties V, LLC, CPG/GS Island Properties VI, LLC and CPG/GS
Island Properties VII, LLC, (the Subsidiaries). The Subsidiaries, Puerto Rico limited liability companies, were organized primarily to
hold any real estate assets the Parent Company obtains through foreclosure of its investments in loans receivable.
Collectively, the Parent Company and the Subsidiaries are the “Company”. The members of the Parent Company are PRLP Ventures,
LLC (PRLP) and First Bank Puerto Rico (First Bank) (collectively, the Members). The members of PRLP are FBLP Group Holding,
LLC (FBLP) and Goldman, Sachs & Co. (GS).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Parent Company and its wholly owned Subsidiaries. These
consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United
States of America and present the Company’s consolidated financial position, results of operations and cash flows. Intercompany
transactions have been eliminated in consolidation.
Basis of accounting and use of estimates
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Management has evaluated subsequent
events through March 11, 2014, the date which the consolidated financial statements were available to be issued.
Fair value measurements
Fair value measurements are market-based measurements, not entity-specific measurements. Fair value measurements are determined
based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, management uses a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are
classified within Levels 1 and 2 of the hierarchy) and management’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
24
Investments in loans receivable, at fair value
Management elected to carry the Company’s investments in loans receivable at fair value due to the fair value option being
operationally less complex for the Company to manage. Fair value is an exit price, representing the amount that would be received to
sell an asset in an orderly transaction between market participants at the measurement date. The Company’s private investments, by
their nature, have little to no price transparency. The Company’s investments in loans receivable are either non-performing or sub-
performing in relation to the original terms of the loans. The fair value of the Company’s investments in loans receivable are
determined based on an income approach that uses cash flows at the loan level from the highest and best use of the assets by a
market participant. In reaching its determination of fair value, management considers many factors including, but not limited to,
broker quotations to support inputs used in the valuations of the underlying collateral, the operating cash flows and financial
performance of the investments considered relevant to a market participant, taxes associated with owning the investments,
trends within sectors and/or regions, historical events, the expected hold period and strategy anticipated to be employed by a
market participant and any other specific rights or terms associated with the investment that management believes would be a
relevant factor impacting the exit price. Such investments are classified within level 3 of the fair value hierarchy.
Management’s judgment is also required to determine the appropriate risk-adjusted discount rate for investments that are classified
within level 3 of the fair value hierarchy. In such situations, management estimates the rates based on available market information
adjusted to rates which market participants would likely consider appropriate for risks associated with a particular investment.
Investments in loans receivable are on nonaccrual status and all cash payments are first applied to the loans’ principal balances. All
income or loss is recognized at the valuation date in net change in unrealized appreciation/depreciation from investments in loans
receivable on the consolidated statement of operations. Interest income on performing loans is recognized on an accrual basis. The
recognition of income on a performing loan is discontinued when interest or principal payments become 90 days past due. Cash
payments subsequently received on investments in loans receivable are applied to the principal balance or recorded as interest income,
depending upon management’s assessment of the ultimate collectability of the loan.
Loan modifications and restructurings may occur when the borrower experiences financial difficulty and needs temporary or
permanent relief from the original contractual terms of the loan and the lender grants a concession. These modifications are structured
on either a loan-by-loan or borrower group basis, and depending on the circumstances, may extend payment terms, modify interest
rates, reduce principal owed, or other concessions. When this occurs, the loan may be considered a troubled debt restructuring. Once a
loan is restructured and the borrower is not in default of the renegotiated terms, the Company accrues interest earned. When a loan is
settled, the difference between the proceeds received and the loan basis is recorded to gain or loss on loan settlement in the income
statement.
Real estate
When real estate assets are acquired through foreclosure or repossession they are initially recorded at the fair value of the property and
included in investments in real estate owned in the accompanying consolidated balance sheet. Estimated fair value is based on the
underlying collateral value which is estimated using an income approach that uses cash flows from the eventual disposition of the
collateral and the estimated cash flows during the hold period, if any. Immediately preceding the foreclosure or repossession, any
adjustments to the loan’s fair value will be reflected as a gain or loss on investments in loans receivable carried at fair value under the
fair value option on the consolidated statement of operations. With the foreclosure, the entity changes from holding a financial asset to
a hard asset, therefore, a realized event has occurred. As of December 31, 2013, the Company had foreclosed on a total of eleven loans
held by six borrower groups. The real estate assets are held in the Subsidiaries of the Company.
Upon foreclosure of a loan in full satisfaction of a loan receivable, the Company accounts for those assets at their fair value less cost
to sell and the assets are classified as held for sale. In subsequent periods, such long-lived assets are measured at the lower of carrying
amount or fair value less cost to sell. As of December 31, 2013 the Company considers all foreclosed assets as long-lived assets held
for sale and are accounted for at the lower of cost or fair value less cost to sell.
25
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less that are not restricted to be cash
equivalents. Cash equivalents are placed with reputable institutions and the balances may at times exceed federally insured deposit
levels; however, the Company has not experienced any losses in such accounts.
As cash and cash equivalents have a maturity of less than three months, the carrying value of cash equivalents approximates fair value.
Deferred financing costs
Deferred financing costs incurred in connection with the receipt of the notes payable are capitalized and amortized over the term of the
debt using a method which approximates the interest method.
Interest rate derivative instrument
The Company’s derivative transaction consists of an interest rate cap agreement entered into to mitigate the Company’s exposure to
increasing borrowing costs in the event of a rising interest rate environment (see Note 6). The Company has elected not to designate
its interest rate cap agreement as a designated accounting hedge. Changes in the fair value of the interest rate cap are recorded in the
accompanying consolidated statement of operations.
The valuation of the interest rate cap is determined using widely accepted valuation techniques including discounted cash flow
analysis on the expected cash flows. This analysis reflects the contractual terms of the derivative, including the period to maturity, and
uses observable market-based inputs such as interest rate curves and volatility assumptions. The fair value of the interest rate cap is
determined using the market standard methodology of discounted future cash receipts. The cash receipts are based on an expectation
of future interest rates using a forward curve that is derived from observable market interest rate curves.
The analysis has incorporated credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk
in the fair value measurements. Management evaluated the counterparty’s nonperformance risk based on the counterparty's most
recent credit rating and any changes in credit rating over the past year. In adjusting the fair value of the derivative contract for the
effect of nonperformance risk, management has considered the impact of collateral netting and any applicable credit enhancements.
Management concluded that the nonperformance risk is insignificant, and no adjustment to the value was necessary for this input.
Therefore, all inputs used to value the derivative falls within Level 2 of the fair value hierarchy and the derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy.
Accounts receivable
Accounts receivable at December 31, 2013 is comprised of real estate tax and insurance receivables and straight line rent receivable of
$115,890.
Other Assets
Other assets at December 31, 2013 are comprised of prepaid real estate taxes and property insurance of $133,304.
The Puerto Rico Insurance Code prohibits a lender from placing insurance on behalf of a borrower and charging the borrower for the
premium payment. However, the lender may protect its own interests without transferring the costs to the borrower. For the period
ended December 31, 2013, the Company paid property insurance premiums on certain collateral. These premiums are reflected as
insurance expense in the consolidated statement of operations.
Income taxes
Under U.S. federal income tax law and Puerto Rico income tax law, limited liability companies are not taxable entities. Therefore, no
provision has been made in the accompanying consolidated financial statements for income taxes due by the Company. Each member
is individually responsible for reporting its share of the Company’s income or loss.
