2 015 A N N U A L R E P O R T
Financial Highlights
In thousands (except for per share and ratio results)
2015
2014
F O R T H E Y E A R
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income tax (expense) benefit
Net income
Net income 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 per share
Diluted income 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
Tier 1 common equity capital3
Tier 1 capital
Total capital
Leverage
1 Tax-equivalent basis.
2 As of 12/31/2015 and 12/31/2014 .
3 New ratio requirement under the Basel III capital rules
effective January 1, 2015.
$
$
502,266
172,045
81,325
383,830
(6,419)
$
21,297
21,297
$
518,073
109,530
61,348
378,253
300,649
392,287
393,946
.17%
1.29%
4.30%
65.77%
3.10%
31.38%
4.34%
65.28%
$
$
0.10
0.10
—
3.25
7.71
7.47
211,457
212,971
1.89
1.87
—
5.87
7.68
7.45
208,752
210,540
$ 12,573,019
9,309,734
240,710
2,138,037
9,338,124
1,381,492
1,694,134
1,546,678
1,828,559
$ 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
16.92%
16.92%
20.01%
12.22%
N/A
18.44%
19.70%
13.27%
Letter to Shareholders
We are pleased to report that 2015 was a year of solid results and significant
progress across our businesses and markets, notwithstanding Puerto
Rico’s fiscal and public sector crises. Despite the ninth economic contraction of the last
10 years in our largest market, we were able to sustain core profitability, improve asset
quality, and build on our very sizable excess capital position. Since our recapitalization
in late 2011, we have worked to position FirstBank for sustainable success through
every economic cycle and to deal effectively with uncertainty.
Our Accomplishments
• Acquisition of Doral Bank
• Termination of Consent
Order by FDIC
• Completion of bulk sale of
problem assets with a book
value of $147.5 million
2015 Results
Net income for 2015 reached $21.3 million, including
the impact of a $49 million loss on the bulk sale
of problem assets in the second quarter. Pre-tax
income, adjusted for unusual and non-ordinary items,
was $78.7 million in 2015 compared to $91.6 million
in 2014. In another sign of stable core income, pretax
pre-provision (“PTPP”) revenues, adjusted for unusual
and non-ordinary items, amounted to $204.3 million
in 2015, compared to $206 million in 2014.
In line with our strategic imperative of improving credit
risk, non-performing assets (“NPAs”) declined to
4.85% of assets at the end of 2015 relative to 5.63%
in 2014, driven in part by the bulk sale of problem
assets with a book value of $147.5 million. For the
five calendar years ending in 2015, non-performing
assets have been reduced by $727 million, driving
our NPA ratio to the lowest level since 2011. Other
key credit metrics also improved as non-performing
loans (“NPLs”), adversely classified assets, NPL
inflows, and net charge-offs all declined. While this
is the effort of several years of improved credit risk
monitoring and workout efforts, we remain vigilant
and active in our de-risking efforts given the state of
the Puerto Rico economy.
FIRST BANCORP | 2015 ANNUAL REPORT | 1
Letter to Shareholders
10%
13%
11%
17%
77%
72%
2015 Residential Loans
by Geography
Puerto Rico
Southeastern Florida
Eastern Caribbean
2015 Total Deposits
by Geography
Puerto Rico
Southeastern Florida
Eastern Caribbean
ratio of 12.22%, First BanCorp remains significantly
above regulatory definitions for well capitalized and
is well positioned to deal with the uncertainty of
the Puerto Rico economy and to begin exploring
potential deployment of its very large excess capital
cushion. This informed view was further supported
by the submission of our Dodd Frank Stress Test in
the first quarter of 2015, which showed that, even
under the severely adverse scenario, we would
remain above well capitalized levels.
Other Critical Milestones
Our non-financial results were perhaps the most
significant achievements of 2015. First, in February
of 2015, we participated in the acquisition of
more than $500 million of assets from the FDIC
as Receiver for Doral Bank. As part of the
transaction, FirstBank acquired 10 branches,
$325 million in performing residential loans and
$522 million in deposits, strengthening our overall
Our total outstanding exposure to the central
mix of funding and resulting in important synergies
government of Puerto Rico, its municipalities
with our residential loan and mortgage servicing
and public corporations, including PREPA,
businesses where we hold the number two market
had a book value of $361 million at the end of
share position.
2015, representing a manageable 23% of Tier 1
capital, or 19% if loans to PREPA are excluded.
Furthermore, over 55% of our direct exposure is
in loans to municipalities supported by assigned
tax revenues. We also have indirect exposure of
$129 million outstanding in financings to the hotel
industry in Puerto Rico where the Puerto Rico
Tourism Development Fund provides a secondary
guarantee for payment performance. We continue
Reflecting an even larger vote of confidence in our
results and strong capital position, in April of 2015
the FDIC terminated the Consent Order under
which FirstBank had been operating since June 2,
2010. This represents an important milestone and
serves as an implicit endorsement of the health
of our capital position, improved asset quality,
and profitability.
to monitor direct and all other indirect exposure to
Importantly, during late 2014 and early 2015,
the public sector very closely.
the United States Department of the Treasury
Our risk based capital ratios increased in 2015
and remain very strong by any measure, figuring
among the top decile of banks larger than $5 billion
in total assets. With a Total Capital ratio of 20.01%,
Common Equity Tier 1 of 16.92%, and a Leverage
sold approximately 9.4 million shares of First
BanCorp’s common stock through its pre-defined
written trading plan and its ownership position in
First BanCorp’s common stock is down to 5.4%
including a warrant to purchase approximately
1.3 million shares of common stock.
2 | FIRST BANCORP
Stock Price and
Puerto Rico Concerns
It is very disappointing to us that the price of
the decoupling of the local economy from the
United States economy following the phase out of
Section 936 and therefore the lack of economic
our stock does not reflect these positive results
growth. We are hopeful that, should this bill or a
and accomplishments. Unfortunately, our work
variant be approved, this control board, Congress
was overshadowed by the Governor of Puerto
and the political sector in Puerto Rico would
Rico’s announcement in June of 2015 that the
coalesce around introducing pro-growth economic
public sector debt could not be paid in full. The
measures.
uncertainty that ensued by this communication and
the lack of an accompanying plan to address the
situation in an orderly fashion sapped market and
consumer confidence. Our stock closed the year
at $3.25, 44% of our tangible book value and 45%
lower than 2014. We believe the stock price has
been impacted more by the uncertainty and lack
of confidence by the market in Puerto Rico than by
our operating fundamentals. A more clear picture
for the Island should emerge once there is an
agreed upon framework to restructure the public
sector debt, establish a control board that removes
uncertainty, and create a path to economic growth.
All three of these elements are a must in our
opinion. We care deeply about this outcome and
have been, and will continue to be, involved in the
ongoing discussions with stakeholders in Puerto
Rico and Washington.
As we write to you, Congress seems intent on
delivering a Puerto Rico bill through the House
Natural Resources Committee for a vote by the
House of Representatives in April of 2015. The
bill purports to create a strong control board that
will have specific powers to guide and oversee
the restructuring of Puerto Rico’s public sector
debt, and unknown energy related measures.
While we cannot speculate on whether this bill
will pass or what the Senate may or not do, we
believe this incomplete set of measures are a
first needed step to regain confidence in the
local economy and the future of the Island. The
fundamental problem of Puerto Rico has been
Dealing with Uncertainty Through
Planning and Diversification
We have been preparing since the recapitalization
for the situation we are facing today in Puerto
Rico. The lack of competitiveness of the Puerto
Rican economy, the bloated public sector, loss of
population, declining growth is all well known to
us. Our excess capital position, the strengthening
of our board of directors and senior management
team, the emphasis on cleaning up our balance
sheet, improving our deposit mix, and the reduction
of our direct exposure to the public sector from
over $1.2 billion in 2011 to the current level of
$361 million, among others, have been the result
of good planning and execution.
Our Strategic Plan, and its annual updates, as
well as total devotion to performance against
strategic levers embedded in a balanced corporate
scorecard have guided our actions over the
preceding years and 2015 was no different.
Recognizing the uncertainty that was unleashed
in June 2015 around the liquidity and debt service
capacity of the public sector, we re-evaluated
underwriting standards, accelerated business
rationalization initiatives and identified new ones.
We placed additional emphasis on sustaining the
Bank’s balance sheet position, improving non-
interest income and achieving efficiencies across
the entire Corporation by reducing expenses.
Our loan and deposit initiatives did well. We were
very pleased with the growth achieved in our two
FIRST BANCORP | 2015 ANNUAL REPORT | 3
Letter to Shareholders
other markets, Florida and the Eastern Caribbean.
position in this line of business, growing market
Our loan portfolios in these two markets grew
share to 20.9% at the end of 2015. Our execution
15% and 6%, respectively, in 2015, softening the
allowed us to achieve important market share gains
3% reduction in our Puerto Rico loan book. The
in deposits, branches, mortgages, POS, ATM’s and
performing loan portfolio grew only 1% in 2015, but
transaction services while sustaining market share
diversification among geographies improved with
in the loan portfolios.
Puerto Rico, Florida, and the Eastern Caribbean
accounting for 81%,12% and 7%, respectively, of
the loan book. We also made good progress with
respect to our deposit strategy. Deposits, net of
government and brokered, increased $467 million
During the year, we also successfully completed
the integration and re- branding of the Doral
branches and the mortgage portfolio acquired
during the first quarter. This transaction further
solidified our strong position in the Puerto Rico
and Puerto Rico deposits
increased $681 million in
2015. Our deposits are
also diversified with 72%
in Puerto Rico, 17% in
South Florida, and 11%
in the Eastern Caribbean.
The geographic
diversification within our
business model allows
us to be agile during
cyclical fluctuations
and adjust to market
conditions.
The Corporation’s
business model
is also driven by
Our execution allowed
us to achieve important
market share gains
in deposits, branches,
mortgages, POS, ATM’s
and transaction services
while sustaining market
share in the loan portfolios.
market and should
continue to generate
benefits as we cross-sell
these new customers and
benefit our core deposit
strategy from the expanded
branch and ATM network.
Despite an important
economic contraction
in Puerto Rico during
2015, total nonperforming
assets declined by $107
million and inflows to
nonperforming loans
decreased $133 million
compared to the prior
good diversification among lending segments.
Commercial lending represented 44% of the
loan portfolio with average quarterly origination
and renewal volume of $439 million during 2015;
residential mortgage lending accounted for 36% of
the loan portfolio with average quarterly origination
volume of $176 million; and consumer lending
contributed the remaining 20% of the loan portfolio
with average quarterly origination volume of $230
million. While Puerto Rico experienced a decline
in residential mortgage originations due to market
driven events, FirstBank solidified its number two
4 | FIRST BANCORP
year. We have redoubled our efforts around loan
monitoring, both at the management and board
levels, and have been able to drill down into
credits and industry concentrations to understand
their exposure, direct and indirect, to the public
sector and macro conditions in Puerto Rico. We
have continued to work down our exposure to
problem loans and while they remain elevated
relative to United States peers, we derive comfort
from carrying commercial non-performing loans,
including PREPA, at 58% of their unpaid
principal balance.
Finally, we reviewed pricing and enhanced non-interest
innovation. Improvements in retail remote deposit
income across all lines of business. We have stepped
capture capabilities; enhanced online and mobile
up strategic reductions in non-interest expense
banking platforms; and an expanded branch network
through business rationalization initiatives as efficiency
with increased functionality are key areas of focus
continues to play a critical role in achieving targeted
for 2016.
operating performance metrics.
Strategic Pillars
The Corporation’s Strategic Plan has been grounded
We would like to thank our customers in Puerto Rico,
Florida, and the Eastern Caribbean for trusting us with
their business and reiterate our commitment to meeting
on three strategic pillars: Our Clients & Communities,
their current and future needs.
Our Employees, and Our Shareholders. Significant
progress has been achieved in recent years
towards the strategic goals in each of our pillars as
the Corporation continues its path to complete its
successful turnaround plan.
Our Clients & Communities
Our Employees
The Corporation also aspires to be one of the
best employers in its operating markets in order to
encourage the needed loyalty within the organization
that will ensure the achievement of its strategic goals.
Engagement surveys are periodically conducted to
FirstBank is committed to improving the lives of
assess employee engagement. In October 2015, a
customers and the well-being of our communities.
survey was conducted to assess the Corporation’s
This commitment shows in our products, services
progress with its employees since the last survey
and relationships, and it also shows in the way we
conducted in 2012. Initial results show marked progress
work together to add value in the places where we
in areas of corporate pride, motivation and loyalty
live and work. This long legacy of caring, continued
compared to prior results. Also, significant investments
in 2015. FirstBank actively participates, through
have been made in leadership training and a new talent
strategic alliances with non-profit and community-
management system. The Corporation will continue
based organizations to drive economic and social
to dedicate resources and invest capital to ensure the
transformation, in educational, housing and urban
promotion of an attractive working environment for
development, environmental protection and art
all its employees, including expanding the reach of
programs. Last year FirstBank’s corporate social
FirstBank University to facilitate ongoing education in
responsibility program, One with the Environment,
multiple practice fields within the banking industry.
was recognized by the Puerto Rico Public Relations
Professionals Association as Public Relations Program
of the year. Our urban gardens project, Grow Green,
was also awarded the Community Relations Campaign
of the year.
The accomplishments mentioned above are the work
of a team of talented and dedicated colleagues. The
challenging situation in Puerto Rico, as well as the
increased demands on our operations in Florida and
the Eastern Caribbean, have tested the mettle of our
We know that by putting the customer at the center
employees. They have responded, as in the past,
of everything we do, we will continue to create
with great determination and optimism, and delivered
shareholder value. As the Corporation strives to achieve
results. We want to express our gratitude to them for
excellence in customer satisfaction, there is room to
their loyalty and leadership.
enhance the banking experience through technological
FIRST BANCORP | 2015 ANNUAL REPORT | 5
Letter to Shareholders
Our Shareholders
The third strategic pillar pursues achieving industry
The Future
We remain focused on continued improvement
standard returns for our shareholders. Despite the
in asset quality and profitability metrics through
considerable progress achieved in this strategic
expense controls and execution of regional
pillar over the past few years, there is still a gap
strategies to continue diversifying revenues and
between the Bank’s current profitability metrics
minimizing risk. We have managed the Bank within
and the profitability targets of our peers. The
this challenging economic environment in Puerto
challenging economic condition in Puerto Rico has
Rico for over a decade and have been able to
delayed the achievement of these targets, as credit
complete a major capital raise, improve our risk
quality continues to be a relevant factor and, more
profile meaningfully, better our funding mix and
recently, the government’s liquidity constraints have
quality of deposits, grow profitably in Florida, obtain
propelled discussions of potential debt defaults and
relief from the FDIC Consent Order, and participate
elevated uncertainty in the market.
in an in-market FDIC assisted transaction- all while
While we recognize that the fiscal situation in
building a sizable excess capital position.
Puerto Rico remains a negative for our stock price
We continue to be comfortable with our various
in the near term and will likely keep capital returns
exposures to the public sector, both directly and
on hold until more clarity is known, we are well
indirectly, especially given our hefty capital position.
positioned to weather through this headwind.
We think that any progress toward a resolution of
We expect to begin delivering on a conservative
Puerto Rico’s liquidity and debt crises could only
and selective approach to capital deployment
be a positive for the Island and the Corporation.
during 2016, as the government’s public debt
situation and initiatives to address the current
liquidity constraints are resolved. We are greatly
appreciative of our Shareholders and value your
continued support and investment in
First BanCorp.
We are proud to be part of First BanCorp and
this team and look forward to the future with
confidence, optimism and great faith that Puerto
Rico will emerge stronger from this crisis and that
we will continue to make a positive difference in the
lives of our customers, communities, employees,
We would like to thank our Board of Directors
and shareholders.
for their leadership, guidance and support.
We are fortunate to be able to count on the
counsel of such an experienced and dedicated
group of professionals, particularly in these
challenging times.
Sincerely,
Roberto R. Herencia
Chairman of the Board
Aurelio Alemán
President and Chief Executive Officer
6 | 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, 2015
or
[ ] 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:134) No (cid:59)
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:134) No (cid:59)
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:59) No (cid:134)
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:59) No (cid:134)
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:134)
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.
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134) (Do not check if a smaller reporting company)
Accelerated filer (cid:59)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:59)
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2015 (the last trading day of the registrant’s most recently
completed second fiscal quarter) was $609,349,743 based on the closing price of $4.82 per share of the registrant’s common stock on the New York Stock Exchange on June 30,
2015. The registrant had no nonvoting common equity outstanding as of June 30, 2015. 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, 2015. 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: 215,207,992 shares as of March 4, 2016.
Documents incorporated by reference: Portions of the definitive proxy statement relating to the registrant’s annual meeting of stockholders scheduled to be held on May 24, 2016
are incorporated by reference in this Form 10-K in response to items 10, 11, 12, 13 and 14 of Part III.
FIRST BANCORP.
2015 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
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 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
5
27
42
42
42
43
43
48
50
140
141
250
250
250
251
251
251
251
251
252
256
2
Forward Looking Statements
This Form 10-K contains forward-looking statements within the meaning of, and subject to the protections 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”), and 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
words and phrases “would,” “will allow,” “intends,” “will likely result,” “expect to,” “should,” “anticipate,” “look forward,”
“believes,” 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.”
These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and
assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to
differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, the risks described below in Item 1A. “Risk Factors,” and the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
uncertainty about whether the Corporation 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”) that, among other things, requires the Corporation to serve as a source of strength to
FirstBank Puerto Rico (“FirstBank” or “the Bank”) and that, except with the consent generally of the New York FED and the
Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), prohibits the Corporation from paying
dividends to stockholders or receiving dividends from FirstBank, making payments on trust preferred securities or
subordinated debt and incurring, increasing or guaranteeing debt or repurchasing any capital securities;
the ability of the Puerto Rico government or any of its public corporations or other instrumentalities to repay its respective
debt obligations, including the effect of the recent payment defaults on certain bonds of government public corporations, 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 and, in turn, further adversely impact the Corporation;
a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued
recession in Puerto Rico;
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 to fund operations and provide liquidity;
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 Federal Reserve
Board to declare or pay any dividends and to take dividends or any other form of payment representing a reduction in capital
from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;
the 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;
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 reduced interest margins and affected funding
sources, and has affected demand for all of the Corporation’s products and services and reduced the Corporation’s revenues
and earnings, and the value of the Corporation’s assets, and may continue to have these effects;
an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
the risk that additional portions of the unrealized losses in the Corporation’s investment portfolio are determined to be other-
than-temporary, including additional impairments on the Puerto Rico government’s obligations;
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uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., the USVI and
the BVI, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual
results for future periods to differ materially from prior results and anticipated or projected results;
changes in the fiscal and monetary policies and regulations of the U.S. federal government and the Puerto Rico and other
governments, including those determined by the Federal Reserve Board, the New York FED, the Federal Deposit Insurance
Corporation (“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
acquisition of loans and branches of Doral Bank as well as the assumption of deposits at the branches acquired from Doral
during the first quarter of 2015;
a need to recognize impairments on the Corporation’s 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 on the Corporation’s businesses, business practices and results of operations of a potential higher interest rate
environment; and
general competitive factors and industry consolidation.
The Corporation does not undertake, and specifically disclaims any obligation, to update any of the “forward-looking statements”
to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal
securities laws.
Investors should refer to 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.
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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, 2015, the Corporation had total assets of $12.6 billion, total
deposits of $9.3 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,
2015, 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 Office of the Commissioner of Financial Institutions
(“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 and the FDIC. The Consumer Financial Protection
Bureau (“CFBP”) regulates FirstBank’s consumer financial products and services. 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 three 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, 51 banking branches in Puerto Rico as of
December 31, 2015, 11 branches in the USVI and BVI, and 10 branches in the state of Florida (USA). As of December 31, 2015
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 securities underwriting and selling for local Puerto Rico municipal bond issuers and other investment
bearing activities, such as advisory services, capital raise efforts on behalf of clients and assist in financial transaction structuring;
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.
On February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank through an alliance with Banco Popular of
Puerto Rico (“Popular”), who was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders (the
“Doral Bank transaction”). This transaction is described in more detail in “Significant Events Since the Beginning of 2015” below.
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 33, “Segment Information,” to the Corporation’s audited financial statements for the year ended December 31, 2015 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
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borrowers. This segment also includes the Corporation’s broker-dealer activities, which are primarily concentrated in the
underwriting of municipal securities and financial advisory services.
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 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
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 (the “FHA”), Veterans Administration (the “VA”) and
Rural Development (the “RD”) standards. Loans originated that meet the FHA’s standards qualify for the FHA’s insurance program
whereas loans that meet the standards of the VA and RD 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 and, under this program, the Corporation has been selling FHA/VA mortgage
loans into the secondary market.
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 on the United States mainland.
FirstBank provides a wide range of banking services to individual and corporate customers primarily in southern Florida through 10
branches. FirstBank’s success in attracting core deposits in Florida has enabled it 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 11 branches serving the islands in the USVI of St. Thomas, St. Croix, and St.
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John, and the island of Tortola in the BVI. 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 its own lending activities.
Employees
As of March 1, 2016, the Corporation and its subsidiaries employed 2,758 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 2015
Acquisition of Certain Assets and Deposits of Doral Bank
On February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank, assumed $522.7 million in deposits related to
such branches, acquired approximately $324.8 million in principal balance of loans, primarily residential mortgage loans, acquired
$5.5 million of property, plant and equipment and received $217.7 million of cash, through an alliance with Popular, which was the
successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders. This transaction solidified FirstBank as the
second largest bank in Puerto Rico, enhanced FirstBank’s presence in geographical areas in Puerto Rico with growth potential for
deposits and mortgage originations (two of the main business strategies of FirstBank), and provides a stable source of low-cost
deposits that are expected to support and enhance future growth activities.
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
assumption agreements with the alliance co-bidders, including FirstBank, for the transferred assets and deposits. There is no loss-share
arrangement with the FDIC related to the acquired assets, meaning that FirstBank will assume all losses with respect to such assets,
with no financial assistance from the FDIC.
The Corporation accounted for this transaction as a business combination. The application of the acquisition method of accounting
resulted in a bargain purchase gain of $13.4 million, which is included in non-interest income in the Corporation’s consolidated
statement of income for year ended December 31, 2015, and a core deposit intangible of $5.8 million ($5.1 million as of December 31,
2015). During 2015, the Corporation incurred $4.6 million on acquisition and conversion costs related to loans and deposit accounts
acquired from Doral that are considered non-recurring in nature, and $3.6 million on interim servicing costs until the completion in
May 2015 of the conversion to the FirstBank systems. These expenses are primarily included as part of professional fees in the
consolidated statement of income.
Termination of Consent Order
During the second quarter of 2015, FirstBank was notified by the FDIC that, effective April 29, 2015, the Consent Order under
which FirstBank had been operating since June 2, 2010 was terminated. Although the FDIC Order was terminated, First BanCorp. is
still subject to the Written Agreement entered into with the FED.
Bulk sale of assets
On June 5, 2015, the Corporation completed the sale of commercial and construction loans with a book value of $147.5 million
(principal balance of $196.5 million), comprised mostly of non-performing and adversely classified loans, as well as other real estate
owned (“OREO”) properties with a book value of $2.9 million in a cash transaction. The sale price of this bulk sale was $87.3
million. Approximately $15.3 million of reserves had been allocated to the loans. This transaction resulted in total charge-offs of
$61.4 million and an incremental pre-tax loss of $48.7 million, including $0.9 million in professional service fees directly attributable
to this bulk sale.
Other-Than-Temporary Impairment on Puerto Rico Government Obligations
During 2015, the Corporation recorded $15.9 million in other-than-temporary impairment (“OTTI”) charges on three Puerto Rico
Government debt securities held by the Corporation as part of its available-for-sale securities portfolio, specifically bonds of the
Government Development Bank for Puerto Rico (“GDB”) and the Puerto Rico Public Buildings Authority. The credit-related
impairment loss estimates were based on the probability of default and loss severity in the event of default in consideration of the
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latest available market-based evidence implied in current security valuations and information about the Puerto Rico Government’s
financial condition, including credit ratings, payment defaults on other bonds, and “clawback” measures implemented to redirect
revenues pledged to support bonds from certain government agencies to service the general obligation debt. As of December 31,
2015, the Corporation owns Puerto Rico Government debt securities in the aggregate amortized cost of $49.7 million (net of the $15.9
million OTTI charges taken in 2015), recorded on its books at a fair value of $28.2 million.
Sale of Merchant Contracts and Alliance Agreement
Effective October 31, 2015, FirstBank entered into a long-term strategic marketing alliance with Evertec, Inc. (“Evertec”) to which
FirstBank sold its merchant contracts portfolio and related POS terminals. Evertec acquired FirstBank’s merchant contracts and will
continue to provide processing services, customer service and support operations to FirstBank’s merchant locations. Merchant services
will be marketed through FirstBank’s branches and offices in Puerto Rico and the Virgin Islands. Under the 10-year marketing and
referral agreement, FirstBank and Evertec will share, in accordance with agreed terms, revenues generated by the existing and
incremental merchant contracts over the term of the agreement. The Corporation sold the merchant contracts for $10.0 million,
recorded a gain on sale of $7.0 million in the fourth quarter of 2015 and deferred $3.0 million to be recognized into income over the
marketing and referral agreement term.
Voluntary Early Retirement Incentive Program
During the fourth quarter of 2015, the Corporation offered and completed a voluntary early retirement program for certain
employees. Results for the fourth quarter of 2015 included charges of $2.2 million related to the early retirement program expense.
The estimated annual saving from this program is expected to be approximately $1.9 million for 2016.
Repurchase of Trust Preferred Securities
During the first quarter of 2016, the Corporation completed the repurchase of trust preferred securities that were being auctioned in
a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled $10 million in trust
preferred securities of the FBP Statutory Trust II, resulting in a commensurate reduction in the related Floating Rate Junior
Subordinated Debenture.
The Corporation’s winning bid equated to 70% of the $10 million par value. The 30% discount, plus accrued interest, resulted in a
pre-tax gain of approximately $4.2 million. As trust preferred securities no longer qualify for Tier 1 capital, the realized gain on the
transaction contributed to an increase of approximately 5 basis points in the Common Equity Tier 1 and Tier 1 capital ratios, an
increase of approximately 4 basis points in the Leverage capital ratio, and a decrease of approximately 6 basis points in the Total
Regulatory capital ratio.
Puerto Rico Government Fiscal Situation, Government Actions and Exposure
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.
On June 28, 2015, the Governor of Puerto Rico and the GDB released a report by former World Bank Chief Economist and former
Deputy Director of the International Monetary Fund, Dr. Anne Krueger, and economists Dr. Ranjit Teja and Dr. Andrew Wolfe (the
“Krueger Report”) that analyzes the full extent of the Commonwealth’s fiscal condition including revenues, expenditures, deficits, and
current and future obligations. It also makes recommendations for a five-year fiscal adjustment plan. The Krueger Report states that Puerto
Rico faces an acute crisis in the face of faltering economic activity, fiscal solvency, debt sustainability, and institutional credibility.
On June 29, 2015, the Governor of Puerto Rico announced that the Government will seek alternatives to ensure that the aggregate debt
burden of the Commonwealth is adjusted so it can be repaid on sustainable terms, while ensuring pension obligations are honored over the
long term and essential services for the people of Puerto Rico are maintained, and issued an Executive Order to create the Puerto Rico
Fiscal and Economic Recovery Working Group (the “Working Group”). After the announcement, the top three credit rating agencies,
Moody’s, S&P and Fitch downgraded the Puerto Rico issued bonds deeper into non-investment grade status.
The Working Group was created to consider necessary measures, including the measures recommended in the Krueger Report, to
address the fiscal crisis of the Commonwealth and is responsible for the development of the Puerto Rico Fiscal and Economic Growth Plan
(the “Plan”). The Plan, released in September 2015 and updated in January 2016, reviews the historical measures taken to increase taxes
and reduce expenses, analyzes the current liquidity and fiscal position of Puerto Rico, recommends certain fiscal and economic reform and
growth measures, including critical measures that require action by the U.S. Government, proposes to create a financial control board and
new budgetary regulations, and identifies significant projected financing gaps (even assuming the implementation of the recommended
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fiscal reform and economic growth measures) absent significant debt relief. The updated Plan shows that General Fund revenues have
decreased from a previous estimate of $9.46 billion for fiscal year 2016 to $9.21 billion; the estimated five-year projected financing gaps
increase from approximately $14 billion to $16.1 billion, even with the inclusion of economic growth and the implementation of all the
proposed measures in the Plan; and the ten-year projections estimate a $23.9 billion aggregate financing gap.
Moreover, on October 21, 2015, the U.S. Department of Treasury (the “U.S. Treasury) released its roadmap to address Puerto Rico’s
ongoing economic and fiscal crisis and to create a path to economic recovery. This roadmap was presented to Congress by U.S Treasury
officials and laid out four immediate steps that U.S. Congress should take to address the crisis in Puerto Rico:
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Provide Puerto Rico with the necessary tools to restructure its financial liabilities in a fair and orderly manner under the supervision
of a federal bankruptcy court.
Enact strong fiscal oversight and help strengthen Puerto Rico’s fiscal governance.
Provide a long-term solution to Puerto Rico’s historically inadequate Medicaid treatment.
Reward work and support economic growth by providing access to an Earned Income Tax Credit.
In August and December 2015 as well as in January 2016, the Puerto Rico Government met its scheduled debt service payments for
bonds that have constitutional guarantees such as the general obligation bonds and GDB bonds. In order to meet the January 2016 payment,
the Puerto Rico Government implemented “clawback” measures to redirect revenues assigned to certain government agencies for the
payment of the general obligation debt. Nevertheless, the Puerto Rico Government defaulted in August 2015 and January 2016 on the
payment of bonds of certain agencies, specifically bonds of the Public Finance Corporation and the Infrastructure Finance Authority.
Government officials disclosed that due to the lack of appropriated funds by the Legislature of Puerto Rico, as part of the current fiscal year
2016 budget, the debt service payment on these public corporations bonds were not made. These bonds are payable solely from budgetary
appropriations pursuant to legislation adopted by the Legislature of Puerto Rico. The Legislature of Puerto Rico is not legally bound to
appropriate funds for such payments.
Other measures adopted to deal with the Commonwealth’s deteriorating liquidity position include the deferral of tax refunds and the
stretching of payments to suppliers.
In February 2016, the Working Group released details of a comprehensive voluntary exchange proposal presented to advisors to the
Commonwealth’s creditors. Specifically, the restructuring proposal contemplates that creditors will exchange their existing securities for
two new securities: a “Base Bond,” with a fixed rate of interest and amortization schedule, and a “Growth Bond,” which is payable only if
the Commonwealth’s revenues exceed certain levels. Under this proposal, the $49.2 billion of tax-supported debt would be exchanged into
$26.5 billion of newly issued mandatorily payable Base Bonds and $22.7 billion of newly issued Growth Bonds. Interest payments on the
Base Bonds would begin in January 2018, scaling up to 5% per annum by fiscal year 2021, when principal payments would begin. The
Growth Bonds would be payable only to the extent the Commonwealth’s revenues exceed its current baseline projections as a result of real
economic growth in Puerto Rico. The proposal also seeks to lower the Commonwealth’s debt service-to-revenue on tax-supported debt to
approximately 15%, a level consistent with the debt limit contemplated by the Constitution of Puerto Rico, from the current ratio of 36%.
The voluntary exchange offer is intended to restructure those payments to allow the Commonwealth to catch up with payments due to
suppliers and taxpayers, and provides time for the Commonwealth to implement the measures of the Plan, stimulate real economic growth
and, over the long term, make its tax-supported debt sustainable. In addition, the Commonwealth is instituting a fiscal control board to
provide necessary oversight and ensure that the Commonwealth complies with the Plan and the terms of the exchange offer. Ultimate
outcomes from the proposed exchange are uncertain at this time and may vary considerably from the initial proposal, particularly due to
factors that are difficult to predict, such as U.S. federal actions to intervene in this matter and bondholders willingness to accept the
proposed exchange levels.
The U.S. House of Representatives Speaker, Paul Ryan, has asked legislators to craft a proposal to address the Puerto Rico debt situation
by March 31, 2016, which may include a federal control board that would manage its budgets and borrowings. On February 2, 2016, the
U.S. House Committee on Natural Resources held a hearing to evaluate the need for a federal oversight authority for Puerto Rico.
As of December 31, 2015, the Corporation had $316.0 million of credit facilities, excluding investment securities, extended to the
Puerto Rico Government, its municipalities and public corporations, of which $314.6 million was outstanding (book value of $311.0
million), compared to $308.0 million as of December 31, 2014. Approximately $199.5 million of the granted credit facilities
outstanding consisted of loans to municipalities in Puerto Rico whose revenues are independent of the central government. The good
faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Approximately 88% of
the Corporation’s municipality exposure consists primarily of senior priority loans concentrated on five of the largest municipalities in
Puerto Rico (San Juan, Carolina, Bayamon, Mayaguez and Guaynabo). These municipalities are required by law to levy special
property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. Late in 2015, GDB
and the Municipal Revenue Collection Center (CRIM) signed a deed of trust. Through this deed, the GDB, as fiduciary, is bound to
keep the CRIM funds separate from any other deposits and the funds should be distributed by the GDB pursuant to the applicable law.
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In addition to municipalities, loans extended to the Puerto Rico Government include $18.9 million of loans to units of the Puerto Rico
central government, and approximately $96.3 million ($92.6 million book value) of loans to public corporations, including a direct
exposure to the Puerto Rico Electric Power Authority (“PREPA”) with a book value of $71.1 million as of December 31, 2015. The
PREPA credit facility was placed in non-accrual status in the first quarter of 2015 and interest payments are now recorded on a cost-
recovery basis.
Furthermore, as of December 31, 2015, the Corporation had $129.4 million outstanding in financings to the hotel industry in Puerto
Rico where the borrower and the operations of the underlying collateral are the primary sources of repayment and the Puerto Rico
Tourism Development Fund (the “TDF”) provides a secondary guarantee for payment performance, compared to $133.3 million as of
December 31, 2014. The TDF is a subsidiary of the GDB that facilitates private sector financings to Puerto Rico’s hotel industry. The
TDF provides guarantees to financings and may provide direct loans. As a result of liquidity risk and uncertainty regarding the Puerto
Rico government fiscal situation, the Corporation adversely classified this $129.4 million exposure during the third quarter of 2015.
Since late 2012, the Corporation has received combined payments from the borrowers and TDF as guarantor sufficient to cover
contractual payments on these loans, including collections of principal and interest from TDF of approximately $5.3 million in 2015
and $6.1 million in 2014. These loans were current and remained in accrual status as of December 31, 2015.
On March 1, 2016, the Working Group in an updated public presentation indicated that the Commonwealth expects to have
insufficient liquidity to make upcoming debt service payments and that a substantial restructuring of the Commonwealth’s existing
debt is required to allow the Commonwealth to bring its fiscal accounts into balance, to give it time and the financial flexibility to
implement structural reforms and growth initiatives so as to stimulate the Puerto Rican economy and thereby to make the restructured
debt sustainable in the long term. We continue to monitor the Puerto Rico government fiscal and economic situation and its potential
impact on the Corporation's financial condition, including its potential impact on our TDF-guaranteed exposure. Although TDF has
continued to cover its contractually required payments as guarantor during the first quarter of 2016, we are currently assessing,
together with our regulators, whether recent developments related to the Puerto Rico government fiscal situation introduce additional
uncertainty regarding TDF's ability to honor its guarantee, which could require that some or all of our TDF-guaranteed exposure be
placed in nonaccrual status. If we determine to treat some or all of such loans as nonaccrual, then the Corporation’s asset quality
metrics and capital ratios could be adversely impacted, we could be required to prospectively apply principal and interest payments
received to the outstanding principal of the loans, and the affected loans would need to be individually evaluated for impairment with
specific reserves allocated as deemed necessary. In the event these loans are individually evaluated for impairment, based on present
appraised values and assumptions as to recovery rates on Puerto Rico government obligations, the required specific reserves are not
expected to deviate materially from the general reserves associated with these loans as of December 31, 2015.
During 2015, the Corporation increased by approximately $35 million the general reserve for commercial loans extended to or
guaranteed by the Puerto Rico Government (excluding municipalities), including a $19.2 million charge to the provision recorded in
the fourth quarter related to increased qualitative reserve factors applied to these loans in light of recent events surrounding the Puerto
Rico Government’s fiscal situation. In addition, during 2015, the specific reserve allocated to the PREPA credit facility was increased
by approximately $4.3 million. As of December 31, 2015 the total reserve coverage ratio (general and specific reserves) related to
commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 19%.
In November 2015, PREPA entered into a restructuring support agreement with bondholders and bank creditors that provides a
structured framework to implement certain economic agreements, including cuts to repayments of 15% for bondholders. The
agreement also outlines other elements, including new governance standards, operational improvements, and a rate structure proposal
and a capital plan. Under the economic terms of the agreement, fuel line lenders will have the option to convert existing credit
agreements into term loans with a fixed interest rate of 5.75% per annum, to be repaid over 6 years in accordance with an agreed upon
schedule or exchange all or part of principal due under the existing credit agreements for new securitization bonds that will pay cash
interest at a rate of 4.0% - 4.75% (depending on the credit rating) (“Option A Bonds”) or convertible capital appreciation
securitization bonds that will accrete interest at a rate of 4.5% - 5.5% for the first five years and pay current interest in cash thereafter
(“Option B bonds”). In February 2016, the Puerto Rico Government approved legislation to facilitate the implementation of the
restructuring support agreement.
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.1firstbank.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
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conduct and independence principles mentioned below, free of charge on or through its internet website at www.1firstbank.com
(under “Investor Relations”):
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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.
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, 2015, 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 co mplete
and which are qualified in their entirety by reference to those statutes and regulations. Although most of the regulations required under
the Dodd-Frank Wall Street Accountability and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) now have been adopted,
numerous additional regulations and changes to regulations are anticipated as a result of the Dodd-Frank Act, and future legislation
may increase the regulation and oversight of the Corporation and 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 numerous provisions that have affected and will affect large and small financial institutions alike, including banks
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and bank holding companies and how they will be regulated in the future. As a result of the Dodd-Frank Act, 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.
The Dodd-Frank Act establishes as an independent entity, within the Federal Reserve, the Consumer Financial Protection Bureau
(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. The Federal Reserve Board’s current debit card
interchange 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 has reduced our interchange fee revenue in line with industry-
wide expectations since 2011.
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. Treasury’s Troubled Asset Relief Program (“TARP”) are exempt from
this treatment. Bank holding companies, such as the Corporation, were required to fully phase out these instruments from Tier 1
capital by January 1, 2016; however, these instruments may remain in Tier 2 capital until the instruments are redeemed or mature.
Regulatory Capital and Liquidity Coverage Developments. The federal banking agencies adopted new 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, which applied to the Corporation and FirstBank as of
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 increased the quantity and quality of capital
required by, among other things, establishing a new minimum common equity capital requirements and an additional common equity
Tier 1 capital conservation buffer. 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.
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 were required to 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, 2015, the Corporation had $220 million in trust preferred securities
that are subject to the phase-out from Tier 1 capital under the final regulatory capital rules discussed above. During the first quarter of
2016, the Corporation repurchased $10.0 million in trust preferred securities that had been issued by FBP Statutory Trust II. This
transaction is described in more detail in “Significant Events Since the Beginning of 2015” above for additional information.
These new regulatory capital requirements are discussed in further detail in “Regulation and Supervision – Bank and Bank Holding
Company Regulatory Capital Requirements.”
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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. The final rules have increased our regulatory capital requirements and 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, 2015 to all the provisions that will be
phased-in between January 1, 2015 and January 1, 2019, were 15.4%, 15.8%, 19.4%, and 11.7%, respectively. These ratios would
exceed the fully phased-in minimum capital ratios under Basel III.
International Regulatory Capital and Liquidity Coverage Developments
International regulatory developments can affect the regulation and supervision of U.S. banking organizations, including the
Corporation and FirstBank. 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) including the adoption of Basel III and a
commitment to raise capital standards and liquidity buffers within the banking system under Basel III.
In late 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. 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 2016.
Prudential Regulation Developments. U.S. banking organizations, including the Corporation and FirstBank, operate under the
federal banking agencies’ rules and general supervisory guidance for stress testing practices applicable to banking organizations with
more than $10 billion in total consolidated assets. These regulatory actions require bank holding companies with total consolidated
assets of between $10 billion and $50 billion, consistent with the Dodd-Frank Act, to comply with annual company-run stress testing
requirements, and 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.
Under these requirements, 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 economic 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 publishes by February 15
of each year, report the results to their primary federal regulator and the Federal Reserve Board by July 31 of the same year, and
publicly disclose a summary of the results by October 31 of that year.
The Federal Reserve Board and the other federal banking agencies have 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. This guidance now is fully applicable to the Corporation and the Bank. 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 capital plan rule, the annual Comprehensive Capital Analysis and Review, the Dodd-Frank Act
supervisory stress tests, and related data collections. Targeted changes to the Federal Reserve capital planning and stress-testing
regulations most recently were made in November 2015, and are effective as of January 1, 2016. In addition, the federal banking
agencies recently issued the economic scenarios (baseline, adverse and severely adverse) to be used by banking organizations with
total consolidated assets of more than $10 billion for the 2016 company-run stress-tests under the Dodd-Frank Act.
The Federal Reserve’s rules that govern the supervision and regulation of large U.S. bank holding companies and foreign banking
organizations, as required by the Dodd-Frank Act, generally apply only to institutions with total consolidated assets of $50 billion or
more, which would not affect the Corporation. The Federal Reserve’s rules, however, require 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.
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These requirements complement the stress testing and resolution planning requirements for large bank holding companies that the
Federal Reserve previously finalized. The current rules require 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. In addition, one independent
director must chair the risk committee, with the banking organization 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. The Corporation is in
compliance with these new requirements.
Consumer Financial Protection Bureau. CFPB regulations issued over the past few years 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 collectively: (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 and set
standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage, (ii) require stricter
underwriting of “qualified mortgages,” discussed below, that presumptively satisfy the ability to pay requirement (thereby providing
the lender a safe harbor from non-compliance claims), (iii) specify new limitations on loan originator compensation and establish
criteria for the qualifications of, and registration or licensing of loan originators, (iv) further restrict certain high-cost mortgage loans
by expanding the coverage of the Home Ownership and Equity Protections Act of 1994, (v) expand mandated loan escrow accounts
for certain loans, (vi) 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, (vii) establish new appraisal standards for most “higher-risk mortgages” under
TILA, (viii) combine in a single, new form required loan disclosures under TILA and RESPA, (ix) define a “qualified mortgage for
purposes of the Dodd frank Act, and (x) affords safe harbor legal protections for lenders making qualified loans that are not “higher
priced.”
The CFPB also has issued a final regulation setting forth new mortgage servicing rules that now apply to the Bank.
The regulations 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.
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.
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. These new
mortgage servicing standards are expected to add to our costs of conducting a mortgage servicing business.
Effective October 3, 2015, the CFPB rule that combines mortgage disclosures previously established by the TILA and the
RESPA came to effect. Sections 1098 and 1100A of Dodd-Frank Act direct the Bureau to publish rules and forms that
combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the
Truth in Lending Act and the Real Estate Settlement Procedures Act. Consistent with this requirement, the Bureau amended
Regulation X (Real Estate Settlement Procedures Act) and Regulation Z (Truth in Lending) to establish new disclosure
requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition
to combining the existing disclosure requirements and implementing new requirements imposed by the Dodd -Frank Act, the
final rule provides extensive guidance regarding compliance with those requirements.
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
(“covered 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 have been adopted by the financial regulatory agencies and are now generally
effective.
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The Corporation and the Bank are not engaged in proprietary trading as defined in the Volcker Rule. 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. 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 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.
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 (the “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.
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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, 2015, 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 our 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.
As of December 31, 2015, 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 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 the 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 U.S. 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, which included the sale by the U.S. Treasury of 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 December 31, 2015, the U.S. Treasury owned approximately 4.8% of the
Corporation’s outstanding common stock, excluding the shares underlying the warrant.
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Under the terms of the amended Letter Agreement with the U.S. Treasury dated as of July 7, 2010 (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 U.S. 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 the U.S. 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 the U.S. 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 on
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.
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. 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 U.S. Treasury. Failure of a financial institution to comply with the requirement of the
Bank Secrecy Act or the USA PATRIOT Act 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 U.S. 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, U.S. Treasury and OFAC regulations.
Community Reinvestment
The CRA encourages banks to help meet the credit needs of the local communities in which the banks offer their services, including
low- and moderate-income individuals, consistent with safe and sound operation of the bank.
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The 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
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 conformance to safe and
sound banking practices and compliance with various statutory and regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which a banking 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.
Written Agreement
FirstBank was notified by the FDIC that the Consent Order under which the Bank had been operating since June 2, 2010 was
terminated effective April 29, 2015. Although the Consent Order has been terminated, First BanCorp. is still subject to the Written
Agreement that the Corporation entered into with the Federal Reserve Bank of New York on June 3, 2010.
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 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 under the Written Agreement setting forth its plans for how to improve capital positions
to comply with 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, 2015, the Corporation had
completed all of the items included in the Capital Plan and is continuing to work on reducing non-performing loans. The Written
Agreement also requires the submission to the regulators of quarterly progress reports.
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Dividend Restrictions
The Federal Reserve’s “Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and
Stock Repurchases at Bank Holding Companies” (the “Supervisory Letter”) discusses 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 U.S. Treasury’s TARP CPP. To that end, the
Supervisory Letter specifically addresses the Federal Reserve’s supervisory considerations for TARP participants.
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. 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).
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 stock 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.
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 that 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
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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.
Bank and Bank Holding Company Regulatory 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 were 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, were superseded by new risk-based and leverage
capital requirements that went into effect, on a multi-year transitional basis, on January 1, 2015. The FDIC has adopted substantively
identical requirements that apply to insured banks under its regulation and supervision. These requirements are part of a revised
regulatory capital framework for U.S. banking organizations (the “Basel III rules”) adopted by the banking agencies 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 replaced the risk-weighting requirements under prior 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 on January 1, 2015. The capital conservation buffer requirements, and the regulatory capital
adjustments and deductions under the Basel III rules are being 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, were allowed to make a one-time permanent election in early 2015 to continue to exclude AOCI items.
The Corporation and FirstBank elected to permanently exclude capital in AOCI 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 require the Corporation to maintain an additional CET1 capital conservation buffer of 2.5%. The capital conservation buffer
must be maintained to avoid limitations on both (i) capital distributions (e.g. repurchases of capital instruments or dividend or interest
payments on capital instruments) and (ii) discretionary bonus payments to executive officers and heads of major business lines. Under
the fully phased-in 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%, (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%, (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%, 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 phase-in of the capital
conservation buffer began 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 certain intangible assets, and deferred tax assets dependent upon future taxable income; the four-year phase-in period for
these adjustments generally began on January 1, 2015. Mortgage servicing assets and deferred tax assets attributable to temporary
differences, among others, are 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 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 began to
phase out TRuPs from Tier 1 capital on January 1, 2015. The Corporation’s 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 Corporation and FirstBank compute risk weighted assets using the Standardized Approach required by the Basel III rules. The
Standardized Approach for risk-weightings has expanded the risk-weighting categories from the four major risk-weighting categories
under the previous 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 results in higher risk weights for a variety of
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asset categories. Specific changes to the risk-weightings of assets include, among other things: (i) applying a 150% risk weight instead
of a 100% risk weight for 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%), (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 and (iv)
requiring capital to be maintained against on-balance-sheet and off-balance-sheet exposures that result from certain cleared
transactions, guarantees and credit derivatives, and collateralized transactions (such as repurchase agreement transactions).
Prompt Corrective Action. The Prompt Corrective Action (“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 previous 6%); and (iii) eliminating the previous 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.
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, 2015 based on Federal
Reserve and FDIC guidelines, respectively, and the capital ratios required to be attained and maintained under
the FDIC Order:
As of December 31, 2015
Total capital (Total capital to
risk-weighted assets)
Banking Subsidiary
First BanCorp.
FirstBank
Well-
Capitalized
20.01%
19.73%
10.00%
Common Equity Tier 1 Capital (Common Equity
Tier 1 capital to risk-weighted assets)
16.92%
16.35%
Tier 1 capital ratio (Tier 1 capital
to risk-weighted assets)
Leverage ratio (1)
_______________
(1) Tier 1 capital to average assets.
Deposit Insurance
16.92%
12.22%
18.45%
13.33%
6.50%
8.00%
5.00%
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 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. 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 assessment rules currently define the assessment base for deposit insurance as required by the Dodd-Frank Act, specify
assessment rates, implement 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. In October
2015, the FDIC proposed a rule to increase the Deposit Insurance Fund to the statutorily required minimum level of 1.35 percent.
Among other things, the proposed rule would impose on banks with at least $10 billion in assets (which would include the Bank) a
surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC has stated that it expects the
reserve ratio probably would reach 1.35 percent after approximately two years of payments of the proposed surcharges.
FDIC Insolvency Authority
Under Puerto Rico banking laws (discussed below), the OCIF may appoint the FDIC as conservator or receiver of a failed or failing
FDIC-insured Puerto Rican bank such as the Bank, and the FDIA authorizes the FDIC to accept such an appointment. In addition, the
FDIC has broad authority under the FDIA to appoint itself as conservator or receiver of a failed or failing state bank, including a
Puerto Rican bank. 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 or transfer some, part or all of a bank’s assets and liabilities to another bank, or liquidate the bank and pay
out insured depositors, as well as uninsured depositors and other creditors to the extent of the closed bank’s available assets. As part of
its insolvency authority, the FDIC has the authority, among other things, to take possession of and administer the receivership estate,
pay out estate claims, and 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.
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Activities and Investments
The activities as “principal” and equity investments of FDIC-insured, state-chartered banks such as FirstBank are generally limited
to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state-chartered bank
generally may not directly or indirectly acquire or retain any equity investments of a type, or in an amount, that is not permissible for a
national bank.
Federal Home Loan Bank System
FirstBank is a member of the Federal Home Loan Bank (“FHLB”) system. The FHLB system consists of twelve regional Federal
Home Loan Banks governed and regulated by the Federal Housing Finance Agency. The Federal Home Loan Banks serve as reserve
or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB system, and they make loans (advances) to members in accordance with policies and
procedures established by the FHLB system and the board of directors of each regional FHLB.
FirstBank is a member of the FHLB of New York 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 of New York. 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 group of 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 group of 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 (or group of persons acting in concert) 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. Failure to comply with these standards can result in administrative enforcement or
other adverse actions against the bank.
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.
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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”).
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 or 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.
24
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. FirstBank and
FirstBank Overseas Corporation were created under the IBE Act 52, 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 the corporate standard rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net
taxable income. 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
locally 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:
(i)
to the IFE:
(cid:120)
(cid:120)
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.
(ii) to its shareholders:
(cid:120)
(cid:120)
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.
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.
25
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 consolidated tax returns 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 carry forward
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.
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.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate in Puerto Rico mainly by investing in
government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business
through FirstBank IBE, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales
is exempt from Puerto Rico income taxation.