26
Accounting Standards Codification (ASC) 740, Income Taxes, requires management to determine whether a tax position is more
likely than not to be sustained upon examination by the applicable tax authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. Once it is determined that a position meets this recognition
threshold, the position is measured to determine the amount of tax benefit or expense to be recognized. The Company does not have
any uncertain tax positions that would require accrual under ASC 740. No interest or penalty related to uncertain taxes has been
recognized on the accompanying statement of operations. Management does not expect a significant change in uncertain tax positions
during the twelve months subsequent to December 31, 2013.
The Company files U.S. and Puerto Rico tax returns. In the normal course of business, the Company may be audited by either taxing
authority. As of December 31, 2013, the Company is not currently undergoing any tax examinations, nor has the Company agreed to
extend the statute of limitations beyond the prescribed expiration date. The Company remains subject to examination by various
taxing authorities for tax years beginning 2011 and upon completion of any examination, tax adjustments may be necessary.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities at December 31, 2013 are comprised of the following:
Unearned income
Accounts payable
Accrued servicing fees
Real estate tax liability
Accrued professional fees
Other liabilities
Deferred maintenance liability (Note 5)
Borrower deposits liability (Note 5)
Other comprehensive income
46,667
121,751
236,422
407,247
465,114
3,803,632
121,254
63,130
$ 5,265,217
Since there are no transactions requiring presentation in other comprehensive income, but not in net income, the Company’s net
income equates to comprehensive income.
Recent accounting and other developments
In February 2013, the FASB issued ASU 2013-03, which exempts nonpublic entities from the requirement in ASC 825 (amended by
ASU 2011-04) to disclose the fair value hierarchy level (i.e., Level 1, 2, or 3) for fair value measurements of financial assets and
financial liabilities that are disclosed in the footnotes to the financial statements but not reported at fair value in the statement of
financial position. The ASU does not change any other fair value disclosure requirements in ASC 820 or ASC 825. The amendments
in ASU 2013-03 became effective upon issuance. As the Company’s financial assets are reported at fair value on the consolidated
balance sheet, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or
disclosures.
In December 2013, the Puerto Rican government signed into law House Bill 1524 (Act 163-2013), known as the Act of Effective
Mechanisms for Tax Fiscalization (the Act). The purpose of the Act is to modify the content of the supplemental information that
accompanies the audited financial statements that are required to be filed with the income tax return. The Act is effective for taxable
years commencing after December 31, 2012 and requires additional supplemental schedules to be included with the consolidated
financial statements. The Company is currently evaluating the impact of the Act and the additional reporting requirements related to
the new supplemental schedules; however, it did not impact these consolidated financial statements or disclosures.
27
3. INVESTMENTS IN LOANS RECEIVABLE, AT FAIR VALUE:
The Company’s investments in loans receivable are summarized as follows at December 31, 2013 by collateral type:
Collateral Type
Condo
Hotel
Retail
Commercial
Land
Marina
Total investments
Number
of Loans
24
1
11
3
2
3
44
Unpaid
Principal Balance
$ 126,437,294
23,500,000
29,717,031
22,376,486
6,385,071
8,506,354
$ 216,922,236
Fair Value
$ 46,365,954
21,225,094
21,986,968
11,742,966
2,420,883
8,799,955
$ 112,541,820
The concentration of the Company’s investments in loans receivable by collateral type at December 31, 2013 is 41% condo, 20%
retail, 19% hotel, 10% commercial, 8% marina and 2% land.
The concentration of the Company’s investments in loans receivable by borrower group at December 31, 2013 is as follows:
Borrower Group
Eduardo Ferrer
Swiss Chalet
San Geronimo Caribe
Jorge Pulpeiro
Enin
Michael Redondo
Desarrolladora Los Filtros
Other Borrowers
Total investments
Number of
Loans
14
1
4
5
1
3
2
14
44
Unpaid Principal
Balance
$ 29,078,683
23,500,000
27,565,115
20,786,288
13,363,135
37,362,908
6,135,014
59,131,093
$ 216,922,236
Fair Value
$ 26,114,608
21,225,094
18,155,805
12,191,883
7,062,219
6,317,693
3,873,555
17,600,963
$ 112,541,820
The concentration of the Company’s investment in loans receivable by borrower group at December 31, 2013 is 23% Eduardo Ferrer,
19% Swiss Chalet 16% San Geronimo Caribe, and 42% other borrower groups.
The Company’s investments in loans receivable are all collateralized by real estate assets geographically located in Puerto Rico.
The following table sets forth the Company’s investments in loans receivable, at fair value that were measured on a recurring basis as
of December 31, 2013 by level within the fair value hierarchy (see Note 2):
Investments in loans receivable, at
fair value
$ -
$ -
$ 112,541,820
$ 112,541,820
Investments in Loans Receivable, at Fair Value
Level 1
Level 2
Level 3
Total
28
The following table sets forth a summary of changes in the fair value of the Company’s level 3 investments in loans receivable for the
year ended December 31, 2013:
Balance, beginning of year
Contractual advances
Contractual loan collections
Purchases
Sales
Unrealized fair value gains
Realized loss on loan settlement
Foreclosure into real estate owned assets
Transfers in and/or out of level 3
Balance, end of year
Net change in unrealized gains/(losses) from
investments in loans receivable still held at the
reporting date
Level 3 Investments in
Loans Receivable, at Fair Value
$ 131,520,590
11,234,190
(21,662,125)
-
-
7,759,201
(1,000,115)
(15,309,921)
-
$ 112,541,820
$ 3,670,796
Transfers in and/or out of level 3 represents transfers from/(to) level 2. Transfers from level 2 are the result of investment valuations
whose significant inputs have become unobservable, causing less transparency in prices of the investments. Transfers to level 2 are the
result of investment dispositions or offers to purchase investments. There have been no transfers in and/or out of level 3 for the period
ended December 31, 2013.
The following table presents information about significant unobservable inputs related to the Company’s categories of Level 3
financial assets at December 31, 2013.
Collateral
Type
Number
of Loans
Fair Value
Valuation Technique
Condo
Hotel
Retail
Commercial
Land
Marina
Total
investments
24
1
11
3
2
3
$ 46,365,954
Discounted cash flows
21,225,094
Discounted cash flows
21,986,968
Discounted cash flows
11,742,966
Discounted cash flows
2,420,883
Discounted cash flows
8,799,955
Discounted cash flows
44
$ 112,541,820
Significant
Unobservable
Inputs
Inputs or
Ranges of
Inputs
Discount Rate
Discount Rate
Cap Rate
Discount Rate
Cap Rate
Discount Rate
Cap Rate
Discount Rate
Discount Rate
Cap Rate
12-17%
9.5%
8.5%
9.5-17%
9-12%
9.5%
9-12%
13.5%
9.5%
10%
The significant unobservable inputs used in the fair value measurement of the Company’s investments in loans receivable are stated
above. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value
measurement. At each valuation date, the key inputs and assumptions are updated to reflect changes in the market, the performance of
the asset and expectation of a market participant. However, there have been no fundamental changes in valuation techniques utilized
by management in estimating fair value. Because of the inherent uncertainties of valuation, the values reflected in the accompanying
consolidated financial statements may differ materially from the value determined upon the sale of those investments.
29
All net realized and unrealized gains in the table above are reflected on the accompanying consolidated statement of operations. In
prior years, fifteen borrower groups that totaled $60,509,925 of the investments in loan receivable as of December 31, 2013, were
refinanced. The original loan terms were modified granting extended terms, reduced principal, lower interest rates, and/or deferment
of interest and principal payments. In the case of some, collateral was relinquished to the Company. The restructures were considered
TDR’s. Unfunded commitments on restructured loans considered TDR’s as of December 31, 2013 are approximately $42,014,000.