During 2013, the Puerto Rico Government approved Act No. 40, which imposed a national gross receipts tax. The national gross
receipts tax for financial institutions was computed on the basis of 1% of gross income net of allowable exclusions. Subject to certain
limitations, a financial institution was able to claim a credit of 0.5% of its gross income against its regular income tax or the
alternative minimum tax. However, on December 22, 2014, the Governor of Puerto Rico signed Act No. 238, which amended the
2011 PR Code. Act No. 238 clarified that the national gross receipts tax was not applicable to taxable years starting after December
31, 2014. Accordingly, the Corporation did not record a national gross receipts tax expense for 2015. During the year 2014, a $5.7
million gross receipts tax expense was included as part of “Taxes, other than income taxes” in the consolidated statement of income
and a $2.9 million benefit related to this credit was recorded as a reduction to the provision for income taxes.
On May 28 and September 30, 2015, the Puerto Rico legislature approved Act 72-2015 and Act 159-2015, respectively, which
enacted amendments to the 2011 PR Code. The amendments related to the income tax provision include changes to the alternative
minimum tax computation, and changes to the use limitation on NOLs and capital losses for 2015 and future taxable years. The
change in the tax law affected the Corporation’s income tax computation by limiting the NOL deduction to 80% of taxable income,
compared to a 90% limitation in prior years.
Act 72-2015 also introduced a value added tax (the “VAT”) on consumption, effective April 1, 2016, to replace the current sales
and use tax (“SUT”), and certain temporary changes on SUT for the transition into the VAT. The changes in SUT include, an increase
in tax rate from 7% to 11.5%, effective July 1, 2015, and a new 4% SUT on business to business services, and professional services,
with certain exceptions, effective October 1, 2015. That law included a measure that the Puerto Rico Treasury Secretary could
postpone for 60 days the application of the VAT provisions. Early in March 2016, the Puerto Rico Secretary of the Treasury
postponed until June 1, 2016 the implementation of the VAT. Once the VAT enters in force, the 4% SUT imposed on certain business
to business services and professional services will change into a 10.5% VAT and most transactions already subject to the 11.5% SUT
will remain at the same rate under the VAT. Act 159-2015 included additional exemptions to the 4% SUT and 10.5% VAT such as for
certain legal services, intangibles and transportation services.
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 and
solicitation and advertising practices, and by the Federal Reserve as to certain consumer protection provisions mandated by the GLB
Act and its implementing regulations.
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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 (the “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 the 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 the 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.
Item 1A. Risk Factors
RISKS RELATING TO THE CORPORATION’S BUSINESS
We are operating under an agreement 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 range 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 Written
Agreement we entered into with the Federal Reserve Bank of New York on June 4, 2010, 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.
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 and/or New York FED (referred to jointly as the “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 Written Agreement,
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 Written Agreement, we may become subject to additional regulatory enforcement action and other
adverse regulatory actions that might have a material and adverse effect on our operations.
Our high level of non-performing loans may adversely affect our future results from operations.
We continue to have a high level of non-performing loans as of December 31, 2015, although it decreased $127.6 million to $450.9
million as of December 31, 2015, or 22%, from $578.5 million as of December 31, 2014. Our non-performing loans represent
approximately 5% of our $9.3 billion loan portfolio as of December 31, 2015. In addition, we have a high level of total non-
performing assets, although our non-performing assets decreased $106.8 million to $609.9 million as of December 31, 2015, or 14.9%,
from $716.8 million as of December 31, 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.
27
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, 2015, we had $2.1 billion in brokered
CDs outstanding, representing approximately 22.5% of our total deposits, and a reduction of $789.6 million from the year ended
December 31, 2014. Approximately $1.3 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, 2015 was approximately 1.1 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 change. 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 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 by the Corporation 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 have 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 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 the fourth quarter of 2015, $2.8 million was transferred to the legal surplus reserve. FirstBank’s legal surplus
reserve amounted to $42.8 million as of December 31, 2015.
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 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 $28.7 million as of December 31, 2015.
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
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.
28
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 $4.1 billion as of December 31, 2015.
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,
2015, we had $243.0 million in nonperforming commercial and construction loans held for investment. During 2015, the Corporation
increased the reserve for loan losses by approximately $39 million related to commercial loans extended to or guaranteed by the
Puerto Rico Government (excluding municipalities) and recorded other-than-temporary impairment charges of $15.9 million on
Puerto Rico Government debt securities as a result of the Puerto Rico Government’s fiscal situation. See “Risks Relating to the
Business Environment and Our Industry – The Corporation’s credit quality has been and in the future may be adversely affected by
Puerto Rico’s current economic condition.” 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 additional 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, 2015, approximately 2%, 17% and 36% 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
economic recession since 2006. Sustained weak economic conditions that have affected Puerto Rico over the last several years have
resulted in declines in collateral values.
29
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, 2015, commercial mortgage and
construction real estate loans amounted to $1.7 billion or 18% 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, 2015, net charge-offs
on construction, commercial mortgage and residential mortgage loan portfolios totaled $2.4 million, $49.6 million and $18.1 million,
respectively.
The acquisition of certain assets and deposits of Doral Bank through an alliance with another financial institution could magnify
certain of the Corporation’s risks and could present new risks.
On February 27, 2015, the Corporation, through an alliance with another local financial institution that was the successful lead
bidder with the FDIC on the failed Doral Bank, acquired certain assets and deposits of Doral Bank. The transaction magnifies certain
of the risks the Corporation already faces that are described in these “Risk Factors” and presents new risks, including the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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;
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; 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 pass-through mortgage-backed securities. Such an extension could exacerbate the drop in market value
related to shifts in interest rates.
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.
30
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 rates 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, 2013, 2014, and 2015, we recognized a total of $0.2 million, $0.4 million and $16.5 million,
respectively, in other-than-temporary impairments. The 2015 impairments were primarily related to Puerto Rico Government debt
securities held by the Corporation, which may continue to be adversely affected by the Puerto Rico Government financial difficulties.
See “Risks Relating to the Business Environment and Our Industry – The Corporation’s credit quality has been and in the future may
be adversely affected by Puerto Rico’s current economic condition.” To the extent that any portion of the unrealized losses in our
investment securities portfolio of $43.9 million as of December 31, 2015 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, even if approved by the Federal Reserve, 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 relating to 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:120)
(cid:120)
(cid:120)
(cid:120)
compliance with laws and regulations;
underwriting standards;
the accuracy of information in the loan documents and loan files; and
the characteristics and enforceability of the loan
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
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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 any cyber-attacks 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, the erroneous provision of information to parties who are not permitted to have the information, either by
fault of our systems, employees, or counterparties, or the interception or other inappropriate use of such information 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 believe that 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 of 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.
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.
Our operations are located in regions 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 executives and other key 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 our executives or other 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.
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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”). In the event of a bank failure, the FDIC takes control of a
failed bank and, if necessary, pays all insured deposits up to the statutory deposit insurance 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, such as FirstBank, 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 has proposed a rule to increase the DIF of the statutorily required minimum level of 1.35 percent. Among other things,
the proposed rule would impose on banks with at least $10 billion in assets (which would include the Bank) a surcharge of 4.5 cents
per $100 of their assessment base, after making certain adjustments. The FDIC has stated that it expects the reserve ratio probably
would reach 1.35 percent after approximately two years of payments of the proposed surcharges.
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, reserves we
establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which has occurred in the
past and may again occur, resulting in a material adverse impact on our consolidated results of operations or financial condition.
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, has had and could in the future 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 Written
Agreement, 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.
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If we fail to promptly address matters that bear on our reputation, our reputation may be materially adversely affected and 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 balance sheet 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 most recent evaluation of goodwill during the fourth quarter of 2015.
The Step 1 evaluation of goodwill allocated to the Florida reporting unit under valuation approaches (market and discounted cash
flow analyses) 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, 2015 or 2014, nor was any goodwill written off due to impairment during 2015, 2014, and 2013. 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.
Recognition of deferred tax assets is dependent upon the generation of future taxable income by the Bank.
As of December 31, 2015, the Corporation had a deferred tax asset of $311.3 million (net of a valuation allowance of $201.7
million), including $182.1 million associated with FirstBank’s Net Operating Losses. Under Puerto Rico law, the Corporation and its
subsidiaries, including FirstBank, 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 January 1, 2013, 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, 2015, 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. The Corporation
recorded a partial reversal of its valuation allowance in the amount of $302.9 million in the fourth quarter of 2014. The Corporation’s
valuation allowance as of December 31, 2015 amounted to $201.7 million. 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 tax 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.
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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 United States Internal Revenue Service (“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
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 has been and in the future 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 been
in an economic recession since 2006. Based on the most recent information available, the main economic indicators suggest that the Puerto
Rico economy remains weak. For fiscal years 2015 and 2016, the Puerto Rico Planning Board projects a continued economic contraction
in the Commonwealth’s real gross national product (“GNP”) of 0.9% and 1.2%, respectively, while the Government Development Bank for
Puerto Rico economic activity index (“GDB-EAI”) in December 2015 decreased 0.5% on a year-over-year basis. The GDB-EAI is a
coincident index of economic activity for Puerto Rico made up of four indicators (payroll employment, electric power generation, cement
sales and gasoline consumption). The seasonally adjusted unemployment rate in Puerto Rico was 12.2% in December 2015, which is
higher than in any U.S. state. Puerto Rico lost over 60 thousand residents in 2014, a 30% increase from 2013, and the largest out-migration
in at least 10 years, according to U.S. census data.
On June 29, 2015, the Governor of Puerto Rico announced that the Government will seek alternatives to ensure that the aggregate debt
burden of the Commonwealth is adjusted so it can be repaid on sustainable terms, while ensuring pension obligations are honored over the
long term and essential services for the people of Puerto Rico are maintained, and issued an Executive Order to create the Puerto Rico
Fiscal and Economic Recovery Working Group. After the announcement, the top three credit rating agencies, Moody’s, S&P and Fitch
downgraded the Puerto Rico issued bonds deeper into non-investment grade status.
The Working Group was created to consider necessary measures, including the measures recommended in the Krueger Report, to
address the fiscal crisis of the Commonwealth and is responsible for the development of the Puerto Rico Fiscal and Economic Growth Plan
(the “Plan”). The Plan, released in September 2015 and updated in January 2016, reviews the historical measures taken to increase taxes
35
and reduce expenses, analyzes the current liquidity and fiscal position of Puerto Rico, recommends certain fiscal and economic reform and
growth measures, including critical measures that require action by the U.S. Government, proposes to create a financial control board and
new budgetary regulations, and identifies significant projected financing gaps (even assuming the implementation of the recommended
fiscal reform and economic growth measures) absent significant debt relief. The updated Plan shows that General Fund revenues have
decreased from a previous estimate of $9.46 billion for fiscal year 2016 to $9.21 billion; the estimated five-year projected financing gaps
increase from approximately $14 billion to $16.1 billion, even with the inclusion of economic growth and the implementation of all the
proposed measures in the Plan; and the ten- years projections estimate a $23.9 billion aggregate financing gap.
The Commonwealth has adopted measures intended to raise additional revenue, including the increase in the sales and use tax (“SUT”)
and a value added tax (“VAT”) to replace the central government’s portion of the SUT, subject to certain conditions. It is uncertain
how these measures will impact the consumer and commercial sector.
In August and December 2015 as well as in January 2016, the Puerto Rico Government met its scheduled debt payments for bonds that
have constitutional guarantees such as the general obligation bonds and GDB bonds. In order to meet the January 2016 payment, the Puerto
Rico Government implemented “clawback” measures to redirect revenues assigned to certain government agencies for the payment of the
general obligation debt. Nevertheless, the Puerto Rico Government defaulted in August 2015 and January 2016 on the payment of bonds of
certain agencies, specifically bonds of the Public Finance Corporation and the Infrastructure Finance Authority. Government officials
disclosed that due to the lack of appropriated funds by the Legislature of Puerto Rico, as part of the current fiscal year 2016 budget, the debt
service payment on these public corporations bonds were not made. These bonds are payable solely from budgetary appropriations pursuant
to legislation adopted by the Legislature of Puerto Rico. The Legislature of Puerto Rico is not legally bound to appropriate funds for such
payments.
Other measures adopted to deal with the Commonwealth’s deteriorating liquidity position include the deferral of tax refunds and the
stretching of payments to suppliers.
In February 2016, the Working Group released details of a comprehensive voluntary exchange proposal presented to advisors to the
Commonwealth’s creditors. In addition, the Commonwealth is instituting a fiscal control board to provide necessary oversight and ensure
that the Commonwealth complies with the Plan and the terms of the exchange offer. Ultimate outcomes from the proposed exchange are
uncertain at this time, and may vary considerably from the initial proposal, particularly due to factors that are difficult to predict, such as
U.S. federal actions to intervene in this matter and bondholders willingness to accept the proposed exchange levels.
The U.S. House of Representatives Speaker, Paul Ryan, has asked legislators to craft a proposal to address the Puerto Rico debt situation
by March 31, 2016, which may include a federal control board that would manage its budgets and borrowings.
As of December 31, 2015, the Corporation had $316.0 million of credit facilities, excluding investment securities, extended to the
Puerto Rico Government, its municipalities and public corporations, of which $314.6 million was outstanding (book value of $311.0
million), compared to $308.0 million as of December 31, 2014. Approximately $199.5 million of the granted credit facilities
outstanding consisted of loans to municipalities in Puerto Rico whose revenues are independent of the central government. The good
faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. In addition to
municipalities, loans extended to the Puerto Rico Government include $18.9 million of loans to units of the Puerto Rico central
government, and approximately $96.3 million ($92.6 million book value) of loans to public corporations, including a direct exposure
to PREPA with a book value of $71.1 million as of December 31, 2015. The PREPA credit facility was placed in non-accrual status in
the first quarter of 2015 and interest payments are now recorded on a cost-recovery basis.
Furthermore, as of December 31, 2015, the Corporation had $129.4 million outstanding in financings to the hotel industry in Puerto
Rico where the borrower and the operations of the underlying collateral are the primary sources of repayment and the Puerto Rico
Tourism Development Fund provides a secondary guarantee for payment performance, compared to $133.3 million as of December
31, 2014. The TDF is a subsidiary of the GDB that facilitates private-sector financings to Puerto Rico’s hotel industry. As a result of
liquidity risk and uncertainty regarding the Puerto Rico government fiscal situation, the Corporation adversely classified this $129.4
million exposure during the third quarter of 2015. Since late 2012, the Corporation has received combined payments from the
borrowers and TDF as guarantor sufficient to cover contractual payments on these loans, including collections of principal and interest
from TDF of approximately $5.3 million in 2015 and $6.1 million in 2014. These loans were current and remained in accrual status as
of December 31, 2015.
On March 1, 2016, the Working Group in an updated public presentation indicated that the Commonwealth expects to have
insufficient liquidity to make upcoming debt service payments and that a substantial restructuring of the Commonwealth’s existing
debt is required to allow the Commonwealth to bring its fiscal accounts into balance, to give it time and the financial flexibility to
implement structural reforms and growth initiatives so as to stimulate the Puerto Rican economy and thereby to make the restructured
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debt sustainable in the long term. We continue to monitor the Puerto Rico government fiscal and economic situation and its potential
impact on the Corporation's financial condition, including its potential impact on our TDF-guaranteed exposure. Although TDF has
continued to cover its contractually required payments as guarantor during the first quarter of 2016, we are currently assessing,
together with our regulators, whether recent developments related to the Puerto Rico government fiscal situation introduce additional
uncertainty regarding TDF's ability to honor its guarantee, which could require that some or all of our TDF-guaranteed exposure be
placed in nonaccrual status. If we determine to treat some or all of such loans as nonaccrual, then the Corporation’s asset quality
metrics and capital ratios could be adversely impacted, we could be required to prospectively apply principal and interest payments
received to the outstanding principal of the loans, and the affected loans would need to be individually evaluated for impairment with
specific reserves allocated as deemed necessary. In the event these loans are individually evaluated for impairment, based on present
appraised values and assumptions as to recovery rates on Puerto Rico government obligations, the required specific reserves are not
expected to deviate materially from the general reserves associated with these loans as of December 31, 2015. There can be no
assurance that we would not be required to take additional reserves in future periods, which could impact our financial statements and
results of operations.
During 2015, the Corporation increased by approximately $35 million the general reserve related to commercial loans extended to
or guaranteed by the Puerto Rico Government (excluding municipalities), including a $19.2 million charge to the provision recorded
in the fourth quarter related to increased qualitative reserve factors applied to these loans in light of recent events surrounding the
Puerto Rico Government’s fiscal situation. In addition, during 2015, the specific reserve allocated to the PREPA credit facility was
increased by approximately $4.3 million. As of December 31, 2015 the total reserve coverage ratio (general and specific reserves)
related to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 19%.
In November 2015, PREPA entered into a restructuring support agreement with bondholders and bank creditors that provides a
structured framework to implement certain economic agreements, including cuts to repayments of 15% for bondholders. The
agreement also outlines other elements, including new governance standards, operational improvements, and a rate structure proposal
and a capital plan. Under the economic terms of the agreement, fuel line lenders will have the option to convert existing credit
agreements into term loans with a fixed interest rate of 5.75% per annum, to be repaid over 6 years in accordance with an agreed upon
schedule or exchange all or part of principal due under the existing credit agreements for new securitization bonds that will pay cash
interest at a rate of 4.0% - 4.75% (depending on the credit rating) (“Option A Bonds”) or convertible capital appreciation
securitization bonds that will accrete interest at a rate of 4.5% - 5.5% for the first five years and pay current interest in cash thereafter
(“Option B bonds”). In February 2016, the Puerto Rico Government approved legislation to facilitate the implementation of the
restructuring support agreement.
In addition, as of December 31, 2015, the Corporation held $49.7 million of obligations of the Puerto Rico Government as part of
its available-for-sale investment securities portfolio (net of other-than-temporary credit impairment charges of $15.9 million) recorded
on its books at a fair value of $28.2 million. During 2015, the Corporation recorded $15.9 million in OTTI charges on three Puerto
Rico Government debt securities, specifically bonds of the GDB and the Puerto Rico Buildings Authority. A $12.9 million impairment
charge was booked in the second quarter and an additional $3.0 million impairment was recorded in the fourth quarter. The credit-
related impairment loss estimate is based on the probability of default and loss severity in the event of default in consideration of the
latest available market-based evidence implied in current security valuations and information about the Puerto Rico Government’s
financial conditions, including credit ratings and the aforementioned payment defaults and “clawback” measures implemented. Given
the uncertainty of the debt restructuring process outcomes, the Corporation cannot be certain that future impairment charges will not
be required against these securities.
The decline in Puerto Rico’s economy since 2006 has resulted in, among other things, a decline in our loan originations, an increase
in the level of our non-performing assets, higher loan loss provisions and charge-offs, and an increase in the rate of foreclosure loss on
mortgage loans, all of which adversely affected our profitability. Any further potential deterioration of economic activity could result
in further adverse effects on our profitability and credit quality.
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.
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In particular, we may face the following risks:
(cid:120) 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.
(cid:120)
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.
(cid:120) 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 further disruptions in the capital markets or other events, including
deteriorating investor expectations.
(cid:120)
Competitive dynamics in the industry could change as a result of consolidation of financial services companies in
connection with current market conditions.
(cid:120) We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and
limit our ability to pursue business opportunities.
(cid:120)
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, our business, financial condition and results of operations and our ability to comply with the Written Agreement which
could result in further regulatory enforcement actions.
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.
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 of 2008 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.
38
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 addition, 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
Troubled Assets Relief Program. 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 U.S. Treasury in
January 2009 pursuant to the TARP. In July 2010, the Corporation issued to U.S. Treasury a warrant, which amends, restates and
replaces the original warrant that it issued to U.S. 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.
As discussed above, 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. In addition, U.S. banking organizations, including the Corporation and
FirstBank, are subject to new and more stringent regulatory capital requirements that generally increase the amounts of capital that we
need to hold.
As of December 31, 2015, the Corporation had $220 million in trust preferred securities that are now subject to the full phase-out
from Tier 1 capital under the final regulatory capital rules discussed above.
Although First BanCorp. and FirstBank were able to meet well-capitalized capital ratios upon implementation of the requirements,
and we expect they will continue to exceed the minimum requirements for well capitalized status under the new capital rules, we may
not remain well capitalized. Moreover, for as long as we are subject to the provisions of the Written Agreement, 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, and
the Real Estate Settlement Procedures Act. See “Regulation and Supervision – Consumer Financial Protection Bureau.”
Among other consequences of these numerous changes, the requirements relating to the evaluation of the borrower’s ability to
repay the loan 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.
These and other changes required by the Dodd-Frank Act have required 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.
39
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 was submitted to regulators in the
first quarter of 2015. Public disclosure of the results for the severely adverse economic scenario was made during the second quarter
of 2015 on the Corporation’s website.
Future 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.
40
RISKS RELATING TO AN INVESTMENT IN THE CORPORATION’S COMMON AND PREFERRED STOCK
Sales in the public market of the approximately 44% of our outstanding shares of Common Stock that are held by a small group of
large stockholders could adversely affect the trading price of our Common Stock.
The following stockholders own an aggregate of approximately 44.4% of our outstanding shares of common stock: funds affiliated
with Thomas H. Lee Partners, L.P. (“THL”), which own approximately 19.46%, and funds managed by Oaktree Capital Management,
L.P. (“Oaktree”), which own approximately 19.45%, and U.S. Treasury, which owns approximately 5.38%, including the shares of
Common Stock issuable upon exercise of the Warrant. We have registered these securities for resale under the Securities Act of 1933
and are obligated to keep the prospectus, which is part of the resale registration statement filed with the SEC, 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 markets and other capital management or business strategies that we may
pursue could depress the market price of our Common Stock and could result in dilution of holders of our Common Stock,
including purchasers of our Common Stock under the resale registration statement.
Generally, we are not restricted from issuing additional equity securities, including common stock. We may choose to sell
additional equity securities, or we could 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 U.S. 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 our common stock in
the October 2011 $525 million capital raise. These rights 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 frequently 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.
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
uncertainties and developments related to the resolution of the Puerto Rico Government fiscal problems;
our ability to continue to comply with the Written Agreement;
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 USVI, BVI
and U.S.;
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.
41
In addition, the stock market in general, and the NYSE and the other trading markets for the securities of 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 or Puerto Rico’s economic environment. 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 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 applicable Federal Reserve Board’s 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 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of March 1, 2016, 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, over 1,000 employees from operations, FirstMortgage and FirstBank Insurance Agency
headquarters and the customer service department. 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 21 branch and office premises and auto lots and leases 86 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 30, “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.
42
Item 4. Mine Safety Disclosure.
Not applicable.
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 4, 2016, there were 435 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 $2.88.
Since August 2009, the Corporation has suspended 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 for the Corporation’s
common stock during such periods.
Quarter Ended
2015:
Fourth Quarter Ended December 31, 2015
Third Quarter Ended September 30, 2015
Second Quarter Ended June 30, 2015
First Quarter Ended March 31, 2015
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
High
Low
Last
Dividends
per Share
$
$
$
$
4.49
4.89
6.74
6.74
5.89
5.57
5.66
6.04
$
$
3.06
3.15
4.82
5.27
4.56
4.75
4.87
4.42
$
$
3.25
3.56
4.82
6.20
5.87
4.75
5.44
5.44
-
-
-
-
-
-
-
-
On August 16, 2013, THL, Oaktree and the U.S. Treasury participated in 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.
As of March 4, 2016, each of THL and Oaktree owned 19.5% of the Corporation’s outstanding common stock and the U.S.
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
483,053 shares of common stock with a weighted average market value of $4.67 in 2015 as such additional salary amounts (2014 –
312,850 shares with a weighted average market value of $5.20). The Corporation withheld 149,463 shares from the common stock
paid to the officers as additional compensation to cover employee payroll and income tax withholding liabilities in 2015 (2014 –
105,000 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.
43
In 2015, the Corporation granted 1,013,495 shares of restricted stock to certain executive officers, other employees, and
independent directors (2014 – 1,219,711 shares). The Corporation withheld in 2015 72,918 shares of restricted stock that vested
during 2015 (2014 – 68,870 shares) to cover employee payroll and income tax withholding liabilities; these shares are also held as
treasury shares.
As of December 31, 2015 and December 31, 2014, the Corporation had 962,430 and 740,049 shares held as treasury stock,
respectively.
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 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.
44
2015 Exchange
During the second quarter of 2015, the Corporation exchanged trust-preferred securities with a liquidation value of $5.3 million for
852,831 shares of the Corporation’s common stock in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act.
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 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 15% 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 15% 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.
45
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, 2015:
(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))
69,848 (1)
N/A
69,848
$
$
160.30
N/A
160.30
3,478,442 (2)
N/A
3,478,442
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, 2015, 3,478,442 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, 2015.
Period
October, 2015
November, 2015
December, 2015
Total
Total number of
shares purchased (1)
15,317 $
14,189
11,226
40,732 $
Average
Price
Paid
3.80
4.10
3.22
3.75
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Or Programs
Maximum
Number of Shares
That May Yet be
Purchased Under
These Plans or
Programs
-
-
-
-
-
-
-
-
(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.
46
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, 2010 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, 2010 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
$200
$175
$150
$125
$100
$75
$50
$25
$0
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
First Bank
S&P 500
S&P Supercom Banks Index
47
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,
2015. 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)
2015
Year Ended December 31,
2013
2014
2012
2011
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 (expense) benefit
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
$
605,569 $
633,949 $
645,788 $
637,777 $
103,303
502,266
172,045
81,325
383,830
27,716
(6,419)
21,297
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
659,615
266,103
393,512
236,349
107,981
338,054
(72,910)
(9,322)
(82,232)
21,297
393,946
(164,487)
29,782
173,226
21,297
393,946
(164,487)
29,782
195,763
0.10 $
1.89 $
(0.80) $
0.15 $
2.69
0.10 $
-
1.87 $
-
(0.80) $
-
0.14 $
-
211,457
212,971
208,752
210,540
205,542
205,542
205,366
205,828
7.71 $
7.47 $
7.68 $
7.45 $
5.57 $
5.30 $
6.89 $
6.60 $
2.18
-
64,466
89,658
6.73
6.54
9,309,734 $
240,710
2,138,037
9,339,392 $
222,395
2,008,380
9,712,139 $ 10,139,508 $ 10,575,214
493,917
435,414
2,200,888
1,986,669
285,858
2,208,342
50,583
311,263
12,573,019
9,338,124
1,381,492
36,104
1,685,779
49,907
313,045
12,727,835
9,483,945
1,456,959
36,104
1,653,990
54,866
7,644
12,656,925
9,879,924
1,431,959
63,047
1,231,547
60,944
4,867
13,099,741
9,864,546
1,640,399
63,047
1,393,546
39,787
5,442
13,127,275
9,907,754
1,622,741
63,047
1,361,899
(27,749)
1,694,134
(18,351)
1,671,743
(78,736)
1,215,858
28,430
1,485,023
19,198
1,444,144
$
$
$
$
$
48
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,
2015
2014
2013
2012
2011
0.17
1.26
1.29
13.23
4.09
4.30
12.84
-
65.77
2.60
1.65
1.12 x
4.85
3.10
30.25
31.38
10.25
4.16
4.34
12.51
-
65.28
2.40
1.81
0.63 x
5.63
(1.28)
(12.39)
(13.01)
10.36
4.01
4.21
8.71
-
83.10
0.23
2.04
2.14
11.24
3.41
3.68
10.44
-
69.44
(0.57)
(7.31)
(13.38)
7.83
2.59
2.86
10.25
-
67.41
2.97
4.01
0.69 x
5.73
4.33
1.74
4.68
2.68
0.67 x
9.45
0.80 x
10.19
4.77
5.66
5.14
9.70
10.78
54.36
42.45
57.69
44.63
43.39
87.92
64.80
85.56
65.78
61.73
Other Information:
Common stock price: End of period
___________
(1) Non-GAAP financial measures. Refer to "Capital" 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 (see "Net Interest Income" below for a
reconciliation of these non-GAAP financial 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.
(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.
3.25
6.19
5.87
$
$
$
$
4.58
$
3.49
49
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. It presents various non-GAAP financial measures. Refer to “Basis of Presentation” below for
information about why the non-GAAP financial measures are being presented.
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 on commercial banking,
residential mortgage loan originations, finance leases, credit cards, personal loans, small loans, auto loans, insurance agency and
broker-dealer activities.
Puerto Rico Economic Environment
A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has been
in an economic recession since 2006. Based on the most recent information available, the main economic indicators suggest that the Puerto
Rico economy remains weak. For fiscal years 2015 and 2016, the Puerto Rico Planning Board projects a continued economic contraction
in the Commonwealth’s real gross national product (“GNP”) of 0.9% and 1.2%, respectively, while the GDB economic activity index
(“GDB-EAI”) in December 2015 decreased 0.5% on a year-over-year basis. The GDB-EAI is a coincident index of economic activity for
Puerto Rico made up of four indicators (payroll employment, electric power generation, cement sales and gasoline consumption). The
seasonally adjusted unemployment rate in Puerto Rico was 12.2% in December 2015, which is higher than in any U.S. state. Puerto Rico
lost over 60 thousand residents in 2014, a 30% increase from 2013, and the largest out-migration in at least 10 years, according to U.S.
census data.
Based on information published by the Puerto Rico Government, preliminary General Fund net revenues for the fiscal year ended June
30, 2015 were $8.961 billion, a decrease of $76.0 million when compared to the prior fiscal year and $604.1 million less than the original
estimate for the year. The Government’s most recent projection is that it will close fiscal year 2015 with a budget deficit in the range of
$531 million to $566 million, an amount that, when adjusted for actual tax refunds paid in this fiscal year in excess of the reserve included
in the budget for fiscal year 2015, increases the deficit to a range of $705 million to $740 million. Preliminary General Fund net revenues
for the first six months of fiscal year 2016 were $3.9 billion, an increase of $140.3 million year-over-year and a decrease of $21.5 million
compared to estimates included in the original budget for fiscal year 2016. The original revenue estimates were recently revised to
approximately $9.2 billion, a $508 million reduction.
On June 28, 2015, the Governor of Puerto Rico and the GDB released a report by former World Bank Chief Economist and former
Deputy Director of the International Monetary Fund, Dr. Anne Krueger, and economists Dr. Ranjit Teja and Dr. Andrew Wolfe (the
“Krueger Report”) that analyzes the full extent of the Commonwealth’s fiscal condition including revenues, expenditures, deficits, and
current and future obligations. It also makes recommendations for a five-year fiscal adjustment plan. The Krueger Report states that Puerto
Rico faces an acute crisis in the face of faltering economic activity, fiscal solvency, debt sustainability, and institutional credibility.
On June 29, 2015, the Governor of Puerto Rico announced that the Government will seek alternatives to ensure that the aggregate debt
burden of the Commonwealth is adjusted so it can be repaid on sustainable terms, while ensuring pension obligations are honored over the
long term and essential services for the people of Puerto Rico are maintained, and issued an Executive Order to create the Puerto Rico
Fiscal and Economic Recovery Working Group (the “Working Group”). After the announcement, the top three credit rating agencies,
Moody’s, S&P and Fitch downgraded the Puerto Rico issued bonds deeper into non-investment grade status.
The Working Group was created to consider necessary measures, including the measures recommended in the Krueger Report, to
address the fiscal crisis of the Commonwealth and is responsible for the development of the Puerto Rico Fiscal and Economic Growth Plan
(the “Plan”). The Plan, released in September 2015 and updated in January 2016, reviews the historical measures taken to increase taxes
and reduce expenses, analyzes the current liquidity and fiscal position of Puerto Rico, recommends certain fiscal and economic reform and
growth measures, including critical measures that require action by the U.S. Government, proposes to create a financial control board and
new budgetary regulations, and identifies significant projected financing gaps (even assuming the implementation of the recommended
fiscal reform and economic growth measures) absent significant debt relief. The updated Plan shows that General Fund revenues have
decreased from a previous estimate of $9.46 billion for fiscal year 2016 to $9.21 billion; the estimated five-year projected financing gaps
increase from approximately $14 billion to $16.1 billion, even with the inclusion of economic growth and the implementation of all the
proposed measures in the Plan; and the ten-year projections estimate a $23.9 billion aggregate financing gap.
50
Moreover, on October 21, 2015, the U.S. Treasury released its roadmap to address Puerto Rico’s ongoing economic and fiscal crisis and
to create a path to economic recovery. This roadmap was presented to Congress by U.S Treasury officials and laid out four immediate
steps that U.S. Congress should take to address the crisis in Puerto Rico:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Provide Puerto Rico with the necessary tools to restructure its financial liabilities in a fair and orderly manner under the supervision
of a federal bankruptcy court.
Enact strong fiscal oversight and help strengthen Puerto Rico’s fiscal governance.
Provide a long-term solution to Puerto Rico’s historically inadequate Medicaid treatment.
Reward work and support economic growth by providing access to an Earned Income Tax Credit.
In August and December 2015 as well as in January 2016, the Puerto Rico Government met its scheduled debt service payments for
bonds that have constitutional guarantees such as the general obligation bonds and GDB bonds. In order to meet the January 2016 payment,
the Puerto Rico Government implemented “clawback” measures to redirect revenues assigned to certain government agencies for the
payment of the general obligation debt. Nevertheless, the Puerto Rico Government defaulted in August 2015 and January 2016 on the
payment of bonds of certain agencies, specifically bonds of the Public Finance Corporation and the Infrastructure Finance Authority.
Government officials disclosed that due to the lack of appropriated funds by the Legislature of Puerto Rico, as part of the current fiscal year
2016 budget, the debt service payment on these public corporations bonds were not made. These bonds are payable solely from budgetary
appropriations pursuant to legislation adopted by the Legislature of Puerto Rico. The Legislature of Puerto Rico is not legally bound to
appropriate funds for such payments.
Other measures adopted to deal with the Commonwealth’s deteriorating liquidity position include the deferral of tax refunds and the
stretching of payments to suppliers.
In February 2016, the Working Group released details of a comprehensive voluntary exchange proposal presented to advisors to the
Commonwealth’s creditors. Specifically, the restructuring proposal contemplates that creditors will exchange their existing securities for
two new securities: a “Base Bond,” with a fixed rate of interest and amortization schedule, and a “Growth Bond,” which is payable only if
the Commonwealth’s revenues exceed certain levels. Under this proposal, the $49.2 billion of tax-supported debt would be exchanged into
$26.5 billion of newly issued mandatorily payable Base Bonds and $22.7 billion of newly issued Growth Bonds. Interest payments on the
Base Bonds would begin in January 2018, scaling up to 5% per annum by fiscal year 2021, when principal payments would begin. The
Growth Bonds would be payable only to the extent the Commonwealth’s revenues exceed its current baseline projections as a result of real
economic growth in Puerto Rico. The proposal also seeks to lower the Commonwealth’s debt service-to-revenue on tax-supported debt to
approximately 15%, a level consistent with the debt limit contemplated by the Constitution of Puerto Rico, from the current ratio of 36%.
The voluntary exchange offer is intended to restructure those payments to allow the Commonwealth to catch up with its payments due to
suppliers and taxpayers, and provides time for the Commonwealth to implement the measures of the Plan, stimulate real economic growth
and, over the long term, make its tax-supported debt sustainable. In addition, the Commonwealth is instituting a fiscal control board to
provide necessary oversight and ensure that the Commonwealth complies with the Plan and the terms of the exchange offer. Ultimate
outcomes from the proposed exchange are uncertain at this time, and may vary considerably from the initial proposal, particularly due to
factors that are difficult to predict, such as U.S. federal actions to intervene in this matter and bondholders willingness to accept the
proposed exchange levels.
The U.S. House of Representatives Speaker, Paul Ryan, has asked legislators to craft a proposal to address the Puerto Rico debt situation
by March 31, 2016, which may include a federal control board that would manage its budgets and borrowings. On February 2, 2016, the
U.S. House Committee on Natural Resources held a hearing to evaluate the need for a federal oversight authority for Puerto Rico.
Exposure to Puerto Rico Government
Loans Held For Investment
As of December 31, 2015, the Corporation had $316.0 million of credit facilities, excluding investment securities, extended to the
Puerto Rico Government, its municipalities and public corporations, of which $314.6 million was outstanding (book value of $311.0
million), compared to $308.0 million as of December 31, 2014. Approximately $199.5 million of the granted credit facilities
outstanding consisted of loans to municipalities in Puerto Rico whose revenues are independent of the central government. The good
faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Approximately 88% of
the Corporation’s municipality exposure consists primarily of senior priority loans concentrated on five of the largest municipalities in
Puerto Rico (San Juan, Carolina, Bayamon, Mayaguez and Guaynabo). These municipalities are required by law to levy special
property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. Late in 2015, GDB
and the Municipal Revenue Collection Center (CRIM) signed a deed of trust. Through this deed, GDB, as fiduciary, is bound to keep
the CRIM funds separate from any other deposits and the funds should be distributed by the GDB pursuant to the applicable law. In
addition to municipalities, loans extended to the Puerto Rico Government include $18.9 million of loans to units of the Puerto Rico
51
central government, and approximately $96.3 million ($92.6 million book value) of loans to public corporations, including a direct
exposure to the Puerto Rico Electric Power Authority (“PREPA”) with a book value of $71.1 million as of December 31, 2015. The
PREPA credit facility was placed in non-accrual status in the first quarter of 2015 and interest payments are now recorded on a cost-
recovery basis.
Furthermore, as of December 31, 2015, the Corporation had $129.4 million outstanding in financings to the hotel industry in Puerto
Rico where the borrower and the operations of the underlying collateral are the primary sources of repayment and the Puerto Rico
Tourism Development Fund provides a secondary guarantee for payment performance, compared to $133.3 million as of December
31, 2014. The TDF is a subsidiary of the GDB that facilitates private sector financings to Puerto Rico’s hotel industry. The TDF
provides guarantees to financings and may provide direct loans. As a result of liquidity risk and uncertainty regarding the Puerto Rico
government fiscal situation, the Corporation adversely classified this $129.4 million exposure during the third quarter of 2015. Since
late 2012, the Corporation has received combined payments from the borrowers and TDF as guarantor sufficient to cover contractual
payments on these loans, including collections of principal and interest from TDF of approximately $5.3 million in 2015 and
$6.1 million in 2014. These loans were current and remained in accrual status as of December 31, 2015.
On March 1, 2016, the Working Group in an updated public presentation indicated that the Commonwealth expects to have
insufficient liquidity to make upcoming debt service payments and that a substantial restructuring of the Commonwealth’s existing
debt is required to allow the Commonwealth to bring its fiscal accounts into balance, to give it time and the financial flexibility to
implement structural reforms and growth initiatives so as to stimulate the Puerto Rican economy and thereby to make the restructured
debt sustainable in the long term. We continue to monitor the Puerto Rico government fiscal and economic situation and its potential
impact on the Corporation's financial condition, including its potential impact on our TDF-guaranteed exposure. Although TDF has
continued to cover its contractually required payments as guarantor during the first quarter of 2016, we are currently assessing,
together with our regulators, whether recent developments related to the Puerto Rico government fiscal situation introduce additional
uncertainty regarding TDF's ability to honor its guarantee, which could require that some or all of our TDF-guaranteed exposure be
placed in nonaccrual status. If we determine to treat some or all of such loans as nonaccrual, then the Corporation’s asset quality
metrics and capital ratios could be adversely impacted, we could be required to prospectively apply principal and interest payments
received to the outstanding principal of the loans, and the affected loans would need to be individually evaluated for impairment with
specific reserves allocated as deemed necessary. In the event these loans are individually evaluated for impairment, based on present
appraised values and assumptions as to recovery rates on Puerto Rico government obligations, the required specific reserves are not
expected to deviate materially from the general reserves associated with these loans as of December 31, 2015.
During 2015, the Corporation increased by approximately $35 million the general reserve for commercial loans extended to or
guaranteed by the Puerto Rico Government (excluding municipalities), including a $19.2 million charge to the provision recorded in
the fourth quarter related to increased qualitative reserve factors applied to these loans in light of recent events surrounding the Puerto
Rico Government’s fiscal situation. In addition, during 2015, the specific reserve allocated to the PREPA credit facility was increased
by approximately $4.3 million. As of December 31, 2015, the total reserve coverage ratio (general and specific reserves) related to
loans commercial extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 19%.
In November 2015, PREPA entered into a restructuring support agreement with bondholders and bank creditors that provides a
structured framework to implement certain economic agreements, including cuts to repayments of 15% for bondholders. The
agreement also outlines other elements, including new governance standards, operational improvements, and a rate structure proposal
and a capital plan. Under the economic terms of the agreement, fuel line lenders will have the option to convert existing credit
agreements into term loans with a fixed interest rate of 5.75% per annum, to be repaid over 6 years in accordance with an agreed upon
schedule or exchange all or part of principal due under the existing credit agreements for new securitization bonds that will pay cash
interest at a rate of 4.0% - 4.75% (depending on the credit rating) (“Option A Bonds”) or convertible capital appreciation
securitization bonds that will accrete interest at a rate of 4.5% - 5.5% for the first five years and pay current interest in cash thereafter
(“Option B bonds”). In February 2016, the Puerto Rico Government approved legislation to facilitate the implementation of the
restructuring support agreement.
As of December 31, 2015, the Corporation also had $124.6 million in indirect exposure to residential mortgage loans to individual
borrowers that are guaranteed by the Puerto Rico Housing Finance Authority. Residential mortgage loans guaranteed by the Puerto
Rico Housing Finance Authority are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in
the event of a borrower default. The Puerto Rico Government guarantees up to $75 million of the principal insured by the mortgage
loans insurance program. According to the most recently released audited financial statements, as of June 30, 2014, the Puerto Rico
Housing Finance Authority mortgage loans insurance program covered loans aggregating to approximately $546 million. The
regulations adopted by the Puerto Rico Housing Finance Authority, requires the establishment of adequate reserves to guarantee the
solvency of the mortgage loans insurance fund. As of June 30 2014, the Puerto Rico Housing Finance Authority had restricted net
position for such purposes of approximately $72.5 million.
52
Investment Securities
As of December 31, 2015, the Corporation held $49.7 million of obligations of the Puerto Rico Government as part of its available-
for-sale investment securities portfolio (net of other-than-temporary credit impairment charges of $15.9 million) recorded on its books
at a fair value of $28.2 million. During 2015, the Corporation recorded $15.9 million in OTTI charges on three Puerto Rico
Government debt securities, specifically bonds of the GDB and the Puerto Rico Buildings Authority. A $12.9 million impairment
charge was booked in the second quarter and an additional $3.0 million impairment was recorded in the fourth quarter. The credit-
related impairment loss estimate is based on the probability of default and loss severity in the event of default in consideration of the
latest available market-based evidence implied in current security valuations and information about the Puerto Rico Government’s
financial conditions, including credit ratings and the aforementioned payment defaults and “clawback” measures implemented. Given
the uncertainty of the debt restructuring process outcomes, the Corporation cannot be certain that future impairments charges will not
be required against these securities.
Deposits
As of December 31, 2015, the Corporation had $390.4 million of public sector deposits in Puerto Rico, compared to $227.4 million
as of December 31, 2014. Approximately 45% is from municipalities and municipal agencies in Puerto Rico and 55% is from public
corporations and the central government and agencies in Puerto Rico.
OVERVIEW OF RESULTS OF OPERATIONS
First BanCorp.'s results of operations depend primarily on 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, 2015 amounted to $21.3 million, or $0.10 per diluted share, compared to net income
of $392.3 million, or $1.87 per diluted share, for 2014 and net loss of $164.5 million, $0.80 per diluted share, for 2013. The
Corporation’s financial results for 2015 were impacted by the following significant items: (i) a $48.7 million pre-tax loss on a bulk
sale of assets, mostly comprised of non-performing and adversely classified commercial loans, including transaction expenses, (ii)
OTTI charges on Puerto Rico Government debt securities amounting to $15.9 million, (iii) a $13.4 million bargain purchase gain on
assets acquired and deposits assumed from Doral Bank (the “Doral Bank transaction”), (iv) a $7.0 million gain on the sale of the
Corporation’s merchant contracts, (v) pre-tax costs of approximately $4.6 million related to the conversion of loan and deposit
accounts acquired from Doral Bank to the FirstBank systems, and (vi) pre-tax costs of $2.2 million related to a voluntary early
retirement program.
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 pre-tax loss of $140.8 million 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. (“Lehman”) together
with an additional $2.5 million for a loss contingency of attorneys’ fees awarded to the counterparty related to this matter.
53
The following table reconciles for the years ended December 31, 2015, 2014 and 2013 the reported pre-tax income to adjusted pre-
tax income, a non-GAAP financial measure that excludes the significant items mentioned above that affected comparability:
(In thousands)
Pre-tax income as reported (GAAP)
Exclude significant items:
Gain on sale of merchant contracts
Other than temporary impairment charges on Puerto Rico
Government securities
Voluntary early retirement program expenses
Loss on bulk sales of assets, including transaction costs
Bargain purchase gain on assets acquired and liabilities assumed
from Doral Bank
Acquisition and conversion costs of loans and deposits assumed
from Doral Bank
Write-off collateral pledged to Lehman and related contingency
for attorneys' fees
Adjusted pre-tax income, excluding items affecting comparability
2015
December 31,
2014
2013
$
27,716 $
91,638 $
(159,323)
(7,000)
15,889
2,238
48,667
(13,443)
4,646
-
-
-
-
-
-
-
-
-
-
140,842
-
-
69,074
(Non-GAAP)
$
78,713 $
91,638 $
50,593
The key drivers of the Corporation’s financial results include the following:
• Net interest income for the year ended December 31, 2015 was $502.3 million compared to $518.1 million and $514.9 million
for the years ended December 31, 2014 and 2013, respectively. The decrease for 2015 compared to 2014 was primarily driven
by: (i) a $30.2 million decrease in interest income on commercial and construction loans, including a decrease of
approximately $24.5 million attributable to a $594.2 million decline in the average volume of these portfolios and the adverse
impact of $3.8 million in interest payments received in 2015 from the credit facility to PREPA, accounted for on a cost-
recovery basis since May 2015, (ii) a $20.4 million decrease in interest income on consumer loans, including a decrease of
approximately $16.2 million related to a $148.0 million decrease in the average volume of such loans and a $3.8 million
adverse variance due to the fact that the remaining discount on the credit card portfolio acquired in 2012 was fully accreted into
income in the first half of 2014, and (iii) a $7.6 million decrease in interest income on mortgage-backed securities (“MBS”),
including a decrease of approximately $4.6 million attributable to a $180.0 million decline in the average volume of MBS and
a $3.0 million decrease related to lower yields reflecting, among other things, the gradual reinvestment of MBS prepayments in
lower-yielding investments given the low interest rate environment.
These variances were partially offset by: (i) a $28.6 million increase in the interest income on residential mortgage loans
primarily related to the acquisition of several loan portfolios from Doral Financial and Doral Bank completed in the second and
fourth quarter of 2014, respectively, as well as the most recent acquisition from Doral Bank in February 2015, (ii) an $8.9
million decrease in interest expense on deposits, including a decrease of $5.0 million in interest expense on brokered CDs
primarily related to a $670.5 million decrease in the average volume of brokered CDs, and a $3.9 million decrease in interest
expense on non-brokered interest-bearing deposits mainly due to lower deposit pricing that resulted in an 8 basis points
reduction in the average cost of such deposits, and (iii) a $4.6 million decrease in interest expense on repurchase agreements
mainly related to the restructuring of $400 million of repurchase agreements early in 2015 and the interest income earned on
reverse repurchase agreements entered into in 2015 that qualifies for offsetting accounting. The net interest margin decreased 5
basis points to 4.15% for the year ended December 31, 2015 compared to the same period in 2014.
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 Doral Financial and Doral Bank
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.
54
• The provision for loan and lease losses for 2015 was $172.0 million compared to $109.5 million and $243.8 million for 2014
and 2013, respectively. The provision for the year ended December 31, 2015 includes a charge of $46.9 million associated
with the bulk sale of assets completed during the second quarter of 2015. Excluding the impact of the bulk sale of assets, the
provision for loan and lease losses increased by $15.6 million to $125.1 million for 2015 compared to the same period in 2014
reflecting, among other things, (i) a $35 million increase in the general reserve for commercial loans extended to or guaranteed
by the Puerto Rico Government (excluding municipalities), reflecting the migration of certain loans to adverse classification
categories and a $19.2 million charge to the provision related to qualitative factor adjustments that stressed the historical loss
rates applied to these loans, and (ii) a $12.9 million increase in the provision for residential mortgage loans reflecting higher
reserve requirements for loans in late stage of delinquencies and the establishment of a $4.0 million reserve for purchased-
credit impaired loans acquired in May 2014. These variances were partially offset by a $32.8 million decrease in the provision
for consumer loans that reflects improvements in charge-off rates, declining loss severity rates on auto loans and the overall
decrease in the size of this portfolio. As of December 31, 2015, the total reserve coverage ratio (general and specific reserves)
related to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 19%.
On June 5, 2015, the Corporation completed the sale of commercial and construction loans with a book value of $147.5
million (principal balance of $196.5 million), comprised mostly of non-performing and adversely classified loans, as well as
OREO properties with a book value of $2.9 million in a cash transaction. The sale price of this bulk sale was $87.3 million.
Approximately $15.3 million of reserves had been allocated to the loans. This transaction resulted in total charge-offs of $61.4
million and an incremental pre-tax loss of $48.7 million, including $0.9 million in professional service fees directly attributable
to this bulk sale. The following table shows the impact of the bulk sale on net charge-offs and the provision for loan and lease
losses for the year ended December 31, 2015 on a GAAP basis as well as on a non-GAAP basis excluding the impact of the
bulk sale of assets:
(Dollars in thousands)
Year ended December 31, 2015
As Reported (GAAP)
Bulk Sale Transaction
Impact
Excluding Bulk Sale
Transaction (Non-
GAAP)
Total net charge-offs
Total 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
$
$
$
$
$
$
$
$
$
153,730
1.65%
49,567
3.12%
29,528
1.23%
2,412
1.42%
172,045
$
61,435
37,590
20,570
3,275
46,947
92,295
1.00 %
11,977
0.77 %
8,958
0.38 %
(863)
(0.52)%
125,098
The provision for the year ended December 31, 2013 also includes a charge of $132.0 million related to two 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 loan portfolio composition following the sale of
non-performing residential assets in 2013, partially offset by an increase in the provision for consumer loans.
55
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 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 and
the provision for loan and lease losses for the year ended December 31, 2013 on a GAAP basis as well as on a non-GAAP
basis excluding the impact of the bulk sales of assets:
(Dollars in thousands)
Year ended December 31, 2013
As Reported
(GAAP)
Bulk Sales
Transaction
Impact
Loans Transferred
To Held For Sale
Impact
Excluding Bulk Sales
Impact and Loans
Transferred to Held for
Sale (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
$
393,307
4.01%
127,999
4.77%
62,602
3.44%
105,213
3.52%
41,247
15.11%
243,751
$
196,491
$
35,953
$
98,972
-
40,057
14,553
44,678
-
12,784
21,400
$
126,780
$
5,222
$
160,863
1.68%
29,027
1.13%
7,992
0.45%
60,535
2.04%
7,063
2.91%
111,749
Net charge-offs totaled $153.7 million for the year ended December 31, 2015, or 1.65% of average loans, including $61.4 million
of net charge-offs related to the bulk sale of assets in 2015. Net charge-offs for the year ended December 31, 2014 totaled $173.0
million 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 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 that exclude from net charge-offs for 2015 the
impact of the bulk sale of assets and, for 2014, the impact of charge-offs resulting from the loans acquired in satisfaction of a
secured borrowing are non-GAAP financial measures. Non-GAAP adjusted net charge-offs for 2015 amounted to $92.3 million,
or 1.00% of average loans, a decrease of $73.8 million compared to non-GAAP adjusted net charge-offs for 2014, mainly
reflected in the commercial and industrial and consumer loan portfolios. Refer to “Basis of Presentation” below for additional
information about these non-GAAP financial measures. 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:120)
The Corporation recorded non-interest income of $81.3 million for the year ended December 31, 2015 compared to non-interest
income of $61.3 million and non-interest loss of $15.5 million for the years ended December 31, 2014 and 2013, respectively.