4. REAL ESTATE:
The Company holds investments in real estate that are subsequently measured at the lower of cost or fair value less costs to sell.
Accordingly, fair value measurements related to real estate is considered non-recurring. The amounts below represent only balances
measured at fair value at December 31, 2013, subsequent to foreclosure, and still held as of the reporting date (see Note 2).
Level 1
December 31, 2013
Level 2
Level 3
Total
Real estate
$ - $ -
$ 35,783,510
$ 35,783,510
The table below presents information, by collateral type, about significant unobservable inputs related to the Company’s non-recurring
Level 3 financial assets at December 31, 2013.
Collateral Type
Lower of Cost
or Fair Value
Valuation Technique
Condo
$ 42,246,901
Discounted cash flows
Commercial
17,615,100
Discounted cash flows
Significant
Unobservable Inputs
Inputs or
Ranges of
Inputs
Discount Rate
Discount Rate
Cap Rate
12%
17-20%
9-12%
Land
Total investments
4,817,009
$ 64,679,010
5. RESTRICTED CASH:
Discounted cash flows
Discount Rate
15-20%
As of December 31, 2013, restricted cash consists of the following:
Advance account
Servicing depository account
Deferred maintenance account
Collections account
Interest reserve account
Working capital account
Marginal account
Real estate tax reserve
$ 100
216,549
121,239
2,966,505
1,800,000
2,196,198
63,507
687,864
$ 8,051,962
The advance account, servicing depository account, collections account, interest reserve account and working capital account are
required and restricted by the loan agreement with First Bank.
All payments from borrowers are sent to the servicing depository account and then moved to the collections account. The funds in the
collections account are used by the Company as follows: (i) first, pays outstanding interest due on the three notes payable facilities
(see Note 6); (ii) second, can elect to fund the interest reserve account, up to $5,000,000; (iii) third, funds the working capital account
to cover budgeted operating expenses of the Company; and (iv) fourth, pays the outstanding principal on first the working capital line
and then the acquisition loan and advance facility (see Note 6).
30
The marginal account is a lockbox that collects rents from certain borrowers who are in default of their loans. The real estate tax
reserve is comprised of funds collected from certain borrowers who are in default to cover real estate tax due on loan collateral.
Accounts payable and accrued liabilities include $184,385, representing the liability to the borrowers for the marginal account.
Due to the short-term nature of the restricted cash balances, the carrying value of restricted cash approximates fair value.
6. NOTES PAYABLE:
The Company's investments are financed pursuant to a loan agreement dated February 16, 2011, with First Bank, a member of the
Company and the seller of the investments in loans receivable purchased by the Company. The notes payable are collateralized by the
assets owned by the Company. The allocation of the notes payable under the loan and security agreement as of December 31, 2013 are
as follows:
Acquisition loan
Advance facility
Working capital line
Maturity
February 1, 2018
February 1, 2018
September 6, 2015
Balance
$ 43,841,232
25,558,142
-
$ 69,399,374
The acquisition loan is a $135,580,122 non-revolving credit facility that was used by the Company solely for the purchase of the
investments in loans receivable and related closing costs. For the year ended December 31, 2013 $22,510,675 was repaid by the
Company.
The advance facility is a $66,923,343 non-revolving credit facility. The proceeds from the facility are used to fund advance
commitments to the borrowers. For the period from January 1, 2013 through December 31, 2013 an additional $19,103,901 was dra wn
and $6,596,575 was repaid by the Company. As of December 31, 2013, there is approximately $31,776,399 available to fund future
advance commitments.
The working capital line was a $20,000,000 revolving line of credit. The original working capital line expired in February 2013. The
second amendment to the loan agreement was signed on September 6, 2013 allowing a $7,000,000 working capital line to be extended
for an additional 24 month period. The Renewed Working Capital Line (Note 7) matures on September 6, 2015. In 2013, an
additional $382,945 was drawn and repaid by the Company. As of December 31, 2013 $7,000,000 was available for future working
capital needs.
The notes payable accrue interest from the date of the loan with interest only due monthly, in arrears. The interest rate is equal to one
month LIBOR, plus 3% (3.16825% at December 31, 2013). Interest and principal payments are made through a set of restricted cash
accounts (see Note 5).
Principal payments are made on the loans based on available collections after the payment of interest and principal on covering loans,
interest payments on the acquisition loan, advance facility and working capital line, elected deposits into the interest reserve account
and budgeted working capital amounts. Accordingly, there are no scheduled contractual principal and interest payments.
On March 1, 2011, the Company entered into an interest rate cap agreement with SMBC Capital Markets, Inc. (SMBC) for a total fee
of $1,005,000. The original interest rate cap agreement, which expired on March 1, 2013, was renewed for a total fee of $4,000. The
renewed agreement expires on March 1, 2014. The cumulative notional amount underlying the interest rate cap agreement is
$176,000,000 for the term of the agreement. Under the agreement, the Company has the right to receive payments based on the
notional amount of the cap to the extent that one month LIBOR exceeds 1.50%. The Company is exposed to credit-related losses in
the event of nonperformance by SMBC; however, it does not expect SMBC to fail to meet its obligations because of the institutions
reputation and history. The cap had a fair value of approximately $0 as of December 31, 2013.
The fair value of the Company’s note payable totals approximately $69,100,000 at December 31, 2013. The fair value of the
Company's notes payable has been estimated based on the discounted cash flow analysis of future expected cash flows of the
underlying loans, forward looking interest rates and using a discount rate representing the Company’s estimate of the rate that would
be used by market participants. Changes in assumptions or estimation methodologies may have a material effect on these estimated
fair values.
31
7. CAPITAL DISTRIBUTIONS:
The Company’s limited liability agreement dictates the priority of distributable cash once the Company’s notes payable have been
repaid. The priority of distributable cash is (i) pay to Members pro rata any additional capital contributions made since the initial
acquisition contributions; (ii) pay to PRLP its unpaid priority return (12% of invested capital in the amount of $89,857,278); (iii) pay
to PRLP its unpaid supplemental return (13.5% of invested capital); (iv), pay to PRLP its entire initial acquisition contributions; (v)
pay to the Members pro rata in the ratio of 35% to PRLP and 65% to First Bank until First Bank earns its unpaid supplemental return
(12% of invested capital of $48,384,742); (vi) pay to the Members pro rata in the ratio of 35% to PRLP and 65% to First Bank until
First Bank recovers its entire initial acquisition contributions; (vii) pay First Bank $6,000,000; (viii) pay PRLP $4,000,000; (ix) pay
remainder to the Members pro rata at that point in time.
The Puerto Rico Department of Treasury requires the Company to pay members’ withholding taxes on behalf of the member. The
Company makes quarterly payments on behalf of its members. Tax payments for the 1st and 2nd quarter of 2013 were paid from cash
funded by the members and was paid on behalf of the members to Puerto Rico’s Department of Treasury. The total amount of cash
funded by members and then paid on behalf of the members in 2013 was $1,664,724.
The second amendment to the loan agreement, signed on September 6, 2013, allowed for Permitted Distributions, funds under the
Renewed Working Capital Line that can be drawn for quarterly tax liability obligations, up to $1,500,000 per fiscal year and not to
exceed $3,000,000 in draws within the two year permitted period. These draws commenced with the quarterly tax payment applicable
to the 3rd quarter of 2013. Under the terms of the second amendment to the loan agreement, these payments will be treated as
distributions to members. $382,945 was drawn from the Renewed Working Capital Line to pay for 3 rd quarter 2013 taxes for the
PRLP members.