Non-interest income for 2015 includes significant unusual items such as OTTI charges of $15.9 million on Puerto Rico
Government debt securities, a $13.4 million bargain purchase gain related to assets acquired and deposits assumed from Doral
Bank (“Doral”) in the first quarter of 2015, and the $7.0 million gain realized on the sale of merchant contracts completed in the
fourth quarter of 2015. Excluding the aforementioned significant items, non-interest income increased by $15.4 million to $76.8
million for 2015 compared to $61.3 million for 2014. The increase was primarily related to: (i) the $7.3 million equity in loss of
unconsolidated entity recognized in the first half of 2014 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, (ii) a $3.6 million increase
in service charges on deposits primarily associated with the deposits assumed from Doral in late February 2015 as well as the
implementation of new service and transactional fees on certain products beginning in the fourth quarter of 2015, (iii) a $2.5
million increase in revenues from the mortgage banking business, and (iv) an increase of $1.3 million in merchant-related income
despite the sale of merchant contracts completed early in the fourth quarter of 2015. Refer to “Non-interest income” below for
additional information.
56
The non-interest loss of $15.5 million for the year ended December 31, 2013 includes the $66.6 million loss related to the write-
off of assets pledged as collateral to Lehman. 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. 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.
(cid:120) Non-interest expenses for 2015 were $383.8 million compared to $378.3 million and $415.0 million for 2014 and 2013,
respectively. Non-interest expenses for 2015 include significant unusual items such as $4.6 million of acquisition and conversion
costs related to assets acquired and deposits assumed from Doral Bank, $1.2 million of expenses and losses related to the bulk
sale of assets and costs of $2.2 million related to a voluntary early retirement program. Excluding the aforementioned significant
items, non-interest expenses decreased by $2.5 million to $375.8 million for 2015 compared to $378.3 million for 2014. The
decrease reflects primarily: (i) a $10.5 million decrease in the FDIC deposit insurance premium expense reflecting, among other
things, the decrease in brokered CDs, a strengthened capital position and an improved earnings to assets average ratio, (ii) a $5.4
million decrease in taxes, other than income taxes, primarily reflecting the elimination of Puerto Rico’s national gross receipts tax
in 2015, partially offset by incremental costs related to the sales and use tax, and (iii) a $5.0 million decrease in adjusted OREO
related expenses, mainly due to a $3.7 million increase in rental income from OREO income-producing properties and higher
gains on sales. These decreases were partially offset by: (i) a $12.3 million increase in employees’ compensation and benefits
(excluding costs associated with the voluntary early retirement program), mainly associated with salary merit increases, the
impact of personnel costs related to the branches acquired from Doral in 2015, higher stock-based compensation expense and an
increase in incentive and performance-based compensation, (ii) a $3.1 million increase in adjusted professional fees, including
$3.6 million in interim servicing costs related to loan and deposit accounts acquired from Doral and $1.3 million of consulting
and legal expenses related to special projects as well as strategic, stress testing and capital planning matters, and (iii) a $1.0
million increase in occupancy and equipment costs primarily related to rental, depreciation and maintenance expenses associated
with the acquired Doral branches. Refer to “Non-Interest Expenses” below for additional information.
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.
(cid:120)
For 2015, the Corporation recorded an income tax expense of $6.4 million, compared to an income tax benefit of $300.6 million
for 2014 and an income tax expense of $5.2 million for 2013. The income tax benefit for 2014 primarily reflects the $302.9
million partial reversal of FirstBank’s deferred tax assets valuation allowance. The Corporation’s effective tax rate for 2015 was
23%. As of December 31, 2015, the Corporation had a net deferred tax asset of $311.3 million (net of a valuation allowance of
$201.7 million, including a valuation allowance of $174.7 million against the deferred tax assets of the Corporation’s banking
subsidiary, FirstBank). Refer to “Income Taxes” below for additional information.
(cid:120) As of December 31, 2015, total assets were $12.6 billion, a decrease of $154.8 million from December 31, 2014. The variance
mainly reflects a $79.3 million decrease in available-for-sale investment securities driven by U.S. agency MBS prepayments, debt
securities called prior to maturity and decreases in the fair value of Puerto Rico Government debt securities and U.S. agency
MBS. The cash and cash equivalents balance decreased by $43.7 million to $752.5 million as of December 31, 2015 from $796.1
million as of December 31, 2014 due to, among other things, funds used for $200 million in reverse repurchase agreements
entered into in 2015 under a master netting arrangement. This agreement qualifies for offsetting accounting, thus, reverse
repurchase agreements were netted against repurchase agreements in the consolidated statement of financial condition. Total
loans (before allowance) decreased by $29.7 million, primarily due to a $213.2 million decrease in commercial and construction
loans, including the $147.5 million of loans included in the bulk sale of assets completed in the second quarter of 2015, and a
$155.4 million decrease in the consumer loan portfolio. These variances were partially offset by a $338.9 million increase in
residential mortgage loans mainly attributable to loans acquired from Doral in late February 2015. Refer to “Financial Condition
and Operating Data” below for additional information.
57
(cid:120) As of December 31, 2015, total liabilities were $10.9 billion, a decrease of $177.2 million, from December 31, 2014. The
decrease was mainly related to a $789.6 million decrease in brokered CDs and the netting of the $200 million reverse repurchase
agreement entered into in 2015 against repurchase agreements. These variances were partially offset by a $643.7 million increase
in non-brokered deposits to $7.2 billion as of December 31, 2015, including an increase of $176.1 million in government deposits
and approximately $446.9 million related to the outstanding balance as of December 31, 2015 of the deposits assumed from Doral
Bank. FHLB advances increased during 2015 by $130.0 million to $455.0 million as of December 31, 2015. Refer to “Risk
Management – Liquidity and Capital Adequacy” below for additional information about the Corporation’s funding sources.
(cid:120) As of December 31, 2015, the Corporation’s stockholders’ equity was $1.7 billion, an increase of $22.4 million from December
31, 2014. The increase was mainly driven by the net income of $21.3 million for 2015 and the exchange of $5.3 million of trust
preferred securities for shares of the Corporation’s common stock.
(cid:120)
(cid:120)
(cid:120)
The Corporation’s Total Capital, Common equity Tier 1 Capital, Tier 1 Capital and Leverage ratios calculated under the Basel III
rules were 20.01%, 16.92%, 16.92%, and 12.22%, respectively, as of December 31, 2015. The Corporation’s tangible common
equity ratio increased to 12.84% as of December 31, 2015, from 12.51% as of December 31, 2014. Refer to “Risk Management –
Capital” below for additional information including further information about the implementation of the Basel III rules in 2015
Total loan production, including purchases, refinancings and draws from existing revolving and non-revolving commitments, was
$3.0 billion for the year ended December 31, 2015, excluding the utilization activity on outstanding credit cards, compared to
$3.2 billion, for 2014. The decrease in loan production was mainly related to lower borrowings under credit facilities granted to
government entities in Puerto Rico and a decrease in auto loan originations.
Total non-performing assets were $609.9 million as of December 31, 2015, a decrease of $106.8 million from December 31,
2014. The decrease was driven by the bulk sale of assets that included $91.9 million of non-performing commercial and
construction loans, the restoration to accrual status of a $24.5 million commercial mortgage facility after consideration of the
borrower’s sustained historical repayment performance and credit evaluation, and an $11.7 million decrease in non-performing
residential mortgage loans, partially offset by the inflow to non-performing status in the first quarter of the credit facility with
PREPA (with a book value of $71.1 million as of December 31, 2015). The remainder of the decrease reflects charge-offs,
commercial loans brought current, and cash collections. Refer to “Risk Management - Non-accruing and Non-performing
Assets” below for additional information.
(cid:120) Adversely classified commercial and construction loans held for investment decreased by $35.4 million to $522.1 million, or 6%,
from December 31, 2014, driven by the bulk sale of assets and the transfer of loans to the OREO, partially offset by the migration
of the $129.4 million exposure to commercial mortgage loans guaranteed by TDF.
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; 3) income taxes;
4) the classification and values of financial instruments; 5) income recognition on loans; 6) loans acquired; and 7) loans held for sale.
These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts
recorded for assets, liabilities and 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
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 does not include amounts related to accrued interest
receivable, other than billed interest and fees on credit card loans, as accrued interest receivable is reversed when a loan is placed on
nonaccrual status. 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.
58
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 residential 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 geography (Puerto Rico, Florida or the Virgin
Islands), 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, and commercial and industrial portfolios and certain boat loans, residential mortgage loans, and home equity lines of
credit, 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.
Commercial mortgage, construction, commercial and industrial, and boat loans with individual principal balances of $1 million or
more, troubled debt restructurings (“TDRs”), as well as residential mortgage loans and home equity lines of credit considered
impaired based on their delinquency and loan-to-value levels are individually evaluated for impairment. When foreclosure of a
collateral dependent loan is probable, 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 according to the Corporation’s appraisal policy. In addition, appraisals and/or
appraiser 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).
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 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 attributes that are most significant to the probability of default include present collection status (current, delinquent, in
bankruptcy, in foreclosure stage), vintage, loan-to-values, and geography (Puerto Rico, Florida or the Virgin Islands).The risk-
59
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.
For commercial loans, historical charge-offs 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). The allowance is calculated using the base rate average of the last 8 quarters. A qualitative factor adjustment is applied to the
base rate average utilizing a resulting factor derived from a set of risk-based ratings and weights assigned to credit and economic
indicators over a reasonable period applied to a developed expected range of historical losses. This factor may be stressed to reflect
other elements not reflected in the historical data underlying the loss estimates, such as the prolonged uncertainty surrounding how the
Puerto Rico Government might restructure its debt and the effect of recent payment defaults and other unprecedented measures
implemented by the Puerto Rico Government to deal with its fiscal condition. In the fourth quarter of 2015, the Corporation recorded a
$19.2 million charge to the provision for loan and lease losses related to qualitative factor adjustments that stressed the historical loss
rates applied to the Corporation’s exposure to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding
loans to municipalities) in light of unprecedented actions taken by the Puerto Rico Government to deal with its deteriorating liquidity
and the extended uncertainty surrounding how the Puerto Rico Government might restructure its debt.
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 the 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 an 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 the latest information available about the financial
health and prospects of the issuer, credit ratings, the failure of the issuer to meet scheduled principal or interest payments, recent
legislation, government actions affecting the issuer’s industry, and actions taken by the issuer to deal with the economic climate. The
Corporation also takes into consideration 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. 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, and
included as a component of stockholders’ equity 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
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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. Debt securities held
by the Corporation at year end primarily consisted of securities issued by U.S. government-sponsored entities, bonds issued by the
Puerto Rico Government and private label mortgage-backed securities (“MBS”). Given the explicit and implicit guarantees provided
by U.S. Federal government, the Corporation believes the credit risk in securities issued by the U.S. government-sponsored entities is
low. The Corporation’s OTTI assessment is concentrated on Puerto Rico Government debt securities, with an amortized cost of $49.7
million as of December 31, 2015, and on private label MBS with an amortized cost of $34.9 million as of December 31, 2015. The
risk-adjusted discounted cash flow analyses applied to the Puerto Rico Government debt securities are calculated based on the
probability of default and loss severity assumptions. The valuation for private label MBS is derived from a discounted cash flow
analysis that considers relevant assumptions such as the prepayment rate, default rate, and loss severity on a loan level basis. For
further information, refer to Note 5 – Investment Securities, 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 and credit ratings, if applicable, 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 Corporation and its subsidiaries are treated as separate
taxable entities and are not entitled to file consolidated tax returns 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 significant operational losses driven by charges to the provision for loan losses, a three-year cumulative
loss position as of the end of the year 2010, and uncertainty regarding the amount of future taxable income that the Bank could
forecast. As of December 31, 2014, based upon the assessment of all positive and negative evidence, management concluded that it
was more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to
realize $308.2 million of its deferred tax assets and, therefore reversed $302.9 million of the valuation allowance
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During 2015, management reassessed the need for a valuation allowance and concluded, based upon the assessment of all positive
and negative evidence, that it is more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL
carry-forward periods to realize $306.4 million of its deferred tax asset. The positive evidence considered by management to conclude
on the adequacy of the valuation allowance as of December 31, 2015 includes factors such as: FirstBank’s return to profitability,
forecasts of future profitability under several potential scenarios that support the partial utilization of NOLs prior to their expiration
between 2021 through 2024, the taxable year 2015 being the first year with taxable income since 2008, sustained pre-tax pre-provision
for loan losses income which demonstrates demand for FirstBank’s products and services, the Doral Bank transaction which resulted
in market share expansion, and improvements in credit quality measures that have resulted in reduced credit exposures and have
improved both sustainability of profitability and management’s ability to forecast future losses, which in turn led to actions such as the
lifting of the FDIC Consent Order during 2015. The negative evidence considered by management includes that the Bank remains in a
three-year cumulative loss position of $69.9 million due to significant charges to the provision for loan losses as a result of bulk sales
of adversely classified and non-performing loans in 2013 and 2015. However, this loss position is significantly lower than the three-
year cumulative pre-tax loss position of $860.3 million as of December 31, 2010, the year when a full valuation allowance was
established. Other negative factors include Puerto Rico’s current economic conditions and the still elevated levels of non-performing
assets.
Income tax expense includes Puerto Rico and USVI income taxes as well as applicable United States 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 tax paid in the U.S. and USVI is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain
conditions 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.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate in Puerto Rico 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 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 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 the corporate standard 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 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 UTB.
As of December 31, 2015, the Corporation did not have UTBs recorded on its books. During 2014, the Corporation reached a final
settlement with the IRS in connection with the 2007-2009 examination periods. As a result, 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.
Refer to Note 26 – Income Taxes of the Corporation’s audited financial statements for the year ended December 31, 2015 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
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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, the rates at which prepayments occur and discount rates.
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,
U.S. 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. During 2015, the
Corporation recorded OTTI charges of $15.9 million on certain Puerto Rico Government debt securities, specifically bonds of GDB
and the Puerto Rico Public Buildings Authority. The credit impairment loss was based on the probability of default and loss severity in
the event of default in consideration of the latest information available about the Puerto Rico Government’s financial condition. Refer
to Note 5- Investments Securities, for significant assumptions used to determine the credit impairment portion, including default rates
and recovery rates, which are unobservable inputs. 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.
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.
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 2015, 2014 and 2013 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
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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 or the Veterans Administration 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 15 months delinquent. Based on an update to the analysis of
historical collections from these agencies performed in the fourth quarter of 2015, the Corporation determined to discontinue the
recognition of income for FHA/VA loans once loans are over 15 months delinquent. Previously, the Corporation discontinued the
recognition of interest income on these loans when they were 18-months delinquent as to principal or interest. The impact of this
change in estimate was not material to the Corporation’s consolidated statement of financial position, results of operations or cash
flows. 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 after a sustained period of repayment
performance (6 months) and the loan is well secured, is in the process of collection, and full repayment of the remaining contractual
principal and interest is expected. PCI loans are not reported as non-performing as these loans were written down to fair value at the
acquisition date and the accretable yield is recognized in interest income over the remaining life of the loans. 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, or the loan has been modified in a Troubled Debt Restructuring (“TDR”). 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 TDR. 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 TDR loans.
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 a specific
allowance for the loan or by adjusting the specific 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. TDR loans 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
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Home Affordable Modification Program, and could include rate reductions to a rate that is below market on the loan, 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. Residential
mortgage loans for which a binding offer to restructure has been extended are also classified as TDR loans. PCI loans are not
classified as TDR.
TDR loans are classified as either accrual or nonaccrual. Loans in accrual status may remain in accrual status when their contractual
terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the
restructured terms is expected. Otherwise, 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.
In connection with commercial loan 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 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 collectability 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 residential and consumer
restructurings, a nonperforming loan will be returned to accrual status when current as to principal and interest, under the 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.
A loan that had previously been modified in a TDR and is subsequently refinanced under current underwriting standards at a market
rate with no concessionary terms is accounted for as a new loan and is no longer reported as a TDR.
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, credit scores, and revised loan terms. 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
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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 continues to estimate cash flows expected to be collected over the life of the PCI loans
using models that incorporate current key assumptions such as default rates, loss severity, and prepayment speeds. Decreases in
expected cash flows 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 at its relative carrying amount. The carrying
amount is defined as the loan’s current contractually required payments receivable less its remaining nonaccretable difference and
accretable yield, but excluding any post-acquisition loan loss allowance. To determine the carrying value, the Corporation performs a
pro-rata allocation of the pool’s total remaining nonaccretable difference and accretable yield to an individual loan in proportion to the
loan’s current contractually required payments receivable compared to the pool’s total contractually required payments receivable.
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 the remaining effective yield caused by this removal method is
addressed by the Corporation’s quarterly cash flow evaluation process for each pool. 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 aggregate cost or fair value. 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 and government sponsored entities such as the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation. 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 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 from/to held for sale or held for investment based on a change in strategy.
If such a change in holding strategy is made, significant adjustments to the loans’ carrying values may be necessary. Reclassification
of loans held for sale to held for investment are made at fair value on the date of transfer. Any difference between the carrying value
and the fair value of the loan is recorded as an adjustment to non-interest income. Meanwhile, reclassification of loans held for
investment to held for sale are made 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.
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, 2015 was $502.3 million,
compared to $518.1 million and $514.9 million for 2014 and 2013, respectively. On a tax-equivalent basis and excluding the changes
66
in the fair value of derivative instruments, net interest income for the year ended December 31, 2015 was $520.0 million compared to
$535.0 million and $527.4 million for 2014 and 2013, respectively.
The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted
tax-equivalent basis and Part II presents, also on an adjusted tax-equivalent basis, the extent to which changes in interest rates and
changes in 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 the change in the fair value of derivative
instruments. For the definition and reconciliation of this non-GAAP financial measure, refer to discussions below.
Part I
Year Ended December 31,
2015
Average volume
2014
2013
Interest income(1) / expense
2014
2015
2013
2015
Average rate(1)
2014
2013
(Dollars in thousands)
Interest-earning assets:
Money market and other
short-term investments
Government obligations (2)
Mortgage-backed securities
FHLB stock
Other investments
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
Net interest income
Interest rate spread
Net interest margin
$
$
775,848
474,275
1,489,423
26,522
777
2,766,845
3,272,464
169,666
3,984,302
228,709
1,670,245
9,325,386
$
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
$
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
$
2,148
10,420
44,909
1,075
-
58,552
181,400
6,357
172,634
18,259
186,120
564,770
$
1,892
8,258
54,291
1,169
-
65,610
153,373
7,304
199,787
19,530
205,278
585,272
1,927
7,892
52,841
1,359
-
64,019
148,033
8,722
196,814
20,591
220,089
594,249
0.28%
2.20%
3.02%
4.05%
0.00%
2.12%
5.54%
3.75%
0.25%
2.36%
3.25%
4.30%
0.00%
2.35%
5.57%
3.68%
0.28%
2.33%
3.17%
4.39%
0.00%
2.35%
5.52%
3.20%
4.33%
7.98%
11.14%
6.06%
4.39%
8.13%
11.36%
6.13%
4.10%
8.56%
12.23%
6.06%
$
12,092,231
$
12,336,447
$
12,520,166
$
623,322
$
650,882
$
658,268
5.15%
5.28%
5.26%
$
$
1,096,087
2,533,689
2,294,939
2,428,185
8,352,900
997,615
349,027
$
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
$
9,699,542
$
10,341,256
$
10,523,212
$
$
$
$
5,440
13,660
25,246
24,904
69,250
29,882
4,171
$
6,446
15,416
26,371
29,894
78,127
34,188
3,561
8,419
15,852
29,264
38,252
91,787
33,025
6,031
103,303
520,019
$
$
115,876
535,006
$
$
130,843
527,425
0.50%
0.54%
1.10%
1.03%
0.83%
3.00%
1.20%
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%
1.07%
1.12%
1.24%
4.08%
4.30%
4.16%
4.34%
4.02%
4.21%
(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 of 39.0%
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 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 $10.8 million, $14.2 million and $13.8 million for 2015, 2014 and 2013, respectively, of income from prepayment penalties and late fees related to the
Corporation’s loan portfolio.
67
Part II
(In thousands)
Interest income on interest-earning
assets:
Money market and other
short-term investments
Government obligations
Mortgage-backed securities
FHLB stock
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
$
$
$
2015 Compared to 2014
Increase (decrease)
Due to:
Rate
Volume
2014 Compared to 2013
Increase (decrease)
Due to:
Rate
Total
Total
Volume
$
86 $
2,827
(5,599)
(27)
(2,713)
28,967
(1,069)
170 $
(665)
(3,783)
(67)
(4,345)
(940)
122
$
256
2,162
(9,382)
(94)
(7,058)
28,027
(947)
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)
(24,531)
(927)
(15,260)
(12,820)
(15,533) $
(2,622)
(344)
(3,898)
(7,682)
(12,027) $
(27,153)
(1,271)
(19,158)
(20,502)
(27,560) $
(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)
(6,673) $
1,001
(4,026)
430
(9,268)
(6,265) $
1,683 $
(4,888)
(280)
180
(3,305)
(8,722) $
(4,990) $
(3,887)
(4,306)
610
(12,573)
(14,987) $
(1,726) $
136
-
(691)
(2,282)
(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
Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. government agencies and
sponsored entities, generate interest that is exempt from income tax, principally in Puerto Rico. Also, interest and gains on sales of
investments held by the Corporation’s IBEs are tax-exempt under the Puerto Rico tax law (refer to “Income Taxes” 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 taxable equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by
1 less the Puerto Rico statutory tax rate as adjusted for changes to enacted tax rates (39.0%) 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
(“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 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.
68
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 reconciles net interest spread and net interest margin on a GAAP
basis to these items excluding valuations and on an adjusted tax-equivalent basis:
Year Ended December 31,
2015
2014
2013
(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 the $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
Net interest income - GAAP
Net interest income excluding valuations and the $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 the $2.5 million prepayment penalty income
Average rate on interest-bearing liabilities excluding valuations
Net interest spread excluding valuations and the $2.5 million
prepayment penalty income
Net interest margin excluding valuations and the $2.5 million
prepayment penalty income
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
$
$
$
$
$
$
$
$
605,569
(139)
605,430
-
605,430
17,892
-
623,322
103,303
502,266
502,127
520,019
9,325,386
2,766,845
12,092,231
9,699,542
$
$
$
$
$
$
5.01%
1.07%
3.94%
4.15%
5.01%
1.07%
3.94%
4.15%
5.15%
1.07%
4.09%
4.30%
$
633,949
(1,258)
632,691
(2,546)
630,145
18,191
2,546
650,882
115,876
518,073
514,269
535,006
9,546,462
2,789,985
12,336,447
10,341,256
$
$
$
$
$
$
5.14%
1.12%
4.02%
4.20%
5.11%
1.12%
3.99%
4.17%
5.28%
1.12%
4.16%
4.34%
645,788
(1,695)
644,093
-
644,093
14,175
-
658,268
130,843
514,945
513,250
527,425
9,799,159
2,721,007
12,520,166
10,523,212
5.16%
1.24%
3.92%
4.11%
5.14%
1.24%
3.90%
4.10%
5.26%
1.24%
4.02%
4.21%
69
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.
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, 2015, most of the interest rate swaps outstanding are used for protection against rising interest rates, although not
designated as hedges. Refer to Note 31 of the Corporation’s audited financial statements for the year ended December 31, 2015
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.
2015 compared to 2014
Net interest income for the year ended December 31, 2015 amounted to $502.3 million, a decrease of $15.8 million, when
compared to $518.1 million in 2014. The net interest margin, excluding fair value adjustments and the $2.5 million prepayment
penalty collected on a commercial mortgage loan paid off in the fourth quarter of 2014, decreased by 2 basis points to 4.15% for 2015,
compared to 2014. The $15.8 million decrease in net interest income was primarily due to:
(cid:120) A $30.2 million decrease in interest income on commercial loans, including a decrease of approximately $24.5 million
attributable to a $594.2 million decline in the average volume of such loans and the adverse impact of approximately $3.8
million in interest payments received from the PREPA credit facility accounted for on a cost-recovery basis since May 2015.
(cid:120) A $20.4 million decrease in interest income on consumer loans and finance leases, including a decrease of approximately
$16.2 million related to a $148.0 million decrease in the average volume of such loans and a $3.8 million decrease due to the
fact that the remaining discount on the credit card portfolio acquired in 2012 was fully accreted into income in the first half of
2014.
(cid:120) A $7.6 million decrease in interest income on MBS investments, including a decrease of approximately $4.6 million
attributable to a $180.0 million decline in the average volume of MBS investments and a $3.0 million decrease related to
lower yields reflecting, among other things, an acceleration of prepayments and the gradual reinvestment of MBS
prepayments in lower-yielding investments given the low interest rate environment.
These variances were partially offset by:
(cid:120) A $28.6 million increase in the interest income on residential mortgage loans primarily related to the acquisition of several
loan portfolios from Doral completed after the end of the first quarter of 2014, including the most recent acquisition in
February 2015.
(cid:120) An $8.9 million decrease in interest expense on deposits, including a $5.0 million reduction in interest expense on brokered
CDs primarily related to a $670.5 million decrease in the average volume of brokered CDs. Interest expense on non-
brokered interest-bearing deposits (i.e. savings, interest-bearing checking and retail CDs) decreased by $3.9 million mainly
due to a lower deposit pricing that resulted in an 8 basis points reduction in the average cost of such deposits to 0.75% in
2015 from 0.83% in 2014. The decrease in interest expense on non-brokered deposits was achieved despite the $126.7
million increase in the average balance of such deposits.
(cid:120) A $4.6 million decrease in interest expense on repurchase agreements mainly related to the aforementioned restructuring of
$400 million of repurchase agreements and the netting effect of the $2.7 million interest income earned in 2015 on $200
million reverse repurchase agreements entered into in 2015 that qualifies for offsetting accounting pursuant to ASC 210-20-
45-11.
On an adjusted tax-equivalent basis, net interest income for the year ended December 31, 2015 decreased $15.0 million to $520.0
million when compared to 2014. In addition to the facts discussed above, the decrease for the 2015 period also includes a reduction of
70
$0.3 million in the tax-equivalent adjustment attributable to a lower volume of tax-exempt assets, primarily MBS investments held by
the Corporation’s IBE subsidiary, FirstBank Overseas Corporation.
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 main drivers of the increase were:
(cid:120) A decline of $8.4 million in interest expense on brokered CDs for 2014, when compared to 2013. 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. 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%.
(cid:120) A net decrease of $5.3 million in interest expense on non-brokered deposits for 2014, when compared to 2013. 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.
(cid:120) A decrease of approximately $2.5 million in interest expense on FHLB advances for 2014, as compared to 2013. 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 was 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.
(cid:120) 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 Financial on May 30,
2014 was approximately $6.3 million higher than the interest income recorded in 2013 on Doral Financial’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:
(cid:120) A decrease of approximately $16.7 million in interest income on consumer loans attributable to a reduction in the
average yield. The average yield of consumer loans (including finance leases) decreased to 10.98% for 2014, from
11.80% for 2013. 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.
(cid:120) A $1.6 million reduction in interest income on commercial and construction loans driven by a $177.2 million decrease in
the average volume of such portfolios, excluding the average volume of Doral’s secured borrowings, partially offset by
higher yields.
(cid:120) 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
71
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.
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 2015, the Corporation recorded a provision for loan and lease losses of $172.0 million, compared to $109.5 million in
2014 and $243.8 million in 2013. The provision for the year ended December 31, 2015 includes a $46.9 million charge associated
with commercial loans held for investment included in the bulk sale of assets completed in the second quarter of 2015.
2015 compared to 2014
The adjusted provision for loan and lease losses, excluding the impact of the 2015 bulk sale of assets, increased by $15.6 million
in 2015, as compared to 2014 driven by:
(cid:120) A $35.5 million increase in the provision for commercial and construction loans, including a $35 million increase in the
general reserve related to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding
municipalities) that reflects the migration of loans guaranteed by the TDF to adverse classification categories as well as a
$19.2 million charge related to qualitative factors adjustments that stressed the historical loss rates applied to the
Government loans (excluding municipalities). As of December 31, 2015 the total reserve coverage ratio (general and specific
reserves) related to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities)
was 19%. The increase also reflects reductions in loan loss recoveries of $11.5 million in the Florida region, as shown
below. This was partially offset by an $8.1 million reserve release for construction loans recorded in the fourth quarter of
2015 that reflects adjustments to the general reserve given the stabilization in the asset quality of land loans.
(cid:120) A $12.9 million increase in the provision for residential mortgage loans driven by several factors including inherent loss
severities of loans in late stages of delinquency, decreases in appraised values, the overall increase in the size of this
portfolio and the establishment of a $4.0 million reserve for PCI loans acquired from Doral Financial in May 2014. The
reserve for PCI loans was driven by the revision of the expected cash flows of the portfolio for the remaining term of the
loan pool based on market conditions.
Partially offset by:
(cid:120) A decrease in the provision for consumer loans of $32.8 million mainly due to improvements in charge-off trends and lower
loss severity rates on auto loans. Consumer loans net charge-offs decreased by $16.7 million for 2015 compared to 2014,
including loan loss recoveries of $2.7 million on the sale in the second quarter of 2015 of certain auto and personal loans that
had been fully charged-off in prior periods. The decrease in the provision also reflects the decline in the size of this
portfolio.
Refer to “Credit Risk Management” below for an analysis of the allowance for loan and lease losses, non-performing assets,
impaired loans and related information and refer to “Financial Condition and Operating Analysis – Loan Portfolio” and “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.
72
2014 compared to 2013
During 2014, the Corporation recorded a provision for loan and lease losses of $109.5 million, compared to $243.8 million in
2013. 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 adjusted non-GAAP 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 loan portfolio composition following the sale of non-performing residential assets in 2013, partially offset by an
increase in the provision for consumer loans. The most significant drivers of the decrease in the non-GAAP adjusted provision
include:
(cid:120) Continued improvements in the Florida region 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 were 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 2015, 2014, and 2013:
Year Ended
December 31,
2015
2014
2013
(In thousands)
Charge-offs
Recoveries
Net recoveries (charge-offs)
$
$
(2,182) $
2,554
372
$
(1,398) $
14,210
12,812
$
(9,857)
5,075
(4,782)
(cid:120) An $8.1 million reduction in the provision for residential mortgage loans in the Puerto Rico region driven by an
improved portfolio composition following the sale of non-performing residential assets in 2013.
(cid:120) A $6.5 million decrease in the provision for the commercial and construction portfolio in the Puerto Rico region mainly
related to certain recoveries of amounts previously charged-off related to construction loans and updated appraisals on
commercial mortgage loans.
On May 30, 2014, FirstBank purchased from Doral Financial 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 Financial 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 Financial 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.
Partially offset by:
(cid:120) A $25.7 million increase in the provision for consumer loans in the Puerto Rico region 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 the size of this portfolio.
73
Non-Interest Income (Loss)
The following table presents the composition of non-interest income (loss):
(In thousands)
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, bargain purchase
gain, gain on sale of merchant contracts,equity in loss of
unconsolidated entity, and write-off of collateral pledged to Lehman
Net gain on sale of investments
OTTI on equity securities
OTTI on debt securities
Net loss on investments
Impairment - collateral pledged to Lehman
Bargain purchase gain
Gain on sale of merchant contracts
Equity in loss of unconsolidated entity
Total
2015
2014
2013
$
20,330 $
17,217
7,058
-
32,794
77,399
-
-
(16,517)
(16,517)
-
13,443
7,000
-
$
81,325 $
16,709 $
14,685
6,868
459
30,033
68,754
262
-
(388)
(126)
-
-
-
(7,280)
61,348 $
16,974
16,830
5,955
97
28,079
67,935
-
(42)
(117)
(159)
(66,574)
-
-
(16,691)
(15,489)
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 through the second quarter of 2014; 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 securitization 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 and check and cash management fees.
The net gain (loss) on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation’s
investment policies as well as OTTI charges on the Corporation’s investment portfolio.
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. No negative investments need to be reported as the Bank has no legal obligation or commitment to provide further financial
support to this entity; thus, no further losses are being 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
74
allocated to the investors. Refer to Note 15 of the Corporation’s audited financial statements for the year ended December 31, 2015
included in Item 8 of this Form 10-K for additional information about the Bank’s investment in CPG/GS.
The bargain purchase gain is related to assets acquired and deposits assumed from Doral Bank in the first quarter of 2015. On
February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank, assumed $522.7 million in deposits related to such
branches, acquired approximately $324.8 million in principal balance of loans, primarily residential mortgage loans, acquired $5.5
million of property, plant and equipment and received $217.7 million of cash, through an alliance with Popular, who was the
successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders. 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 assumption agreements with the alliance co-bidders,
including FirstBank, for the transferred assets and deposits. There is no loss-share arrangement with the FDIC related to the acquired
assets. The gain of $13.4 million represents the excess of the estimated fair value of the assets acquired (including cash payments of
$217.7 million received from the FDIC) over the estimated fair value of the liabilities assumed and is influenced significantly by the
FDIC-assisted transaction process. Refer to Note 2 of the Corporation’s audited financial statements for the year ended December 31,
2015 included in Item 8 of this Form 10-K for further information, including the fair values of assets acquired and liabilities assumed
in this transaction.
The gain on sale of merchant contracts is associated with a long-term strategic marketing alliance entered during the fourth quarter
of 2015 as part of the sale of FirstBank’s merchant contracts portfolio. Effective October 31, 2015, FirstBank entered into a long-term
strategic marketing alliance with Evertec, Inc. (“Evertec”) to which FirstBank sold its merchant contracts portfolio and related POS
terminals. Evertec acquired FirstBank’s merchant contracts and will continue to provide processing services, customer service and
support operations to FirstBank’s merchant locations. Merchant services will be marketed through FirstBank’s branches and offices in
Puerto Rico and the Virgin Islands. Under the 10-year marketing and referral agreement, FirstBank and Evertec will share, in
accordance with agreed terms, revenues generated by the existing and incremental merchant contracts over the term of the agreement.
The Corporation sold the merchant contracts for $10.0 million, recorded a gain on sale of $7.0 million in the fourth quarter of 2015
and deferred $3.0 million to be recognized into income over the marketing and referral agreement term.
2015 compared to 2014
Non-interest income for 2015 amounted to $81.3 million, compared to non-interest income of $61.3 million for 2014. Non-
interest income for 2015 includes significant unusual items such as OTTI charges of $15.9 million on Puerto Rico Government debt
securities, a $13.4 million bargain purchase gain related to assets acquired and deposits assumed from Doral Bank in the first quarter
of 2015, and the $7.0 million gain on the sale of merchant contracts. Excluding the aforementioned significant items, non-interest
income increased by $15.4 million primarily due to:
(cid:120)
The impact in 2014 of the $7.3 million equity in loss of unconsolidated entity on the Bank’s investment in CPG/GS.
(cid:120) A $3.6 million increase in service charges on deposits primarily associated with the deposits assumed from Doral late in
February 2015 as well as the implementation of new service and transactional fees on certain products beginning in the fourth
quarter of 2015.
(cid:120) A $2.5 million increase in revenues from the mortgage banking business driven by a $1.2 million decrease in losses on TBAs
MBS forward contracts, a $1.1 million decrease in charges related to compensatory fees imposed by government-sponsored
agencies, and a $0.2 million increase in servicing fees tied to a larger portfolio. Realized gains on sales of residential
mortgage loans amounting to $13.5 million in 2015 remained flat as compared to 2014. Loans sold in the secondary market
to U.S. government-sponsored entities amounted to $427.9 million in 2015, compared to $337.2 million in 2014. Higher
margins were observed in 2014 due, in part, to the sale of re-performing mortgage loans.
(cid:120) A $1.3 million increase in merchant-related income despite the sale of merchant-contracts completed early in the fourth
quarter of 2015.
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:120) 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.
75
(cid:120) 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:120) A $0.9 million increase in insurance commission income.
(cid:120) A $0.4 million increase related to underwriting fees on a bond issuance of the Puerto Rico government early in 2014.
(cid:120) A $0.3 million gain on the sale of a $4.6 million Puerto Rico government agency bond.
Partially offset by:
(cid:120) 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
agreement related to loans included in the bulk sales of 2013. Loan sales 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:120) A $0.3 million decrease in service charges on deposit accounts primarily related to cash management and overdraft fees.
(cid:120) 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.
Non-Interest Expenses
The following table presents the components of non-interest expenses:
(In thousands)
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
2015 compared to 2014
2015
2014
2013
$
$
150,059 $
59,295
29,021
12,669
12,833
18,547
24,252
16,177
15,234
7,726
15,788
-
22,229
383,830 $
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 $
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
Non-interest expenses for 2015 were $383.8 million compared to $378.3 million for 2014. Non-interest expenses for 2015
include significant unusual items such as the $4.6 million of acquisition and conversion costs related to the Doral Bank transaction,
$1.2 million of expenses and losses related to the bulk sale of assets and costs of $2.2 million related to a voluntary early retirement
program. Excluding the aforementioned significant items, non-interest expenses decreased by $2.5 million primarily due to:
76
(cid:120) A $10.5 million decrease in the FDIC insurance premium expense reflecting, among other things, the continued decrease in
brokered CDs, a strengthened capital position and an improved earnings to assets average ratio for most of the year. This
expense is included as part of “Insurance and supervisory fees” in the table above.
(cid:120) A $5.4 million decrease in taxes, other than income taxes, reflecting the elimination of Puerto Rico’s national gross receipts
tax effective January 1, 2015 that represented a decrease of approximately $5.7 million, partially offset by incremental costs
of approximately $0.5 million associated with the sales and use tax including the new 4% sales and use tax applicable to
business-to-business services and designated professional services.
(cid:120) A $5.0 million decrease in OREO-related expenses reflecting an increase of $3.7 million in rental income from income-
producing OREO properties and a $2.0 million decrease in losses on the sale of OREO properties, partially offset by higher
OREO operating expenses such as repairs and management fees.
(cid:120) A $1.3 million decrease in business promotion expenses mainly due to lower marketing expenses.
Partially offset by:
(cid:120) A $3.1 million increase in total professional service fees, excluding the portion of acquisition and conversion costs and
expenses incurred in the bulk sale of assets amounting $4.6 million included as part of professional service fees, driven by: (i)
$3.6 million in interim servicing costs incurred in the first half of 2015 related to loans and deposits acquired from Doral
Bank in late February 2015 up to the completion of the conversion in May 2015 (upon competition of the conversion, the
ongoing costs related to the processing and maintenance of these accounts are lower), (ii) $1.3 million in consulting and legal
expenses for special projects as well as strategic, stress testing and capital planning matters that are not expected to be
incurred on an ongoing basis, and (iii) a $0.8 million increase in collections, appraisals and other credit related professional
service fees related to troubled loan resolution efforts. These increases were partially offset by a $2.2 million decrease in
legal fees, including the impact in 2014 of $1.2 million of professional fees incurred in the two separate acquisitions of
mortgage loans from Doral Financial and Doral Bank in 2014.
(cid:120) A $12.3 million increase in employees’ compensation and benefit expenses, excluding the $2.2 million costs related to the
voluntary early retirement program, mainly due to salary merit increases, the impact of personnel costs related to the
branches acquired from Doral, which accounted for approximately $2.7 million of the increase, a $1.4 million increase in
stock-based compensation expense, and a $2.1 million increase in incentive and performance-based compensation. The
voluntary early retirement program completed in 2015 is expected to result in an annual saving of approximately $1.9 million
for 2016.
(cid:120) A $1.0 million increase in occupancy and equipment costs primarily related to rental, depreciation and maintenance expenses
associated with the acquired Doral branches.
(cid:120) A $3.2 million increase in “other expenses” in the table above, that primarily includes increases in supplies, printing and the
amortization of the core deposit intangible associated with the acquired Doral branches and a $0.9 million increase in the
provision for unfunded loan commitments.
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:120) 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:120) 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.
77
(cid:120) 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:120)
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.
(cid:120) 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:120) A $1.7 million decrease in costs associated with the conversion of the credit card processing platform in 2013, primarily
included as part of “Other” in 2013.
(cid:120) 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 Financial and Doral Bank in 2014, and a $0.9 million increase in legal, collection fees and other costs incurred in
troubled loan resolution efforts.
(cid:120) 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:120) 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:120) 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.
Income Taxes
Income tax expense includes Puerto Rico and USVI income taxes as well as applicable United States 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 tax paid in the U.S. and USVI 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 Corporation and its subsidiaries are treated as separate
taxable entities and are not entitled to file consolidated tax returns 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, a particular
subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry forward 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 in Puerto Rico 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 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 income taxation. The IBE unit 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 the corporate standard rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net
taxable income.
78
For additional information relating to income taxes, see Note 26 to the Corporation’s audited financial statements for the year
ended December 31, 2015 included in Item 8 of this Form 10-K, including the reconciliation of the statutory to the effective income
tax rate for 2015, 2014 and 2013.
2015 compared to 2014
For 2015, the Corporation recorded an income tax expense of $6.4 million compared to an income tax benefit of $300.6 million for
2014. The income tax benefit for the year 2014 primarily reflects a $302.9 million partial reversal of the valuation allowance of the
Bank’s deferred tax assets. Other variances are primarily related to a higher taxable income in 2015 and the disallowance of $7.7
million of NOL carryforwards. The effective tax rate for year ended December 31, 2015 is 23%.
In 2010, the Corporation established a valuation allowance for substantially all of the deferred tax assets of its banking subsidiary,
FirstBank, primarily due to significant operational losses driven by charges to the provision for loan losses, a three-year cumulative
loss position as of the end of the year 2010, and uncertainty regarding the amount of future taxable income that the Bank could
forecast. As of December 31, 2014, based upon the assessment of all positive and negative evidence, management concluded that it
was more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to
realize $308.2 million of its deferred tax assets and, therefore reversed $302.9 million of the valuation allowance.
The Corporation’s net deferred tax assets amounted to $311.3 million as of December 31, 2015, net of a valuation allowance of
$201.7 million. The net deferred tax assets of the Corporation’s banking subsidiary, FirstBank, amounted to $306.4 million as of
December 31, 2015, net of a valuation allowance of $174.7 million. During 2015, management reassessed the need for a valuation
allowance and concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that
FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to realize $306.4 million of its
deferred tax asset. The positive evidence considered by management to conclude on the adequacy of the valuation allowance as of
December 31, 2015 includes factors such as: FirstBank’s return to profitability, forecasts of future profitability under several potential
scenarios that support the partial utilization of NOLs prior to their expiration between 2021 through 2024, the taxable year 2015 being
the first year with taxable income since 2008, sustained pre-tax pre-provision for loan losses income which demonstrates demand for
FirstBank’s products and services, the Doral Bank transaction which resulted in market share expansion, and improvements in credit
quality measures that have resulted in reduced credit exposures and have improved both sustainability of profitability and
management’s ability to forecast future losses, which in turn led to actions such as the lifting of the FDIC Consent Order during 2015.
The negative evidence considered by management includes that the Bank remains in a three-year cumulative loss position of $69.9
million due to significant charges to the provision for loan losses as a result of bulk sales of adversely classified and non-performing
loans in 2013 and 2015. However, this loss position is significantly lower than the three-year cumulative pre-tax loss position of
$860.3 million as of December 31, 2010, the year when a full valuation allowance was established. Other negative factors include
Puerto Rico’s current economic conditions and the still elevated levels of non-performing assets.
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 the 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, 2015 net deferred tax asset as
further described below.
The Corporation expects to realize approximately $182.1 million of deferred tax assets associated with FirstBank’s NOLs prior to
their expiration periods, compared to $188.4 million expected to be realized as of December 31, 2014. In addition, as of December 31,
2015, approximately $127.8 million of the deferred tax assets of the Corporation are attributable to temporary differences or tax credit
carry-forwards that have no expiration date, compared to $123.1 million in 2014. Approximately $19.4 million of other non-NOL
related deferred tax assets of the Corporation are fully reserved with a valuation allowance, compared to $16.7 million as of December
31, 2014, given limitations and uncertainties as to their future utilization. The increase in fully reserved deferred tax assets is related to
the increase in other than temporary impairments on investment securities. 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.
As of December 31, 2015, the Corporation did not have UTBs recorded on its books. During 2014, the Corporation reached a final
settlement with the IRS in connection with the 2007-2009 examination periods. As a result, 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. During the second quarter of 2015, the Corporation settled the previously accrued interest of $1.3
million related to the aforementioned IRS examination. The Corporation classifies all interest and penalties, if any, related to tax
79
uncertainties as income tax expense. 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 statute of limitations for each of Virgin Islands and U.S. income tax purposes is
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 the 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 2011
remain open to examination. The 2012 U.S. federal tax return is currently under examination by the IRS. For Puerto Rico tax
purposes, all tax years subsequent to 2011 remain open to examination.
During 2013, the Puerto Rico Government approved Act No. 40, which imposed a national gross receipts tax. The national gross
receipts tax for financial institutions was computed on the basis of 1% of gross income net of allowable exclusions. Subject to certain
limitations, a financial institution was able to claim a credit of 0.5% of its gross income against its regular income tax or the
alternative minimum tax. However, on December 22, 2014, the Governor of Puerto Rico signed Act No. 238, which amended the
2011 PR Code. Act No. 238 clarified that the national gross receipts tax was not applicable to taxable years starting after December
31, 2014. Accordingly, the Corporation did not record a national gross receipts tax expense for 2015. During the year 2014, a $5.7
million gross receipts tax expense was included as part of “Taxes, other than income taxes” in the consolidated statement of income
and a $2.9 million benefit related to this credit was recorded as a reduction to the provision for income taxes.
On May 28 and September 30, 2015, the Puerto Rico legislature approved Act 72-2015 and Act 159-2015, respectively, which
enacted amendments to the 2011 PR Code. The amendments related to the income tax provision include changes to the alternative
minimum tax computation, and changes to the use limitation on NOLs and capital losses for 2015 and future taxable years. The
change in the tax law affected the Corporation’s income tax computation by limiting the NOL deduction to 80% of taxable income,
compared to a 90% limitation in prior years.
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.
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, 2015, 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 33, “Segment Information,” to the Corporation’s
audited financial statements for the year ended December 31, 2015 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, 2015 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 2015, 2014, and 2013, other
operating expenses not allocated to a particular segment amounted to $103.9 million, $94.3 million, and $94.1 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 Investments 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
80
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
securities underwriting and financial advisory services. 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, 2015, 2014
and 2013 include the following:
(cid:120)
Segment loss before taxes for the year ended December 31, 2015 was $15.8 million compared to income of $69.1 million
for 2014 and a loss of $5.0 million for 2013.
(cid:120) Net interest income for the year ended December 31, 2015 was $115.8 million compared to $150.9 million and $157.7
million for the years ended December 31, 2014 and 2013, respectively. The decrease in net interest income for 2015,
compared to 2014, was mainly related to a decrease of $617.2 million in the average balance of commercial and
construction loans in Puerto Rico and the adverse impact of the approximately $3.8 million in interest payments received
from the PREPA credit facility accounted for on a cost-recovery basis since May 2015. The decrease in net interest
income for 2014, compared to 2013, was mainly related to a decrease of $721.4 million in the average balance of
commercial loans 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.
(cid:120)
(cid:120)
The provision for loan losses for 2015 was $101.6 million compared to $40.1 million and $102.0 million for 2014 and
2013, respectively. The provision for 2015 includes a charge of $46.9 million related to the bulk sale of assets
completed in the second quarter of 2015. Excluding the effect of the bulk sale, the provision for this business segment
increased $14.6 million in 2015, reflecting a $35 million increase in the general reserve for commercial loans extended to
or guaranteed by the Puerto Rico Government (excluding municipalities) due to the migration of certain loans to adverse
classification categories and the $19.2 million charge related to increased qualitative reserve factors applied to these
loans. This increase was partially offset by an $8.1 million general reserve release for construction-land loans given the
stabilization in the asset quality of this portfolio, a $5.1 million increase in loan loss recoveries on commercial and
construction loans in Puerto Rico and the overall decrease in the size of this portfolio. The decrease in 2014, compared
to 2013, 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 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. 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.
Total non-interest income for the year ended December 31, 2015 amounted to $12.5 million compared to $5.2 million
and $3.9 million for the years ended December 31, 2014 and 2013, respectively. The increase in 2015, compared to
2014, includes the $4.2 million portion of the gain on sale of merchant contracts attributable to this segment and
increases in cash management and overdraft fees on deposit accounts of corporate clients, partially offset by a $0.5
million decrease in fee income from the broker-dealer subsidiary as a result of underwriting fees on a bond issuance of
the Puerto Rico Government that took place in the first quarter of 2014, and a $0.6 million loss on the sale of a
commercial mortgage loan held for sale as part of the bulk sale of assets in 2015. 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
the aforementioned bond issuance of the Puerto Rico government early in 2014.
81
(cid:120) Direct non-interest expenses for 2015 were $42.5 million, compared to $47.0 million in 2014, and $64.6 million in 2013.
The decrease in 2015, compared to 2014, reflects a $6.8 million decrease related to the portion of the FDIC deposit
insurance premium allocated to this segment, partially offset by $1.2 million of professional service fees and losses
related to the bulk sale of assets completed in 2015. The main variances for 2014, compared to 2013, 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.
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 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.
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. 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, 2015, 2014 and
2013 include the following:
(cid:120)
Segment income before taxes for the year ended December 31, 2015 was $50.2 million compared to $42.2 million and
$67.0 million for the years ended December 31, 2014 and 2013, respectively.
(cid:120) Net interest income for the year ended December 31, 2015 was $188.4 million compared to $208.4 million and $204.8
million for the years ended December 31, 2014 and 2013, respectively. The decrease in 2015, compared to 2014, was
mainly due to the $152.1 million decrease in the average volume of consumer loans in Puerto Rico and a $3.8 million
decrease due to the fact that the remaining discount related to a credit card portfolio acquired in 2012 was fully accreted
into income in the first half of 2014. 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.
(cid:120)
The provision for loan and lease losses for 2015 decreased by $33.3 million to $46.7 million compared to 2014 and
increased by $25.7 million to $79.9 million when comparing 2014 with 2013. The decrease in the provision in 2015,
compared to 2014, was mainly due to improvements in charge-off trends, lower loss severities on auto loans and the
overall decrease in the size of this portfolio. 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.
(cid:120) Non-interest income for the year ended December 31, 2015 was $41.9 million compared to $40.0 million and $39.0
million for the years ended December 31, 2014 and 2013, respectively. The increase in 2015, compared to 2014, reflects
primarily a $3.1 million increase in service charge on deposits mainly related to the deposits assumed from Doral Bank
in 2015 as well as the implementation of new service and transactional fees on certain products beginning in the fourth
quarter of 2015. The increase in 2014, compared to 2013, was mainly related to the $0.9 million increase in insurance
commission income.