For the year ended December 31, 2013 the Company paid taxes of $2,047,669.
8. ALLOCATION OF PROFITS AND LOSSES:
The Company’s limited liability agreement dictates profit and losses for any fiscal year or portion thereof shall be allocated to the
members in such a manner so that their capital accounts at the end of such fiscal year or portion thereof will reflect as nearly as
possible the amount which each member would receive if the Company were to be liquidated as of the end of that fiscal year or
portion thereof, assuming for purposes of any hypothetical liquidation (i) a sale of all of the assets of the Company at prices equal to
their gross asset values, and (ii) the distribution of the net proceeds thereof to the members after the payment of all actual Company
indebtedness, and any other liabilities related to the Company’s assets, limited, in the case of non-recourse liabilities, to the collateral
securing or otherwise available to satisfy such liabilities and pursuant to the priority of distributable cash (see Note 7).
The Company’s limited liability agreement does address a situation where one member’s proportionate share of allocated losses would
cause a deficit balance to their capital account. If some, but not all members, would have a deficit balance after losses are allocated,
then losses are reallocated so that the allocated loss to each member would not create a deficit capital balance to any one member. In
future years, if the Company has allocated gains, these gains will first go the members that were reallocated losses until they are made
whole. As of December 31, 2013, losses have been allocated between PRLP and First Bank so that First Bank does not have a deficit
capital balance.
9. RELATED PARTY TRANSACTIONS:
On February 8, 2011, the Company entered into a servicing agreement with CPG Island Servicing LLC (CPG). The Company may
terminate the agreement with CPG following an event of default by CPG as defined in the servicing agreement. The owner of CPG is
an affiliate of FBLP Group Holdings LLC, one of the members of PRLP. A subservicing agreement between CPG and Goldman
Sachs Realty Management, L.P. (RMD), formerly known as Archon Group, L.P, was also signed on February 8, 2011 and then
amended on September 29, 2011. The owner of RMD is an affiliate of GS.
32
CPG is paid a monthly fee by the Company for loan asset servicing. This fee is equal to 1/12 of 1% of the aggregate principal balance
of the Company’s investments in loans receivable and loans secured by a foreclosed property on the first day of a given month. Under
the subservicing agreement, CPG pays RMD a fee in an amount equal to 1/12 of 0.1% of the aggregate principal balance of the
Company’s investments in loans receivable and loans secured by a foreclosed property on the first day of a given month. Total
servicing fees earned by CPG were $3,235,087 for the period ended December 31, 2013. CPG paid RMD $323,509 for the period
ended December 31, 2013.
10. COMMITMENTS AND CONTINGENCIES:
The Company is involved in various legal proceedings and disputes in the ordinary course of business. The Company does not believe
that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position or continuing
operations on the Company.
The Company may be required to fund additional loan proceeds to borrowers pursuant to the terms of the underlying loan agreements
as a result of the acquisition of the loan portfolio. To the extent that the Company is required to perform under loan commitments
resulting from litigation existing as of the acquisition of the loan portfolio, the Company has received an indemnification from the
previous owner.
33
CPG/GS PR NPL, LLC and Subsidiaries
Consolidated Financial Statements
For The Year Ended December 31, 2012
And Independent Auditor’s Report
34
Independent Auditor's Report
To the Members of CPG/GS PR NPL, LLC
We have audited the accompanying consolidated financial statements of CPG/GS PR NPL, LLC and its subsidiaries (the “Company”),
which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations,
members’ equity and cash flows for the year then ended.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance
of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
CPG/GS PR NPL, LLC and its subsidiaries at December 31, 2012, and the results of their operations and their cash flows for the year
then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
March 29, 2013
Dallas, Texas
35
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET – DECEMBER 31, 2012
ASSETS
INVESTMENT IN LOANS RECEIVABLE, at fair value (cost $117,357,733)
$ 131,520,590
REAL ESTATE OWNED
CASH AND CASH EQUIVALENTS
RESTRICTED CASH
DEFERRED FINANCING COSTS, net of accumulated amortization of $370,657
ACCOUNTS RECEIVABLE
51,632,128
4,155,076
11,253,672
347,524
210,001
OTHER ASSETS
189,808
Total assets
$ 199,308,799
LIABILITIES AND MEMBERS’ EQUITY
NOTES PAYABLE, related party
$ 79,402,723
OTHER LIABILITIES:
Accounts payable and accrued liabilities
Mortgage loan escrow
Accrued interest payable, related party
1,629,329
510,533
217,657
Total liabilities
81,760,242
COMMITMENTS AND CONTINGENCIES (Note 10)
MEMBERS’ EQUITY
117,548,557
Total liabilities and members’ equity
$ 199,308,799
The accompanying notes are an integral part of these consolidated financial statements.
36
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2012
INCOME:
Rental income
Interest
Other
$ 344,211
1,020,568
24,566
Total income
1,389,346
OPERATING EXPENSES:
Repairs and maintenance
Utilities
Management and administrative
Real estate taxes
Insurance
292,380
350,408
602,922
279,713
553,212
Total operating expenses
2,078,705
EXPENSES:
Interest
Amortization of deferred financing costs
Fair value adjustment of derivative instruments
Legal
Professional fees
Servicing fees to related parties
Other ownership
Total expenses
LOSS BEFORE REALIZED/UNREALIZED GAIN ON INVESTMENTS IN LOANS
AND REALIZED LOSS ON REAL ESTATE
NET UNREALIZED LOSS ON INVESTMENTS IN LOANS RECEIVABLE CARRIED AT
FAIR VALUE UNDER THE FAIR VALUE OPTION
NET REALIZED GAIN ON SETTLEMENT OF INVESTMENTS IN LOANS RECEIVABLE
AT FAIR VALUE UNDER THE FAIR VALUE OPTION
NET REALIZED GAIN ON FORECLOSURE OF INVESTMENTS IN LOANS
AT FAIR VALUE UNDER THE FAIR VALUE OPTION
WRITEDOWN ON REAL ESTATE OWNED
4,040,474
271,430
68,074
1,948,558
587,596
4,001,689
800,039
11,717,861
(12,407,220)
(5,282,104)
3,290,307
3,590,444
(2,139,155)
NET GAIN ON SALE OF REAL ESTATE OWNED
3,598,583
NET LOSS
$ (9,349,145)
The accompanying notes are an integral part of these consolidated financial statements.
37
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2012
PRLP Ventures, LLC
First Bank
Puerto Rico
Members’ Equity
BALANCE AT DECEMBER 31, 2011
$ 108,953,804
$ 17,943,898
$ 126,897,702
Allocation of preferred return
Net loss
4,939,886
-
(4,939,886)
(9,349,145)
-
(9,349,145)
BALANCE AT DECEMBER 31, 2012
$ 113,893,690
$ 3,654,867
$ 117,548,557
The accompanying notes are an integral part of these consolidated financial statements.