(cid:120) Direct non-interest expenses for the year ended December 31, 2015 were $133.4 million compared to $126.3 million and
$122.6 million for the years ended December 31, 2014 and 2013, respectively. The increase for 2015, compared to
2014, was mainly due to a $5.4 million increase in employees’ compensation, and a $1.4 million increase in occupancy
and equipment costs, partially offset by the decrease of $2.5 million in the FDIC insurance assessment portion allocated
to this segment. 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
82
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.
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. The mortgage banking segment focuses on
originating residential real estate loans, some of which conform to the FHA, VA and RD standards. Loans originated that meet the
FHA’s standards qualify for the FHA’s insurance program whereas loans that meet the standards of the VA and RD are guaranteed by
their respective federal agencies.
Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate
loans 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 selling 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, 2015, 2014 and 2013
include the following:
(cid:120)
Segment income before taxes for the year ended December 31, 2015 was $41.3 million compared to $35.1 million for
2014 and a loss of $51.1 million for 2013.
(cid:120) Net interest income for the year ended December 31, 2015 was $92.7 million compared to $78.6 million and $71.5
million for the years ended December 31, 2014 and 2013, respectively. The increase in net interest income experienced
in the last two years was mainly related to the acquisition of several loan portfolios from Doral Financial and Doral Bank
completed in the second and fourth quarter of 2014 and the most recent acquisition in February 2015. 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.
(cid:120)
The provision for loan and lease losses for 2015 was $30.0 million compared to $17.6 million and $89.4 million for the
years ended December 31, 2014 and 2013, respectively. The increase in the provision for 2015, compared to 2014, was
driven by several factors including inherent loss severities of loans in late stages of delinquency, decreases in appraised
values, the overall decrease in the size of this portfolio and the establishment of a $4.0 million reserve for PCI loans
acquired from Doral Financial in May 2014. 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.
(cid:120) Non-interest income for the year ended December 31, 2015 was $16.0 million compared to $13.5 million and $15.8
million for the years ended December 31, 2014 and 2013, respectively. The increase in 2015, compared to 2014, was
mainly due to lower losses on TBAs MBS forward contracts, lower charges related to compensatory fees imposed by
government-sponsored entities and an increase in servicing fees tied to a larger portfolio. The decrease in 2014,
compared to 2013, was mainly due to a lower volume of sales and charges related to compensatory fees imposed by
government-sponsored entities.
(cid:120) Direct non-interest expenses in 2015 were $37.3 million compared to $39.4 million and $48.9 million for 2014 and 2013,
respectively. The decrease in 2015, compared to 2014, reflects a $1.4 million decrease associated with the FDIC deposit
insurance premium allocated to this segment, a $0.6 million decrease in losses on OREO operations, and a $1.0 million
decrease related to the national gross receipts tax, partially offset by a $1.4 million increase in employees’ compensation
expenses. 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.
83
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, 2015, 2014, and 2013
include the following:
(cid:120)
Segment income before taxes for the year ended December 31, 2015 amounted to $6.5 million compared to $1.1 million
for 2014 and a loss of $58.5 million for 2013.
(cid:120) Net interest income for the year ended December 31, 2015 was $26.2 million compared to net interest income of $6.2
million and $18.8 million for the years ended December 31, 2014 and 2013, respectively. The increase in net interest
income in 2015, compared to 2014, primarily reflects the impact of the declining balances of brokered CDS, the
restructuring of repurchase agreements, and the benefit of increases in short-term market rates experienced in the second
half of 2015. The decrease in net interest income in 2014, compared to 2013, was mainly due to lower amounts loaned
to other business segments.
(cid:120) Non-interest loss for the year ended December 31, 2015 amounted to $15.9 million compared to income of $0.3 million
and losses of $66.6 million for the years ended December 31, 2014 and 2013, respectively. The loss for 2015 was driven
by OTTI charges on Puerto Rico Government debt securities of $15.9 million. 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.
(cid:120) Direct non-interest expenses for 2015 were $3.8 million compared to $5.4 million and $10.6 million for 2014 and 2013,
respectively. The decrease in 2015, compared to 2014, was mainly due to a $0.9 million decrease in legal and consulting
fees. The variance in 2014, compared to 2013, was 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, (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 on the United States mainland.
FirstBank provides a wide range of banking services to individual and corporate customers primarily in southern Florida through 10
branches. FirstBank’s success in attracting core deposits in Florida has enabled it 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.
84
The highlights of the United States operations segment’s financial results for the years ended December 31, 2015, 2014, and 2013
include the following:
(cid:120)
Segment income before taxes for the year ended December 31, 2015 was $25.0 million compared to $40.8 million and
$8.0 million for the years ended December 31, 2014 and 2013, respectively.
(cid:120) Net interest income for the year ended December 31, 2015 was $42.9 million compared to $37.3 million and $24.5
million for the years ended December 31, 2014 and 2013, respectively. The variances were primarily related to increases
of $97.9 million and $152.9 million in the average volume of loans, primarily commercial and residential mortgage
loans, in 2015 and 2014, respectively The increases also reflect reductions in the average rate paid on deposits, and
higher interest charges made to operating segments in Puerto Rico.
(cid:120) During 2015, a negative provision of $8.0 million was recorded for this segment, compared to negative provisions of
$27.7 million and $10.7 million for 2014 and 2013, respectively. The lower negative provision in 2015, compared to
2014, reflects an $11.5 million decrease in loan loss recoveries of commercial and construction loans and lower reserve
releases on these portfolios. 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.
(cid:120)
Total non-interest income for the year ended December 31, 2015 amounted to $2.8 million compared to $2.5 million and
$1.3 million for the years ended December 31, 2014 and 2013, respectively. The increase in 2015, compared to 2014,
was mainly due to a $0.2 million increase in gains on sales of residential mortgage loans tied to a higher volume of sales.
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.
(cid:120) Direct non-interest expenses in 2015 were $28.7 million compared to $26.6 million and $28.6 million for 2014 and 2013,
respectively. The increase in 2015, compared to 2014, was mainly due to increases in employees’ compensation of $2.0
million, a $0.6 million increase in OREO-related expenses and a $0.3 million increase in occupancy and equipment
costs, partially offset by a $0.7 million decrease in the allocation of the FDIC insurance premium expense. 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.
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 11 branches currently serving the islands in the USVI of St.
Thomas, St. Croix and St. John, and the island of Tortola in the BVI. 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.
The highlights of the Virgin Islands operations’ financial results for the years ended December 31, 2015, 2014 and 2013 include
the following:
(cid:120)
Segment income before taxes for the year ended December 31, 2015 was $10.9 million compared to income of $5.1
million and losses of $8.9 million for the years ended December 31, 2014 and 2013, respectively.
(cid:120) Net interest income for the year ended December 31, 2015 was $36.3 million compared to $36.8 million and $37.7
million for the years ended December 31, 2014 and 2013, respectively. The decrease in net interest income in 2015,
compared to 2014, was mainly related to a $12.4 million decrease in the average volume of loans, primarily residential
mortgage loans. 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.
85
(cid:120) During 2015, a provision of $1.7 million was recorded for this segment, compared to a net release to the allowance of
$0.4 million for 2014 and a provision of $8.8 million for 2013. The increase in the provision for 2015, compared to
2014, was primarily related to a $0.6 million increase in the provision for residential mortgage loans and the $1.8 million
provision on commercial and industrial loans recorded in 2015. 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 net release to the
allowance of $2.6 million in 2013. The lower net release to the allowance 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.
(cid:120) Non-interest income for the year ended December 31, 2015 was $10.6 million, compared to $7.1 million and $7.9
million for the years ended December 31, 2014 and 2013, respectively. The increase in 2015, compared to 2014, was
mainly related to the $2.8 million portion of the gain on sale of merchant contracts attributable to this segment, and a
$0.4 million gain on the sale of a parcel of land in 2015. 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.
(cid:120) Direct non-interest expenses for the year ended December 31, 2015 were $34.2 million compared to $39.3 million and
$45.7 million for the years ended December 31, 2014 and 2013, respectively. The decrease in 2015, compared to 2014,
was mainly due to a $2.6 million decrease in losses on OREO operations, a $0.6 million decrease related to the allocation
of the FDIC insurance premium expense to this segment, and a $1.5 million decrease in occupancy and equipment costs.
The increase in 2014, compared to 2013, was mainly due to lower losses on OREO operations, primarily lower write-
downs.
86
FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Financial Condition
The following table presents an average balance sheet of the Corporation for the following years:
(In thousands)
ASSETS
Interest-earning assets:
Money market and other short-term investments
U.S. and Puerto Rico Government obligations
Mortgage-backed securities
FHLB stock
Other investments
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
2015
December 31,
2014
2013
$
$
$
$
775,848 $
474,275
1,489,423
26,522
777
2,766,845
3,272,464
169,666
3,984,302
228,709
1,670,245
9,325,386
12,092,231
689,322
12,781,553 $
1,096,087 $
2,533,689
2,294,939
2,428,185
8,352,900
997,615
349,027
9,699,542
1,391,306
11,090,848
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 $
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
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
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
36,104
1,654,601
1,690,705
12,781,553 $
46,576
1,250,129
1,296,705
12,647,445 $
63,047
1,264,003
1,327,050
12,812,461
_________
(1) Includes, among other things, the allowance for loan and lease losses and the valuation of available-for-sale investment securities.
87
The Corporation’s total average assets were $12.8 billion for the year ended December 31, 2015 compared to $12.6 billion for
2014, an increase of $134.1 million. The variance reflects the full year impact of the $302.9 million partial reversal of FirstBank’s
deferred tax assets valuation allowance recorded in December 2014, partially offset by the $221.1 million decrease in the average
volume of loans, primarily commercial and consumer loans.
The Corporation’s total average liabilities were $11.1 billion as of December 31, 2015, a decrease of $259.9 million compared to
December 31, 2014. The decrease was mainly related to a $670.5 million decrease in the average balance of brokered CDs and the
netting of $200 million reverse repurchase agreements entered into in 2015 against repurchase agreements, partially offset by a $344.3
million increase in the average balance of non-interest bearing deposits, and a $128.1 million increase in the average balance of
savings and interest-bearing checking accounts.
Assets
Total assets were approximately $12.6 billion, a decrease of $154.8 million from December 31, 2014. The variance reflects a $79.3
million decrease in available-for-sale investment securities driven by U.S. agency MBS prepayments, debt securities called prior to
maturity and a decrease in the fair value of both Puerto Rico Government debt securities and U.S. agency MBS. In addition, the
balance of cash and cash equivalents decreased by $43.7 million reflecting, among other things, funds used for $200 million in reverse
repurchase agreements entered into in 2015 that qualifies for offsetting accounting, thus, it was netted against repurchase agreements
in the statement of financial condition. Total loans decreased by $29.7 million as further discussed below.
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.
(In thousands)
Residential mortgage loans (1)(2)
Commercial loans:
Commercial mortgage loans
Construction loans (3)
Commercial and Industrial
loans (4)
Loans to local financial institutions
collateralized by real estate
mortgages (2)
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 (3)
Total loans, net
2015
2014
2013
2012
2011
$
3,344,719
$
3,011,187
$
2,549,008
$
2,747,217
$
2,873,785
1,537,806
156,195
1,665,787
123,480
1,823,608
168,713
1,883,798
361,875
1,565,411
427,863
2,407,996
2,479,437
2,788,250
2,793,157
3,856,695
-
4,101,997
229,165
1,597,984
9,273,865
(240,710)
9,033,155
35,869
-
4,268,704
232,126
1,750,419
9,262,436
(222,395)
9,040,041
76,956
240,072
5,020,643
245,323
1,821,196
9,636,170
(285,858)
9,350,312
75,969
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
(435,414)
9,618,700
85,394
(493,917)
10,065,475
15,822
$
9,069,024
$
9,116,997
$
9,426,281
$
9,704,094
$ 10,081,297
___________
(1) On February 27, 2015 FirstBank acquired 10 Puerto Rico branches of Doral Bank and acquired, among other things, $324.8 million
in principal balance of loans, primarily residential mortgage loans. Refer to Critical Accounting Policies and Practices - Accounting
for Acquisition above for additional information about this transaction.
(2) On May 30, 2014, FirstBank acquired from Doral Financial 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 Financial 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.
(3) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent
to sell a $40.0 million construction-commercial loan in the Virgin Islands. Accordingly, the loan was transferred back from held
for sale to held for investment and continues to be classified as a TDR and a non-performing loan.
88
(4) As of December 31, 2015, includes $1.0 billion of commercial loans that are secured by real estate but are not dependent
upon the real estate for repayment.
Lending Activities
As of December 31, 2015, the Corporation’s total loans, before the allowance, decreased by $29.7 million, when compared with
the balance as of December 31, 2014. The decrease was primarily due to a $213.2 million decrease in commercial and construction
loans, reflecting the $147.5 million of loans included in the bulk sale of assets completed in the second quarter of 2015, and a $155.4
million decrease in the consumer loan portfolio. These variances were partially offset by a $338.9 million increase in residential
mortgage loans, mainly attributable to loans acquired from Doral Bank in late February 2015, and an increase of $96.1 million in the
Florida region mortgage portfolio.
As shown in the table above, the 2015 loans held for investment portfolio was comprised of commercial loans (44%), residential
real estate loans (36%), and consumer and finance leases (20%). Of the total gross loan portfolio held for investment of $9.3 billion as
of December 31, 2015, approximately 81% has credit risk concentration in Puerto Rico, 12% in the United States (mainly in the state
of Florida) and 7% in the Virgin Islands, as shown in the following table:
As of December 31, 2015
(In thousands)
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, 2014
(In thousands)
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial and Industrial loans
Total commercial loans
Finance leases
Consumer loans
Puerto Rico
Virgin
Islands
United States
Total
$ 2,575,888 $
327,976 $
440,855 $ 3,344,719
1,208,347
63,654
1,876,143
69,773
69,874
173,916
259,686
22,667
357,937
1,537,806
156,195
2,407,996
3,148,144
229,165
1,506,773
$ 7,459,970 $
33,787
$ 7,493,757 $
313,563
-
48,430
4,101,997
640,290
229,165
-
1,597,984
42,781
689,969 $ 1,123,926 $ 9,273,865
35,869
690,476 $ 1,125,501 $ 9,309,734
1,575
507
Puerto Rico
Virgin
Islands
United States
Total
$ 2,325,455 $
341,098 $
344,634 $ 3,011,187
1,305,057
70,618
2,072,265
3,447,940
232,126
1,666,373
69,629
30,011
120,947
220,587
-
291,101
1,665,787
22,851
123,480
286,225
2,479,437
600,177
4,268,704
-
232,126
47,811
36,235
1,750,419
Total loans held for investment
$ 7,671,894 $
609,496 $
981,046 $ 9,262,436
Loans held for sale
Total loans, gross
34,972
40,317
1,667
76,956
$ 7,706,866 $
649,813 $
982,713 $ 9,339,392
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.
89
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:
2015
For the Year Ended December 31,
2013
2014
2012
2011
(In thousands)
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
Loans acquired from Doral
Sales and securitizations of loans
Repayments and prepayments
Other decreases (3)
Net decrease
$
9,116,997
$
9,426,281
$
9,704,094
$ 10,081,297
$ 11,403,177
703,749
826,937
830,959
756,133
563,138
32,604
39,041
57,514
76,822
93,183
1,738,763
84,978
835,719
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
3,395,813
311,410
(598,840)
(2,975,441)
(180,915)
3,701,691
3,710,509
3,445,437
2,713,675
-
(394,736)
(3,488,207)
(128,032)
-
(968,626)
(2,801,685)
(218,011)
-
(468,463)
(3,049,722)
(304,455)
-
(1,175,463)
(2,422,071)
(438,021)
(47,973)
(309,284)
(277,813)
(377,203)
(1,321,880)
Ending balance as of December 31
$
9,069,024
$
9,116,997
$
9,426,281
$
9,704,094
$ 10,081,297
Percentage decrease
_____________
(1) For 2014, includes the purchase from Doral of $147.5 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
(0.53)%
(3.28)%
(2.86)%
(3.74)%
(11.59)%
the repossession of the collateral and loans repurchased.
Residential Real Estate Loans
As of December 31, 2015, the Corporation’s residential real estate loan portfolio held for investment increased by $333.5 million
as compared to the balance as of December 31, 2014, mainly due to the $321.0 million in principal balance of residential mortgage loans
(initial fair value of $311 million) acquired from Doral in late February 2015 and a $96.2 million increase in the Florida region.
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 does not generally originate negative amortization loans. Refer to “Contractual Obligations
and Commitments” below for additional information about outstanding commitments to sell mortgage loans.
Residential mortgage loan originations and purchases, excluding the loans acquired from Doral, for the year ended December 31,
2015 amounted to $703.7 million compared to $634.3 million for 2014 and $831.0 million for 2013. The higher volume of loan
originations in 2015 includes an increase of $48.6 million in Puerto Rico, mainly refinancings (external and internal) and conforming
loan originations, and a $33.6 million increase in residential mortgage loan originations in the Florida region. These statistics include
loans purchased from mortgage bankers of $91.9 million and $146.5 million for 2015 and 2014, respectively.
Commercial and Construction Loans
As of December 31, 2015, the Corporation’s commercial and construction loan portfolio held for investment decreased by $166.7
million to $4.1 billion, as compared to the balance of $4.3 billion as of December 31, 2014. The reduction primarily reflects the effect of the
aforementioned bulk sale of assets that included $147.5 million of commercial and construction loans, primarily non-performing and
adversely classified loans, as well as loans transferred to the OREO portfolio, including the repossession of the underlying collateral of two
commercial mortgage loans totaling $27.9 million.
90
As of December 31, 2015, the Corporation had $316.0 million of credit facilities, excluding investment securities, granted to the
Puerto Rico government, its municipalities and public corporations, of which $314.6 million was outstanding (book value of $311.0
million), compared to $308.0 million outstanding as of December 31, 2014. In addition, the outstanding balance of facilities granted to
the government of the Virgin Islands amounted to $126.2 million as of December 31, 2015, compared to $57.7 million as of
December 31, 2014. Approximately $199.5 million of the granted credit facilities outstanding consisted of loans to municipalities in
Puerto Rico whose revenues are independent of the central government. The good faith, credit, and unlimited taxing power of the
applicable municipality have been pledged to their repayment. Approximately 88% of the Corporation’s municipality exposure
consists primarily of senior priority loans concentrated on five of the largest municipalities in Puerto Rico (San Juan, Carolina,
Bayamon, Mayaguez, and Guaynabo). These municipalities are required by law to levy special property taxes in such amounts as shall
be required for the payment of all of its general obligation bonds and loans. Late in 2015, GDB and the Municipal Revenue Collection
Center (“CRIM”) signed a deed of trust. Through this deed, the GDB, as fiduciary, is bound to keep the CRIM funds separate from
any other deposits and the funds should be distributed by the GDB pursuant to the applicable law. In addition to municipalities, loans
extended to the Puerto Rico Government include $18.9 million of loans to units of the Puerto Rico central government, and
approximately $96.3 million ($92.6 million book value) of loans to public corporations that generally receive revenues from the rates
they charge for services or products, such as electric power services, including the credit facility extended to PREPA, with a book
value of $71.1 million as of December 31, 2015. The PREPA credit facility was placed in non-accrual status in the first quarter of
2015, and interest payments are now recorded on a cost-recovery basis.
Furthermore, as of December 31, 2015, the Corporation had $129.4 million outstanding in financings to the hotel industry in Puerto
Rico where the borrower and the operations of the underlying collateral are the primary sources of repayment and the TDF provides a
secondary guarantee for payment performance, compared to $133.3 million as of December 31, 2014. As a result of liquidity risk and
uncertainty regarding the Puerto Rico government fiscal situation, the Corporation adversely classified this $129.4 million exposure
during the third quarter of 2015. Since late 2012, the Corporation has received combined payments from the borrowers and TDF as
guarantor sufficient to cover contractual payments on these loans, including collections of principal and interest from TDF of
approximately $5.3 million in 2015 and $6.1 million in 2014. These loans were current and remained in accrual status as of
December 31, 2015.
In the fourth quarter of 2015, the Corporation recorded a $19.2 million charge to the provision for loan losses related to increased
qualitative reserve factors applied to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding
municipalities).
As of December 31, 2015, the Corporation’s total exposure to shared national credit (“SNC”) loans amounted to $603.1 million.
Approximately $455.1 million of the SNC exposure as of December 31, 2015 is in Puerto Rico, including the $71.1 million book
value of the PREPA credit facility and $74.3 million of the loans guaranteed by the TDF.
Commercial and construction loan origination (excluding government loans) for 2015 amounted to $1.7 billion compared to $1.5
billion in 2014. The increase in 2015 was mainly related to disbursements on existing commercial credit facilities in Puerto Rico.
Government loan originations for 2015 amounted to $101.6 million compared to $424.2 million for 2014, a decrease driven by the
reduced draws in existing commercial credit facilities granted to the Commonwealth of Puerto Rico central government and
instrumentalities, partially offset by increases in the Virgin Islands region. Government loan originations in the Virgin Islands for
2015 amounted to $65.3 million compared to $49.1 million for 2014.
The Corporation has significantly reduced its exposure to construction loans, and current originations are mainly draws from
existing commitments.
91
The composition of the Corporation’s construction loan portfolio held for investment as of December 31, 2015 by category and
geographic location follows:
As of December 31, 2015
(In thousands)
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
$
$
$
$
829
6,818
7,647
1,016
20,655
-
18,873
15,679
63,870
(216)
63,654
(2,492)
$
61,162
$
4,002
-
4,002
1,509
47,301
12,911
4,221
-
69,944
(70)
69,874
(991)
68,883
$
$
$
$
-
6,899
6,899
-
15,437
-
331
-
22,667
-
22,667
(36)
$
22,631
$
4,831
13,717
18,548
2,525
83,393
12,911
23,425
15,679
156,481
(286)
156,195
(3,519)
152,676
The following table presents further information on the Corporation’s construction portfolio as of and for the year
ended December 31, 2015:
(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 (1)
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
_________
(1) Includes net charge-offs totaling $3.3 million associated with the bulk sale of assets.
$
$
$
$
$
59,747
54,636
8,135
2,412
3,519
38.20 %
2.25 %
1.42 %
92
The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the
estimated selling price of the units:
(In thousands)
Construction loan portfolio:
Under $300k
Over $600k (1)
$
$
2,640
5,007
7,647
________
(1) One residential housing project in Puerto Rico.
Consumer Loans and Finance Leases
As of December 31, 2015, the Corporation’s consumer loan and finance lease portfolio decreased by $155.4 million to $1.8 billion,
as compared to the portfolio balance of $2.0 billion as of December 31, 2014. 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 $128.8 million during
2015 to $1.2 billion reflecting repayments, charge-offs and a reduced activity in new loan originations. The auto loan and finance
lease portfolios in Puerto Rico amounted to $891.0 million and $229.2 million, respectively, as of December 31, 2015, compared 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 an $11.6 million reduction in the credit card loan
portfolio balance, to $295.0 million as of December 31, 2015, and a $10.7 million decrease in boat loans, to $36.7 million as of
December 31, 2015.
Originations of auto loans (including finance leases) for 2015 amounted to $361.8 million, a decrease of $95.4 million, compared
to $457.2 million for 2014. The decrease mainly reflects the reduced activity in new auto sales reflecting lower consumer confidence
as a result of the prolonged economic recession in Puerto Rico.
Personal loan originations, other than credit cards, for 2015 amounted to $184.8 million compared to $191.8 million for 2014. The
utilization activity on the outstanding credit card portfolio for 2015 amounted to $374.6 million compared to $388.0 million for 2014.
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, 2015
amounted to $1.9 billion, a decrease of $79.3 million from December 31, 2014. During 2015, U.S. agency MBS prepayments
amounted to $233 million, U.S. agency debt obligations called prior to maturity amounted to $46 million, and the fair value of Puerto
Rico Government debt securities decreased by $19 million. The aforementioned decreases were partially offset by purchases of
approximately $239 million of U.S. government-sponsored agencies securities (average yield of 1.87%).
Approximately 97% 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 mentioned above, during 2015, the Corporation recorded $15.9 million in OTTI charges on three Puerto Rico Government debt
securities held by the Corporation as part of its available-for-sale securities portfolio, specifically bonds of the Government
Development Bank for Puerto Rico and the Puerto Rico Public Buildings Authority. A $12.9 million impairment charge was booked
in the second quarter and an additional $3.0 million impairment was recorded in the fourth quarter. The credit-related impairment loss
estimate is based on the probability of default and loss severity in the event of default in consideration of the latest available market-
based evidence implied in current security valuations and information about the Puerto Rico Government’s financial condition,
including credit ratings, payment defaults on other bonds, and “clawback” measures implemented to redirect revenues pledged to
support bonds from certain government agencies to service the general obligation debt. As of December 31, 2015, the Corporation
owns Puerto Rico Government debt securities in the aggregate amortized cost of $49.7 million (net of the $15.9 million OTTI charges
taken in 2015), recorded on its books at a fair value of $28.2 million. Refer to Note 5 to the Corporation’s audited financial statements
for the year ended December 31, 2015 included in Item 8 of this Form 10-K for additional information regarding the assumptions
utilized to determine the OTTI charge on the Puerto Rico Government debt securities held by the Corporation.