38
CPG/GS PR NPL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred financing costs
Fair value adjustment of derivative instruments
Net gain on sale of real estate owned
Unrealized loss on investments in loans receivable
Write-down on loss from other real estate owned
Realized gain on loan settlements
Realized gain on foreclosure
Change in operating assets and liabilities:
Interest receivable
Other assets
Accounts receivable
Accounts payable and accrued liabilities
Accrued interest payable
$ (9,349,145)
271,430
68,074
(3,598,583)
5,282,104
2,139,155
(3,290,307)
(3,590,444)
154,490
(165,331)
670,098
(602,001)
(349,443)
Net cash used in operating activities
(12,359,902)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate owned
Fundings to investments in loans receivable
Collections on loans receivable
Change in restricted cash
Net proceeds from sale of other real estate owned
(1,442,459)
(23,670,020)
71,350,578
69,485,000
20,206,420
Net cash from investing activities
135,929,519
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable
Principal payments made on notes payable
Payment of deferred financing costs
Change in escrow liability
16,043,043
(137,341,053)
(20,053)
(108,044)
Net cash used in financing activities
(121,426,107)
NET CHANGE IN CASH AND CASH EQUIVALENTS
2,143,509
CASH AND CASH EQUIVALENTS, beginning of year
2,011,567
CASH AND CASH EQUIVALENTS, end of year
$ 4,155,076
SUPPLEMENTAL DISCLOSURES:
Interest paid
Investment of loans receivable transferred to other real estate owned
$ 3,822,817
$ 68,936,661
The accompanying notes are an integral part of these consolidated financial statements.
39
CPG/GS PR NPL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2012
1. ORGANIZATION:
CPG/GS PR NPL, LLC (the Parent Company), a Puerto Rico limited liability company, was organized effective January 20, 2011, to
directly or indirectly acquire, own, hold, manage, finance, mortgage, pledge, lease and assign any assets, advance funds, enter into
such acquisition agreements, servicing agreements, leases, assignments, financing agreements, security agreements and other
instruments and agreements of any kind, enter into partnerships, limited partnerships, limited liability companies and joint ventures,
and do any and all other acts and things that may be necessary or useful for the conduct of its business or the winding up thereof. The
Parent Company owns 100% of the equity interests in CPG/GS Island Properties I, LLC, CPG/GS Island Properties II, LLC, CPG/GS
Island Properties III, LLC, CPG/GS Island Properties IV, LLC, CPG/GS Island Properties V, LLC, CPG/GS Island Properties VI,
LLC and CPG/GS Island Properties VII, LLC, (the Subsidiaries). The Subsidiaries, Puerto Rico limited liability companies, were
organized primarily to hold any real estate assets the Parent Company obtains through foreclosure of its investments in loans
receivable.
Collectively, the Parent Company and the Subsidiaries are the “Company”. The members of the Parent Company are PRLP Ventures,
LLC (PRLP) and First Bank Puerto Rico (First Bank) (collectively, the Members). The members of PRLP are FBLP Group Holding,
LLC (FBLP) and Goldman, Sachs & Co. (GS).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Parent Company and its wholly owned Subsidiaries. These
consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United
States of America and present the Company’s consolidated financial position, results of operations and cash flows. Intercompany
transactions have been eliminated in consolidation.
Basis of accounting and use of estimates
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Management has evaluated subsequent
events through March 29, 2013, the date which the consolidated financial statements were available to be issued.
Fair value measurements
Fair value measurements are market-based measurements, not entity-specific measurements. Fair value measurements are determined
based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, management uses a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are
classified within Levels 1 and 2 of the hierarchy) and management’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Investments in loans receivable, at fair value
Management elected to carry the Company’s investments in loans receivable at fair value due to the fair value option being
operationally less complex for the Company to manage. Fair value is an exit price, representing the amount that would be received to
40
sell an asset in an orderly transaction between market participants at the measurement date. The Company’s private investments, by
their nature, have little to no price transparency. The Company’s investments in loans receivable are either non-performing or sub-
performing in relation to the original terms of the loans. The fair value of the Company’s investments in loans receivable are
determined based on an income approach that uses cash flows at the loan level from the highest and best use of the assets by a
market participant. In reaching its determination of fair value, management considers many factors including, but not limited to,
broker quotations to support inputs used in the valuations of the underlying collateral, the operating cash flows and financial
performance of the investments considered relevant to a market participant, taxes associated with owning the investments,
trends within sectors and/or regions, historical events, the expected hold period and strategy anticipated to be employed by a
market participant and any other specific rights or terms associated with the investment that management believes would be a
relevant factor impacting the exit price. Such investments are classified within level 3 of the fair value hierarchy.
Management’s judgment is also required to determine the appropriate risk-adjusted discount rate for investments that are classified
within level 3 of the fair value hierarchy. In such situations, management estimates the rates based on available market information
adjusted to rates which market participants would likely consider appropriate for risks associated with a particular investment.
Investments in loans receivable are on nonaccrual status and all cash payments are first applied to the loans’ principal balances. All
income or loss is recognized at the valuation date in net change in unrealized appreciation/depreciation from investments in loans
receivable on the consolidated statement of operations. Interest income on performing loans is recognized on an accrual basis. The
recognition of income on a performing loan is discontinued when interest or principal payments become 90 days past due. Cash
payments subsequently received on investments in loans receivable are applied to the principal balance or recorded as interest income,
depending upon management’s assessment of the ultimate collectability of the loan.
Loan modifications and restructurings may occur when the borrower experiences financial difficulty and needs temporary or
permanent relief from the original contractual terms of the loan and the lender grants a concession. These modifications are structured
on either a loan-by-loan or borrower group basis, and depending on the circumstances, may extend payment terms, modify interest
rates, reduce principal owed, or other concessions. When this occurs, the loan may be considered a troubled debt restructuring. Once a
loan is restructured and the borrower is not in default of the renegotiated terms, the Company accrues interest earned. When a loan is
settled, the difference between the proceeds received and the loan basis is recorded to gain or loss on loan settlement in the income
statement.
Real estate owned
When real estate assets are acquired through foreclosure or repossession they are initially recorded at the fair value of the property and
included in investments in real estate owned in the accompanying balance sheet. Estimated fair value is based on the underlying
collateral value which is estimated using an income approach that uses cash flows from the eventual disposition of the collateral and
the estimated cash flows during the hold period, if any. Immediately preceding the foreclosure or repossession, any adjustments to the
loan’s fair value will be reflected as a gain or loss on investments in loans receivable carried at fair value under the fair value option
on the statement of operations. With the foreclosure, the entity changes from holding a financial asset to a hard asset, therefore, a
realized event has occurred. Any previous unrealized gains or losses must be recognized as realized gains or losses at the time of the
foreclosure, along with any excess gain/loss at foreclosure and should be reflected as a realized gain or loss foreclosure of investments
in loans receivable. For the period ended December 31, 2012, the Company had foreclosed on a total of eight loans held by five
borrower groups. The real estate owned assets are held in the Subsidiaries of the Company.
Upon foreclosure of a loan in full satisfaction of a loan receivable, the Company accounts for those assets at their fair value less cost
to sell and the assets are classified as held for sale. In subsequent periods, such long-lived assets are measured at the lower of carrying
amount or fair value less cost to sell. As of December 31, 2012 the Company considers all foreclosed assets as long-lived assets held
for sale and are accounted for at the lower of cost or fair value less cost to sell.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less that are not restricted to be cash
equivalents. Cash equivalents are placed with reputable institutions and the balances may at times exceed federally insured deposit
levels; however, the Company has not experienced any losses in such accounts.
As cash and cash equivalents have a maturity of less than three months, the carrying value of cash equivalents approximates fair value.
Deferred financing costs
41
Deferred financing costs incurred in connection with the receipt of the notes payable are capitalized and amortized over the term of the
debt using a method which approximates the interest method.
Interest rate derivative instrument
The Company’s derivative transaction consists of an interest rate cap agreement entered into to mitigate the Company’s exposure to
increasing borrowing costs in the event of a rising interest rate environment (see Note 6). The Company has elected not to designate
its interest rate cap agreement as a designated accounting hedge. Changes in the fair value of the interest rate cap are recorded in the
accompanying consolidated statement of operations.
The valuation of the interest rate cap is determined using widely accepted valuation techniques including discounted cash flow
analysis on the expected cash flows. This analysis reflects the contractual terms of the derivative, including the period to maturity, and
uses observable market-based inputs such as interest rate curves and volatility assumptions. The fair value of the interest rate cap is
determined using the market standard methodology of discounted future cash receipts. The cash receipts are based on an expectation
of future interest rates using a forward curve that is derived from observable market interest rate curves.
The analysis has incorporated credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk
in the fair value measurements. Management evaluated the counterparty’s nonperformance risk based on the counterparty's most
recent credit rating and any changes in credit rating over the past year. In adjusting the fair value of the derivative contract for the
effect of nonperformance risk, management has considered the impact of collateral netting and any applicable credit enhancements.
Management concluded that the nonperformance risk is insignificant, and no adjustment to the value was necessary for this input.
Therefore, all inputs used to value the derivative falls within Level 2 of the fair value hierarchy and the derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy.
Accounts receivable
Accounts receivable at December 31, 2012 is comprised of real estate owned tenant rent receivables of $210,001.
Other Assets
Other assets at December 31, 2012 are comprised of prepaid property insurance on collateral of approximately $185,000.
The Puerto Rico Insurance Code prohibits a lender from placing insurance on behalf of a borrower and charging the borrower for the
premium payment. However, the lender may protect its own interests without transferring the costs to the borrower. For the period
ended December 31, 2012, the Company paid property insurance premiums on certain collateral. These premiums are reflected as
insurance in the consolidated statement of operations.
Income taxes
Under U.S. federal income tax law and Puerto Rico income tax law, limited liability companies are not taxable entities. Therefore, no
provision has been made in the accompanying consolidated financial statements for income taxes due by the Company. Each member
is individually responsible for reporting its share of the Company’s income or loss.
Accounting Standards Codification (ASC) 740, Income Taxes, requires management to determine whether a tax position is more
likely than not to be sustained upon examination by the applicable tax authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. Once it is determined that a position meets this recognition
threshold, the position is measured to determine the amount of tax benefit or expense to be recognized. The Company does not have
any uncertain tax positions that would require accrual under ASC 740. No interest or penalty related to uncertain taxes has been
recognized on the accompanying statement of operations. Management does not expect a significant change in uncertain tax positions
during the twelve months subsequent to December 31, 2012.
The Company files U.S. and Puerto Rico tax returns. In the normal course of business, the Company may be audited by either taxing
authority. As of December 31, 2012, the Company is not currently undergoing any tax examinations, nor has the Company agreed to
extend the statute of limitations beyond the prescribed expiration date. The Company remain subject to examination by various taxing
authorities for tax years beginning 2011 and upon completion of any examination, tax adjustments may be necessary.
42
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities at December 31, 2012 are comprised of the following:
Accounts payable
Accrued servicing fees
Other liabilities
Accrued professional fees
Deferred maintenance liability (Note 5)
Borrower deposits liability (Note 5)
Other comprehensive income
180,692
298,069
458,699
505,120
99,180
87,569
$ 1,629,329
Since there are no transactions requiring presentation in other comprehensive income, but not in net income, the Company’s net
income equates to comprehensive income.
Recent accounting developments
In April 2011, the FASB released Accounting Standards Update No. 2011-02 (ASU 2011-02), Troubled Debt Restructurings (TDR).
The update clarifies the accounting framework for TDRs and is intended to result in more consistent identification of TDRs by
lenders. ASU 2011-02 will be effective for interim and annual periods ending on or after December 15, 2012. The Company adopted
this standard for the year ending December 31, 2012 and has considered the additional guidance on its TDR analysis and disclosures
herein.
In May 2011, the FASB released Accounting Standards Update No. 2011-04 (ASU 2011-04), Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The update
generally clarifies fair value measurement guidance and requires certain additional disclosures related to fair value. The update also
includes instances where a particular principle or requirement for measuring fair value has changed. ASU 2011-04 became effective
for interim and annual periods beginning after December 15, 2011. The Company adopted the required guidance on January 1, 2012.
We have included additional fair value disclosures such as additional quantitative information about inputs (e.g. cap rates, discount
rates, etc.) as well as a description of the valuation process used by the entity.
In June 2011, the FASB released Accounting Standards Update No. 2011-05 (ASU 2011-05), Presentation of Comprehensive
Income. The update enhances the presentation of comprehensive income by requiring presentation either in a single statement of
comprehensive income or in two consecutive statements. The update requires presentation of each component of net income and other
comprehensive income, along with total net income, total other comprehensive income, and total comprehensive income. ASU 2011-
05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this
standard did not have a material impact on the Company’s financial position or results of operations.
3. INVESTMENTS IN LOANS RECEIVABLE, AT FAIR VALUE:
The Company’s investments in loans receivable are summarized as follows at December 31, 2012 by collateral type:
Collateral Type
Condo
Hotel
Retail
Commercial
Land
Marina
Total investments
Number
of Loans
28
1
11
4
3
3
50
Unpaid
Principal Balance
$ 213,807,502
23,500,000
31,044,260
28,484,656
8,397,117
8,549,100
$ 313,782,635
Fair Value
$ 68,055,576
20,099,146
19,385,458
11,122,735
4,183,607
8,674,068
$ 131,520,590
The concentration of the Company’s investments in loans receivable by collateral type at December 31, 2012 is 52% condo, 15%
hotel, 15% retail, 8% commercial, 7% marina and 3% land.
43
The concentration of the Company’s investments in loans receivable by borrower group at December 31, 2012 is as follows:
Borrower Group
San Geronimo Caribe
Eduardo Ferrer
Swiss Chalet
John Pulpeiro
Michael Redondo
Desarrolladora Los Filtros
Hollywood Estates
Jardin Central
Other Borrowers
Total investments
Number
of Loans
6
15
1
5
3
2
1
1
16
50
Unpaid
Principal Balance
$ 103,164,564
32,463,408
23,500,000
21,521,242
37,833,901
6,196,624
5,602,042
8,141,418
75,359,436
$ 313,782,635
Fair Value
$ 30,806,035
26,353,514
20,099,146
11,604,707
8,581,751
4,523,307
758,135
3,718,235
25,075,760
$ 131,520,590
The concentration of the Company’s investment in loans receivable by borrower group at December 31, 2012 is 23% San Geronimo
Caribe, 20% Eduardo Ferrer, 15% Swiss Chalet, and 42% other borrower groups.
The Company’s investments in loans receivable are all collateralized by real estate assets geographically located in Puerto Rico.
The following table sets forth the Company’s investments in loans receivable, at fair value that were measured on a recurring basis as
of December 31, 2012 by level within the fair value hierarchy (see Note 2):
Investments in Loans Receivable, at Fair Value
Level 1
Level 2
Level 3
Total
Investments in loans receivable, at fair value
$ - $ -
$ 131,520,590
$ 131,520,590
The following table sets forth a summary of changes in the fair value of the Company’s level 3 investments in loans receivable for the
year ended December 31, 2012:
Balance, beginning of year
Contractual advances
Contractual loan collections
Purchases
Sales
Unrealized fair value losses
Realized gains on loan settlement
Realized gains on foreclosure
Foreclosure into real estate owned assets
Transfers in and/or out of level 3
Balance, end of year
Net change in unrealized gains/(losses) from
investments in loans receivable still held at the
reporting date
Level 3 Investments in
Loans Receivable, at Fair Value
$ 246,539,162
23,670,020
(71,350,578)
-
-
(5,282,104)
3,290,307
3,590,444
(68,936,661)
-
$ 131,520,590
$ 1,621,576
Transfers in and/or out of level 3 represents transfers from/(to) level 2. Transfers from level 2 are the result of investment valuations
whose significant inputs have become unobservable, causing less transparency in prices of the investments. Transfers to level 2 are the
result of investment dispositions or offers to purchase investments. There have been no transfers in and/or out of level 3 for the period
ended December 31, 2012.
44
The following table presents information about significant unobservable inputs related to the Company’s categories of Level 3
financial assets at December 31, 2012.
Collateral
Type
Number
of Loans
Fair Value
Valuation Technique
Condo
Hotel
Retail
Commercial
Land
Marina
Total
investments
28
1
11
4
3
3
$ 68,055,576
Discounted cash flows
20,099,146
Discounted cash flows
19,385,458
Discounted cash flows
11,122,735
Discounted cash flows
4,183,607
Discounted cash flows
8,674,068
Discounted cash flows
50
$ 131,520,590
Significant
Unobservable
Inputs
Discount Rate
Discount Rate
Cap Rate
Discount Rate
Cap Rate
Discount Rate
Cap Rate
Discount Rate
Discount Rate
Cap Rate
Inputs or
Ranges of
Inputs
12-17%
9.5%
8.5%
9.5-17%
9-12%
9.5%
9-12%
13.5%
9.5%
10%
The significant unobservable inputs used in the fair value measurement of the Company’s investments in loans receivable are stated
above. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value
measurement. At each valuation date, the key inputs and assumptions are updated to reflect changes in the market, the performance of
the asset and expectation of a market participant. However, there have been no fundamental changes in valuation techniques utilized
by management in estimating fair value. Because of the inherent uncertainties of valuation, the values reflected in the accompanying
consolidated financial statements may differ materially from the value determined upon the sale of those investments.
All net realized and unrealized gains in the table above are reflected on the accompanying consolidated statement of operations.
Fifteen borrower groups that total $77,679,765 of the investments in loan receivable as of December 31, 2012, were refinanced during
2012. The original loan terms were modified granting extended terms, reduced principal, lower interest rates, and/or deferment of
interest and principal payments. In the case of some, collateral was relinquished to the Company. The restructures were considered
TDR’s. Unfunded commitments on restructured loans considered TDR’s as of December 31, 2012 are approximately $70,106,000.
4. REAL ESTATE OWNED:
The Company holds investments in real estate owned that are subsequently measured at the lower of cost or fair value less costs to
sell. Accordingly, fair value measurements related to real estate owned is considered non-recurring. The amounts below represent
only balances measured at fair value during 2012, subsequent to foreclosure, and still held as of the reporting date (see Note 2).
Real estate owned
$ - $ -
$ 19,716,025
$ 19,716,025
Level 1
December 31, 2012
Level 2
Level 3
Total
45
The table below presents information, by collateral type, about significant unobservable inputs related to the Company’s non-recurring
Level 3 financial assets at December 31, 2012.
Collateral Type
Lower of Cost
or Fair Value
Valuation Technique
Significant
Unobservable Inputs
Condo
$ 32,107,719
Discounted cash flows
Commercial
16,004,858
Discounted cash flows
Discount Rate
Discount Rate
Cap Rate
Inputs or
Ranges of
Inputs
12%
17-20%
9-12%
Land
3,519,551
Discounted cash flows
Discount Rate
20%
Total investments
$ 51,632,128
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5. RESTRICTED CASH:
As of December 31, 2012, restricted cash consists of the following:
Advance account
Servicing depository account
Deferred maintenance account
Collections account
Interest reserve account
Working capital account
Marginal account
Real estate tax reserve
$ 100
12,117
99,165
6,243,591
1,800,000
2,499,788
88,380
510,531
$ 11,253,672
The advance account, servicing depository account, collections account, interest reserve account and working capital account are
required and restricted by the loan agreement with First Bank.
All payments from borrowers are sent to the servicing depository account and then moved to the collections account. The funds in the
collections account are used by the Company as follows: (i) first, pays outstanding interest due on the three notes payable facilities
(see Note 6); (ii) second, can elect to fund the interest reserve account, up to $5,000,000; (iii) third, funds the working capital account
to cover budgeted operating expenses of the Company; and (iv) fourth, pays the outstanding principal on first the working capital line
and then the acquisition loan and advance facility (see Note 6).
The marginal account is a lockbox that collects rents from certain borrowers who are in default of their loans. The real estate tax
reserve is comprised of funds collected from certain borrowers who are in default to cover real estate tax due on loan collateral.
Accounts payable and accrued liabilities include $87,568, representing the liability to the borrowers for the marginal account.
Due to the short-term nature of the restricted cash balances, the carrying value of restricted cash approximates fair value.
6. NOTES PAYABLE:
The Company's investments are financed pursuant to a loan agreement dated February 16, 2011, with First Bank, a member of the
Company and the seller of the investments in loans receivable purchased by the Company. The notes payable are collateralized by the
assets owned by the Company. The allocation of the notes payable under the loan and security agreement as of December 31, 2012 are
as follows:
Acquisition loan
Advance facility
Working capital line
Maturity
February 1, 2018
February 1, 2018
February 1, 2013
Balance
$ 66,351,906
13,050,817
-
$ 79,402,723
The acquisition loan is a $135,580,122 non-revolving credit facility to be used by the Company solely for the purchase of the
investments in loans receivable and related closing costs. For the year ended December 31, 2012 $69,228,217 was repaid by the
Company.
The advance facility was originally an $80,000,000 non-revolving credit facility. The proceeds from the facility are used to fund
advance commitments to the borrowers. As of April 11, 2012, the entire $80,000,000 had been drawn and $9,049,394 had been repaid
by the Company. Under the first amendment to the loan agreement, as of April 12, 2012 the advance facility was partially paid down
in the amount of $66,923,343 and whereby the amount partially paid down would be available to the Company use for future advances
to fund commitments to the borrowers. The first amendment of the loan agreement waived any prepayment penalty charges
associated with the partial paydown and still considers the credit facility a non-revolving credit facility. Pursuant to the first
amendment to the loan agreement, on April 18, 2012, $66,923,343 was repaid by the Company, leaving a balance of $4,027,263. For
the period from April 19, 2012 through December 31, 2012 an additional $16,043,043 was drawn and $7,019,489 was repaid by the
Company. As of December 31, 2012, there is approximately $50,880,300 available to fund future advance commitments.
The working capital line is a $20,000,000 revolving line of credit. In 2012, the Company did not draw on the working capital line and
$20,000,000 was available for future working capital needs at December 31, 2012. The working capital line expired in February 2013.
47
The notes payable accrue interest from the date of the loan with interest only due monthly, in arrears. The interest rate is equal to one
month LIBOR, plus 3% (3.21% at December 31, 2012). Interest and principal payments are made through a set of restricted cash
accounts (see Note 5).
Principal payments are made on the loans based on available collections after the payment of interest and principal on covering loans,
interest payments on the acquisition loan, advance facility and working capital line, elected deposits into the interest reserve account
and budgeted working capital amounts. Accordingly, there are no scheduled contractual principal and interest payments.
On March 1, 2011, the Company entered into an interest rate cap agreement with SMBC Capital Markets, Inc. for a total fee of
$1,005,000. The interest rate cap agreement expires on March 1, 2013. The cumulative notional amount underlying the interest rate
cap agreement is $176,000,000 for the term of the agreement. Under the agreement, the Company has the right to receive payments
based on the notional amount of the cap to the extent that LIBOR exceeds 1.50%. The Company is exposed to credit-related losses in
the event of nonperformance by the caps’ seller; however, it does not expect the caps’ seller to fail to meet its obligations because of
the institutions reputation and history. The cap had a fair value of approximately $0 as of December 31, 2012.
The fair value of the Company’s note payable totals approximately $79,015,000 at December 31, 2012. The fair value of the
Company's notes payable has been estimated based on the discounted cash flow analysis of future expected cash flows of the
underlying loans, forward looking interest rates and using a discount rate representing the Company’s estimate of the rate that would
be used by market participants. Changes in assumptions or estimation methodologies may have a material effect on these estimated
fair values.
7. CAPITAL DISTRIBUTIONS:
The Company’s limited liability agreement dictates the priority of distributable cash once the Company’s notes payable have been
repaid. The priority of distributable cash is (i) first, pay to Members pro rata any additional capital contributions made since the initial
acquisition contributions; (ii) second, pay to PRLP its unpaid priority return (12% of invested capital in the amount of $89,857,278);
(iii) third, pay to PRLP its unpaid supplemental return (13.5% of invested capital); (iv) fourth, pay to PRLP its entire initial acquisition
contributions; (v) fifth, pay to the Members pro rata in the ratio of 35% to PRLP and 65% to First Bank until First Bank earns its
unpaid supplemental return (12% of invested capital of $48,384,742); (vi) sixth, pay to the Members pro rata in the ratio of 35% to
PRLP and 65% to First Bank until First Bank recovers its entire initial acquisition contributions; (vii) seventh, pay First Bank
$6,000,000; (viii) eighth, pay PRLP $4,000,000; (ix) finally, pay remainder to the Members pro rata at that point in time. No
distributions were made to the Members for the period ended December 31, 2012.
The Puerto Rico Department of Treasury requires the Company to pay members’ withholding taxes on behalf of the member. The
Company makes quarterly payments on behalf of its members. These tax payments are paid from cash funded by the partners and are
paid on behalf of the partners to Puerto Rico’s Department of Treasury. For the year ended December 31, 2012 the Company paid
taxes of $1,584,441.
8. ALLOCATION OF PROFITS AND LOSSES:
The Company’s limited liability agreement dictates profit and losses for any fiscal year or portion thereof shall be allocated to the
members in such a manner so that their capital accounts at the end of such fiscal year or portion thereof will reflect as nearly as
possible the amount which each member would receive if the Company were to be liquidated as of the end of that fiscal year or
portion thereof, assuming for purposes of any hypothetical liquidation (i) a sale of all of the assets of the Company at prices equal to
their gross asset values, and (ii) the distribution of the net proceeds thereof to the members after the payment of all actual Company
indebtedness, and any other liabilities related to the Company’s assets, limited, in the case of non-recourse liabilities, to the collateral
securing or otherwise available to satisfy such liabilities and pursuant to the priority of distributable cash (see Note 7).
In accordance with those provisions and the distribution provisions as discussed in Note 7 above, PRLP has been allocated preferred
returns in the amount of $4,939,886 and the decrease associated with the allocation of preferred returns in the amount of $4,939,886
has been absorbed by First Bank and is reflected as an allocation of preferred return in the accompanying consolidated statement of
members’ equity.
9. RELATED PARTY TRANSACTIONS:
On February 8, 2011, the Company entered into a servicing agreement with CPG Island Servicing LLC (CPG). The Company may
terminate the agreement with CPG following an event of default by CPG as defined in the servicing agreement. The owner of CPG is
48
an affiliate of FBLP Group Holdings LLC, one of the members of PRLP. A subservicing agreement between CPG and Archon Group,
L.P. (Archon) was also signed on February 8, 2011 and then amended on September 29, 2011. The owner of Archon is an affiliate of
GS.
CPG is paid a monthly fee by the Company for loan asset servicing in an amount equal to 1/12 of 1% of the aggregate principal
balance of the Company’s investments in loans receivable on the first day of a given month. Under the subservicing agreement, CPG
pays Archon a fee in an amount equal to 1/12 of 0.225% of the aggregate principal balance of the Company’s investments in loans
receivable on the first day of a given month. In September 2012, the amount paid to Archon changed to be an amount equal to 1/12 of
0.1% of the aggregate principal balance of the Company’s investments in loans receivable on the first day of a given month. Total
servicing fees earned by CPG were $4,001,689 for the period ended December 31, 2012. CPG paid Archon $822,086 for the period
ended December 31, 2012.
10. COMMITMENTS AND CONTINGENCIES:
The Company is involved in various legal proceedings and disputes in the ordinary course of business. The Company does not believe
that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position or continuing
operations on the Company.
The Company may be required to fund additional loan proceeds to borrowers pursuant to the terms of the underlying loan agreements
as a result of the acquisition of the loan portfolio. To the extent that the Company is required to perform under loan commitments
resulting from litigation existing as of the acquisition of the loan portfolio, the Company has received an indemnification from the
previous owner.
49
Shareholder Information
I N D E P E N D E N T R E G I S T E R E D P U B L I C AC C O U N T I N G F I R M F O R T H E
F I S CA L Y E A R E N D E D D E C E M B E R 31, 2 0 14
KPMG LLP
American International Plaza, Suite 1100
250 Muñoz Rivera Ave.
San Juan, PR 00918-1819
A D D I T I O N A L I N F O R M AT I O N A N D F O R M 10 - K
Additional financial information about First BanCorp may be requested by contacting
John Pelling III, Investor Relations Officer, 701 Waterford Way, Suite 800, Miami, Florida 33126.
First BanCorp’s filings with the Securities and Exchange Commission (SEC) may be accessed
on the website maintained by the SEC at http://www.sec.gov and on our website at
www.firstbankpr.com, Investor Relations section, SEC Filings link.
T R A N S F E R AG E N T A N D R E G I S T R A R
Computershare
P.O. Box 30170
College Station, TX 77842-3170
or
Overnight
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
Toll free: 800-851-9677
Foreign Shareholder: 201-680-6578
Outside the US and Canada 781-575-3100
Website: www.computershare.com/investor
I N V E S T O R R E L AT I O N S
John Pelling III
Investor Relations Officer
First BanCorp
305-577-6000, ext. 162
john.pelling@firstbankpr.com
G E N E R A L C O U N S E L
Lawrence Odell, Esq.
Executive Vice President and General Counsel
First BanCorp
C O M M O N S T O C K
The Company’s common stock trades on the New York Stock Exchange under the symbol FBP.
N YS E A N D S E C C E R T I F I CAT I O N S
The Corporation filed on June 27, 2014, the certification of the Chief Executive Officer required
under section 303A.12(a) of the New York Stock Exchange’s listed Company Manual. The Corporation
has also filed, as exhibits to its 2014 Annual Report on Form 10-K, the CEO and the CFO certifications
as required by Sections 302 and Section 906 of the Sarbanes-Oxley Act.
First BanCorp
1519 Ponce De Leon Ave.
San Juan PR 00908-0146
(787) 729-8200
2014