93
The following table presents the carrying value of investments as of December 31, 2015 and 2014:
(In thousands)
Money market investments
Investment securities available for sale, at fair value:
U.S. government and agencies obligations
Puerto Rico government obligations
Mortgage-backed securities
Other
Total investment securities available for sale, at fair value
Other equity securities, including $31.3 million and $25.5
million of FHLB stock as of December 31, 2015 and
2014, respectively
Total money market and investment securities
2015
2014
$
219,473
$
16,961
460,558
28,217
1,397,520
100
1,886,395
340,614
43,222
1,581,830
-
1,965,666
32,169
2,138,037
25,752
$ 2,008,379
$
Mortgage-backed securities as of December 31, 2015 and 2014 consisted of:
(In thousands)
Available-for-sale:
FHLMC certificates
GNMA certificates
FNMA certificates
Other mortgage pass-through certificates
Total mortgage-backed securities
2015
2014
$
287,445
301,573
783,195
25,307
$ 1,397,520
$
$
315,794
377,448
854,940
33,648
1,581,830
94
The carrying values of investment securities classified as available for sale as of December 31, 2015 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
Other Investment Securities
Due after one year through five years
Total
Mortgage-backed securities
$
14,618
387,689
58,251
460,558
11,001
855
16,361
28,217
100
488,875
1,397,520
Total investment securities available for sale
$
1,886,395
0.68
1.31
2.34
1.42
4.38
5.20
5.40
4.87
1.50
1.75
2.61
2.38
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, 2015, the Corporation had approximately $142.8 million in debt
securities (U.S. Agencies and Puerto Rico government securities) with embedded calls and with an average yield of 1.78%. 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 5 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.
95
Investment Securities and Loans Receivable Maturities
The following table presents the maturities or repricings of the loan and investment portfolio as of December 31, 2015:
2-5 Years
Over 5 Years
Fixed
Interest
Rates
Variable
Interest
Rates
Fixed
Interest
Rates
Variable
Interest
Rates
One Year
or Less
(In thousands)
Investments:
Money market investments
Mortgage-backed securities
Other securities (1)
Total investments
$
$
219,473
25,597
46,787
291,857
$
-
2,740
398,790
401,530
-
-
-
-
$
$
-
1,369,183
75,467
1,444,650
-
823,276
369,915
2,179,262
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."
119,761
1,226
2,809
37,547
2,340,605
3,785,255
463,543
5,179
152,168
1,020,366
2,011,171
2,412,701
3,191,853
157,925
74,188
540,071
4,787,313
5,079,170
170,645
170,645
170,645
-
-
-
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
Total
219,473
1,397,520
521,044
2,138,037
3,372,453
3,945,802
164,330
229,165
1,597,984
9,309,734
11,447,771
$
$
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 eleven 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; (9) capital risk;
(10) strategic risk; and (11) information technology 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.
96
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.
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, support its credit rating, or support its growth and strategic
options.
Strategic Risk
Strategic Risk refers to the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from adverse
business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and
operating environment. This risk is a function of the compatibility of the Corporation’s strategic goals, the business strategies
developed to achieve those goals, the resources deployed against these goals, and the quality of implementation.
Information Technology Risk
Information Technology risk is the risk of a potential adverse impact to the Corporation’s operations, reputation, assets, and
customers that arises from the loss of confidentiality, integrity, or availability of information or information systems. It includes
business risk associated with the use, ownership, operation, involvement, influence, and adoption of information technology within the
Corporation.
97
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 is appointed by the Board of Directors of the Corporation to assist the Board in fulfilling its responsibility to
oversee 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 is appointed by the Board of Directors to assist the Board of Directors in its oversight of the
Corporation’s asset and liability management policies related to the management of the Corporation’s funds, investments, liquidity,
interest rate risk, and the use of derivatives. In doing so, the Committee’s primary functions involve:
(cid:120)(cid:120)
(cid:120)
(cid:120)
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.
Credit Committee
The Credit Committee is appointed by the Board of Directors to assist the Board of Directors in its oversight of the Corporation’s
policies related to the Corporation’s lending function, hereafter “Credit Management.” The Committee’s primarily responsibilities are
to:
(cid:120)
Review the quality of the Corporation’s credit portfolio and the trends affecting that portfolio;
(cid:120) Oversee the effectiveness and administration of credit-related policies;
(cid:120) Approve those loans as required by the lending authorities approved by the Board; and
(cid:120)
Report to the Board regarding Credit Management.
Audit Committee
The Audit Committee is appointed by the Board of Directors to assist the Board of Directors in fulfilling its responsibility to
oversee management regarding:
(cid:120)
(cid:120)
(cid:120)
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;
98
(cid:120)
(cid:120)
(cid:120)
(cid:120)(cid:120)
(cid:120)
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 is appointed by the Board of Directors to assist the Board of the Corporation in fulfilling its
responsibility to ensure that the Corporation and the Bank comply with the provisions of the Written Agreement entered into with the
New York FED. In addition, the Compliance Committee shall assist the Board of the Bank in fulfilling its responsibility with respect
to any actions required by the FDIC and the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico to improve
the financial condition of the Bank (and collectively with the Written Agreement the “Regulatory Actions”).
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is appointed by the Board of Directors to develop, review and assess
corporate governance principles. The Corporate Governance and Nominating Committee is responsible for director succession,
orientation and compensation, identifying and recommending new director candidates, overseeing the evaluation of the Board and
management, recommending to the Board the designation of a candidate to hold the position of the Chairman of the Board, and
directing and overseeing the Corporation’s executive succession plan.
Compensation and Benefits Committee
The Compensation and Benefits Committee of the Corporation is appointed by the Board of Directors to oversee compensation
policies and practices including the evaluation and recommendation to the Board of the proper and competitive salaries and incentive
compensation programs of the executive officers and key employees of the Corporation. The Committee recommends guidelines and
principles for compensation programs of executive officers and key employees of the Corporation, including establishing a clear link
between pay and performance and safeguards against the encouragement of excessive risk-taking.
Management Roles and Responsibilities
While the Board of Directors is charged with the oversight of the risk governance program, the responsibility for carrying out the
implementation of the necessary policies and procedures, and internal controls is delegated to Management of the Corporation. To
carry out these responsibilities, the Corporation has a clearly defined risk governance culture, to ensure risk management is
communicated at all levels of the Corporation, and each area understands their specific role, there are several management level
committees that have been established in order to support risk oversight, as follows:
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 the
inaccuracy.
99
The Comitte is appointed by the Chief Executive Officer and provides Senior and Exceutive management with the opportunity to
share their insights about the types of risks that could impede the Corporation’s ability to achieve its business objectives. The Chief
Risk Officer of the Corporation directs the agenda for the meetings and the Enterprise Risk Management and Operational Risk
Director serves as Secretary of the Committee and maintains the minutes on behalf of the Committee. The General Auditor also
participates of the Committee as observer.
The Committee shall provide assistance and support to the Chief Risk Officer to promote effective risk management throughout the
Corporation. The Chief Risk Officer and the ERM and Operational Risk Director report to the Committee those matters related to the
enterprise risk management framework of the Corporation including but not limited to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Risk governance structure
Risk competencies of the Corporation
Corporation’s risk appetite statement and risk tolerance
Risk management strategy and associated risk management initiatives and how both support the business strategy and
business model of the Corporation.
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 practices relating to the Corporation’s identified risks in
the regions of Florida and the USVI and BVI. In so doing, the Regional Committee’s primary general functions involve:
(cid:120)(cid:120)
(cid:120)
(cid:120)
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 identified 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 and cyber security, 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 (a) past-due
loans, (b) overdrafts, (c) non-accrual loans, (d) OREO assets, and (e) 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 processes and
procedures to enable the recognition, assessment, management and monitoring of vendor management risks.
100
(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.
(8) Regulatory Compliance Committee - Oversees the Regulatory Compliance Management System of First BanCorp. Reviews
and discusses any regulatory compliance laws and regulations that impact performance of regulatory compliance policies,
programs and procedures. Ensures the coordination of regulatory compliance requirements throughout departments and
business units.
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. The CEO is ultimately
responsible for business strategies, strategic objectives, risk management priorities, and policies.
2) Chief Risk Officer is responsible for the oversight of the risk management of the organization as well as risk governance
processes. The CRO, together with the Enterprise Risk Management and Operational Risk Director monitors key risks and
manages the operational risk program. The CRO provides the leadership and strategy for the Corporation’s risk management
and monitoring activities and is responsible for the oversight of regulatory compliance, strategic and capital planning, model
risk, and operational risk management.
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 CFO 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
our stress testing modeling framework.
7) ERM and Operational Risk Director is responsible for driving the identification, assessment, measurement, mitigation risk and
exposure and monitoring of key risks throughout the Corporation. The ERM and Operational Risk Director promotes and
instills a culture of risk control, identifies and monitors the resolution of major and critical operational risk issues across the
Corporation, and serves as key advisor to business executives with regards to risk exposure to the organization, corrective
actions and corporate policies and best practices to mitigate risks.
8) Compliance Director is responsible for oversight of regulatory compliance. Maintains an inventory of applicable regulations,
implements an enterprise-wide compliance risk assessment, and monitors compliance with significant regulations. Builds
awareness and educates business units and subsidiaries on regulatory risks.
9) General Counsel is responsible for the oversight of legal risks, including matters such as contract structuring, litigation risk
and all legal related aspects.
10) Corporate Security Officer (CSO) is responsible for the oversight of Information Security policies and procedures, and the
ongoing monitoring of existing and new vendors’ due diligence for information security. In addition, the CSO identifies risk
factors, and determines solutions to security needs.
101
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, 2015,
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 Written Agreement.
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 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 are designed to ensure that the Corporation 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 and are designed to ensure the ability of the Corporation and the Bank to honor its respective commitments, and establish
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.
102
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,
2015, the estimated core liquidity reserve (which includes cash and free liquid assets) was $1.5 billion or 12.3% of total assets, compared to
$1.5 billion or 11.7% of total assets as of December 31, 2014. The basic liquidity ratio (which adds available secured lines of credit to the
core liquidity) was approximately 17.4% of total assets, compared to 15.6% of total assets as of December 31, 2014. As of December 31,
2015, the Corporation had $641.6 million available for additional credit from the FHLB NY. Unpledged liquid securities as of December
31, 2015 mainly consisted of fixed-rate MBS and U.S. agency debentures amounting to approximately $617.6 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. As of December 31, 2015, the holding company had $35.2 million of cash and cash equivalents. Cash and
cash equivalents at the Bank level as of December 31, 2015 were approximately $745.6 million. The Bank has $2.1 billion in brokered
CDs as of December 31, 2015, of which approximately $1.3 billion mature over the next twelve months. Liquidity at the Bank level is
highly dependent on bank deposits, which fund 75% of the Bank’s assets (or 58% excluding brokered CDs).
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.
The Asset Liability Committee of the Board of Directors reviews credit availability on a regular basis. The Corporation has also
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 brokered CDs. As of December 31, 2015, the amount of brokered CDs had
decreased $789.6 million to $2.1 billion from brokered CDs of $2.9 billion as of December 31, 2014. At the same time as the
Corporation focuses on reducing its reliance on brokered CDs, it is seeking to add core deposits. During 2015, the Corporation
increased non-brokered deposits, excluding government deposits, by $467.2 million to $6.7 billion. The Doral transaction added over
$446.9 million in non-brokered deposits as of December 31, 2015, excluding $41.3 million of government deposits.
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.
103
The Corporation's principal sources of funding are:
Deposits
The following table presents the composition of total deposits:
(In thousands)
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
Weighted Average
Cost as of
December 31, 2015
As of December 31,
2015
2014
2013
0.57%
$
2,459,186 $
2,450,484 $
2,334,831
0.45%
1.07%
0.83%
1,088,651
4,453,728
8,001,565
1,336,559
1,054,136
5,078,709
8,583,329
900,616
1,167,480
5,526,401
9,028,712
851,212
9,338,124 $
9,483,945 $
9,879,924
8,352,900 $
8,896,722 $
9,033,592
1,220,726 $
876,460 $
855,231
$
$
$
0.83%
0.88%
1.02%
Brokered CDs – A large portion of the Corporation’s funding has been retail brokered CDs issued by FirstBank. Total brokered CDs
decreased during 2015 by $789.6 million to $2.1 billion as of December 31, 2015. The Corporation utilized a portion of the cash
received in the Doral transaction to pay off maturing brokered CDs.
The average remaining term to maturity of the retail brokered CDs outstanding as of December 31, 2015 is approximately 1.1
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 2015, the Corporation issued $1.0 billion in brokered CDs with an average cost of 1.11%.
The following table presents a maturity summary of brokered and retail CDs with denominations of $100,000 or
higher as of December 31, 2015:
(In thousands)
Three months or less
Over three months to six months
Over six months to one year
Over one year
Total
Total
$
$
582,382
476,439
1,180,805
1,387,823
3,627,449
104
Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $2.1 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.
Government deposits - As of December 31, 2015, the Corporation had $390.4 million of public sector deposits in Puerto Rico ($336.5
million in transactional accounts and $53.9 million in time deposits) compared to $227.4 million as of December 31, 2014.
Approximately 45% came from municipalities and municipal agencies in Puerto Rico and 55% came from public corporations and the
central government and agencies. The Doral Bank transaction added $41.3 million in government deposits as of December 31, 2015.
In addition, as of December 31, 2015, the Corporation had $186.9 million of government deposits in the Virgin Islands, compared
to $173.3 million as of December 31, 2014.
Retail deposits – The Corporation’s deposit products also include regular savings accounts, demand deposit accounts, money market
accounts and retail CDs. On February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral and assumed $522.6 million in
deposits related to such branches. Total deposits, excluding brokered CDs and government deposits, increased by $467.2 million to
$6.7 billion from the balance of $6.2 billion as of December 31, 2014. Refer to Note 16 in the Corporation’s audited financial
statements for the year ended December 31, 2015 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, 2015, 2014 and 2013.
Borrowings
As of December 31, 2015, total borrowings amounted to $1.38 billion as compared to $1.46 billion and $1.43 billion as of
December 31, 2014 and 2013, respectively.
The following table presents the composition of total borrowings as of the dates indicated:
(Dollars in thousands)
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, 2015
As of December 31,
2015
2014
2013
2.73% $
1.30%
3.16%
$
700,000 $
455,000
226,492
1,381,492 $
900,000 $
325,000
231,959
1,456,959 $
900,000
300,000
231,959
1,431,959
2.53%
2.72%
2.62%
(1) Includes borrowings of $826.5 million as of December 31, 2015 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,
2015 and 2014. 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. 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 17 in the Corporation’s audited financial
statements for the period ended December 31, 2015 included in Item 8 of this Form 10-K for further details about repurchase
agreements outstanding by counterparty and maturities.
105
During 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. 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 are presented net on the consolidated statement of financial condition. In addition, during the first quarter of 2015, the
Corporation restructured an additional $200 million of its repurchase agreements with a different 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.
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, 2015 and 2014, the outstanding balance of FHLB advances was $455.0 and $325.0 million, respectively. The
Corporation had $641.6 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 financing 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 financing 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 were required to fully phase out these instruments from Tier I capital
by January 1, 2016 (25% allowed in 2015 and 0% in 2016), however they may remain in Tier 2 capital until the instruments are
redeemed or mature. As of December 31, 2015, the Corporation had $220 million in trust preferred securities that are subject to the
phase-out from Tier 1 Capital under the Basel III Final Rule.
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During the second quarter of 2015, the Corporation issued 852,831 shares of the Corporation’s common stock in exchange for $5.3
million of trust preferred securities (FBP Statutory Trust I), which enabled the Corporation to cancel $5.5 million of the carrying value
of the debentures underlying the purchased trust preferred securities. This transaction resulted in a gain of $0.3 million resulting from
the difference between the carrying value of the trust preferred securities exchanged and the fair value of the common stock issued,
included as part of other income in the consolidated statement of income. The Corporation surrendered the trust preferred securities,
resulting in a commensurate reduction in the related Floating Rate Junior Subordinated Debenture.
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 $28.7 million as of
December 31, 2015, included as part of accounts payable and other liabilities in the consolidated statement of financial condition.
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.
During the first quarter of 2016, the Corporation completed the repurchase of trust preferred securities that were being auctioned in
a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled $10 million in trust
preferred securities of the FBP Statutory Trust II, resulting in a commensurate reduction in the related Floating Rate Junior
Subordinated Debenture.
The Corporation’s winning bid equated to 70% of the $10 million par value. The 30% discount, plus accrued interest, resulted in a
pre-tax gain of approximately $4.2 million. As trust preferred securities no longer qualify for Tier 1 capital, the realized gain on the
transaction contributed to an increase of approximately 5 basis points in the Common Equity Tier 1 and Tier 1 capital ratios, an
increase of approximately 4 basis point in the Leverage capital ratio, and a decrease of approximately 6 basis points in the Total
Regulatory capital ratio.
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 from GNMA to issue GNMA mortgage-backed securities from GNMA, and, under this
program, the Corporation completed the securitization of approximately $286.0 million of FHA/VA mortgage loans into GNMA MBS
during 2015. Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary mortgage market.
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.
107
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 $752.5 million as of December 31, 2015, a decrease of $43.7 million when compared to the balance
as of December 31, 2014, while, as of December 31, 2014, the total balance of cash and cash equivalents amounted to $796.1 million,
an increase of $140.4 million from December 31, 2013. The following discussion highlights the major activities and transactions that
affected the Corporation’s cash flows during 2015 and 2014.
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 2015 and 2014, net cash provided by operating activities was $261.9 million and $264.4 million, respectively. Net cash
generated from operating activities was higher than reported net income largely as a result of adjustments for operating items such as
the provision for loan and lease losses, depreciation and amortization, and impairments as well as the cash generated from sales of
loans held for sale.
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, 2015, net cash provided by investing
activities was $439.0 million, primarily reflecting the net cash received in the Doral Bank transaction, proceeds from the bulk sale of
assets and repayments of commercial and consumer loans.
For the year ended December 31, 2014, net cash used in investing activities was $254.7 million, primarily reflecting principal
repayments on loans held for investment and available-for-sale 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, 2015, net cash used in financing activities was $744.5 million, mainly due to the repayments of maturing brokered CDs
and funds used for the aforementioned $200 million reverse repurchase agreements entered into in 2015.
During 2014, net cash used in financing activities was $378.6 million, mainly due to the reduction of brokered CDs and deposit
withdrawals by certain government entities and public corporations in Puerto Rico.
Capital
As of December 31, 2015, the Corporation’s stockholders’ equity was $1.7 billion, an increase of $22.4 million from December 31,
2014. The increase was mainly driven by the net income of $21.3 million for 2015 and the exchange of $5.3 million of trust preferred
securities for shares of the Corporation’s common stock, partially offset by a $9.4 million decrease in other comprehensive income. 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.
New U.S. regulatory capital requirements (the “Basel III rules”) have introduced new minimum capital ratios and capital
conservation buffer requirements, change the composition of regulatory capital, required a number of new adjustments to and
deductions from regulatory capital, and introduced a new “Standardized Approach” for the calculation of risk-weighted assets. 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 phase-in period for certain deductions and adjustments to
regulatory capital began on January 1, 2015 and will be completed on January 1, 2018.
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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, were allowed to make a one-time permanent election in early 2015 to continue to exclude AOCI items.
The Corporation and FirstBank elected to permanently exclude capital in AOCI 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 require the Corporation to maintain an additional CET1 capital conservation buffer of 2.5%. Under the fully phased-in 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%, (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%, (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%, 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 phase-in of the capital conservation
buffer began 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 certain intangible assets, and deferred tax assets dependent upon future taxable income; the four-year phase-in period for
these adjustments generally began on January 1, 2015. Mortgage servicing assets and deferred tax assets attributable to temporary
differences, among others, are 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, under the Basel III rules banking organizations such as the Corporation were required to phase out TRuPs from Tier 1
capital beginning on January 1, 2015. The Corporation’s 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 Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules. The
Standardized Approach for risk-weightings has expanded the risk-weighting categories from the four major risk-weighting categories
under the previous 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 results in higher risk weights for a variety of
asset categories. Specific changes to the risk-weightings of assets include, among other things: (i) applying a 150% risk weight instead
of a 100% risk weight for 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%), (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 and (iv)
requiring capital to be maintained against on-balance-sheet and off-balance-sheet exposures that result from certain cleared
transactions, guarantees and credit derivatives, and collateralized transactions (such as repurchase agreement transactions).
109
Set forth below are First BanCorp.'s and FirstBank's regulatory capital ratios as of December 31, 2015 and December 31,
2014:
Banking Subsidiary
As of December 31, 2015
Total capital ratio (Total capital to risk-weighted assets)
Common Equity Tier 1 capital ratio
First BanCorp.
Fully
FirstBank
Fully
Actual (1) Phased-in (2) Actual (1) Phased-in (2)
20.01%
19.44%
19.18%
19.73%
(Common equity Tier 1 capital to risk weighted assets) (3)
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)
Leverage ratio
16.92%
16.92%
12.22%
15.44%
15.83%
11.69%
16.35%
18.45%
13.33%
14.61%
17.91%
13.24%
To be well
capitalized
10.00%
6.50%
8.00%
5.00%
As of December 31, 2014 (1)
Total capital (Total capital to risk-weighted assets)
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)
Leverage ratio
Banking Subsidiary
First BanCorp.
FirstBank
19.70%
18.44%
13.27%
19.37%
18.10%
13.04%
To be well
capitalized
10.00%
6.00%
5.00%
(1) Ratios as of December 31, 2015 reflect the adoption of the Basel III Capital Rules in effect beginning January 1, 2015. The ratios for December 31, 2014
represent the applicability previous capital rules under Basel I.
(2) Certain adjustments required under the Basel III capital rules will be phased in through the end of 2018. The ratios shown in this column are calculated
assuming a fully phased-in basis of all such adjustments as if they were effective as of December 31, 2015.
(3) As of December 31, 2015, Common Equity Tier 1 capital ratio is a new ratio requirement under the Basel III capital rules and represents common equity, less
goodwill and intangible assets, divided by risk-weighted assets (subject to phase-in adjusments as indicated in footnote (2) above).
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 for the Corporation through the Federal Reserve’s Dodd-Frank Act Stress Testing program
(DFAST). Consistent with the requirements of these programs, the Corporation submitted its first annual company-run stress test to
regulators prior to the established deadline of March 31, 2015. The results for the severely adverse economic scenario are available on
the Corporation’s website. The results show that even in a severely adverse economic environment, the Corporation’s and the Bank’s
capital ratios exceed the well-capitalized thresholds throughout the nine-quarter horizon.
The tangible common equity ratio and tangible book value per common share are non-GAAP financial 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.
110
The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets for the years ended
December 31, 2015 and 2014, respectively:
(In thousands, except ratios and per share information)
December 31,
2015
December 31,
2014
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
$
$
$
$
$
1,694,134
(36,104)
(28,098)
(13,319)
(9,166)
1,607,447
12,573,019
(28,098)
(13,319)
(9,166)
12,522,436
215,089
12.84%
7.47
$
$
$
$
$
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
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 2015, $2.8 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 to $42.8 million as of December 31, 2015
(2014 - $40.0 million).
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, 2015, commitments to extend credit and commercial and financial standby letters of credit amounted to
approximately $1.1 billion (including $643.2 million pertaining to credit card loans) and $27.9 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 the execution of interest rate lock agreements with prospective borrowers in connection with mortgage
banking activities.
111
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:
(In thousands)
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, 2015
Total
Less than 1 year
1-3 years
3-5 years
After 5 years
$
4,453,728
$
2,751,040
$
1,550,276
$
133,772
$
18,640
400,000
100,000
-
10,175
34,347
3,295,562
100,000
225,000
-
18,087
46,836
1,940,199
$
$
-
130,000
-
13,680
22,338
299,790
$
200,000
-
226,492
46,166
5,139
496,437
$
700,000
455,000
226,492
88,108
108,660
6,031,988
49,998
3,577
1,048,811
24,359
59,747
1,132,917
$
$
$
$
$
(1) Reported net of reverse repurchase agreements by counterparties, when applicable, pursuant to ASC 210-20-45-11.
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, loan originations pipeline, 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
112
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 most 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, U.S. Treasury, FHLB rates, brokered CD rates, repurchase agreements rates and the mortgage
commitment rate of 30 years.
The 12-month net interest income is forecasted assuming the December 31, 2015 interest rate curves remain constant. Then, net
interest income is estimated under rising and falling rate scenarios. For the rising rate scenario, a gradual (ramp) parallel upward shift
of the yield curve is assumed during the first twelve months (the “+200 ramp” scenario). Conversely, for the falling rate scenario, a
gradual (ramp) parallel downward shift of the yield curve 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, 2015, as compared to December 2014, reflected a 33 basis points increase in the short-
term horizon, between one to twelve months, while market rates increased by 9 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 9 basis points. The U.S. Treasury curve in the
short-term increased by 26 point basis and in the medium-term horizon increased 38 basis points as compared to December 2014 end
of month levels. The long-term horizon increased by 15 basis points as compared to December 2014 end of month levels.
The following table presents the results of the simulations as of December 31, 2015 and December 31, 2014. Consistent with prior
years, these exclude non-cash changes in the fair value of derivatives:
December 31, 2015
Net Interest Income Risk
(Projected for the next 12 months)
December 31, 2014
Net Interest Income Risk
(Projected for the next 12 months)
Static Simulation
Growing Balance Sheet
Static Simulation
Growing Balance Sheet
(Dollars in millions)
+ 200 bps ramp
- 200 bps ramp
Change
% Change
Change
% Change
Change
% Change
Change
$
$
12.6
(7.8)
2.51 % $
(1.55)% $
14.2
(8.7)
2.81 % $
(1.72)% $
9.6
(8.2)
1.88 % $
(1.60)% $
9.8
(9.3)
% Change
1.90 %
(1.80)%
The Corporation continues to manage its balance sheet structure to control the overall interest rate risk. As part of the strategy to
limit the interest rate risk, the Company has executed certain transactions that affected the simulation results. The composition of the loan
portfolio changed with commercial and construction loans decreasing by $213.2 million, mainly due to the bulk sale of assets and certain
large repayments and foreclosures, and consumer loans decreasing by $155.4 million, while mortgage loans increased by $339.0 million
mainly due to the residential mortgage loans acquired from Doral Bank. Other transactions completed in 2015 include the reduction in
brokered CDs and the restructuring of $400 million of repurchase agreements, including $200 million in reverse repurchase agreements
entered into in 2015 under a master netting agreement with an existing counterparty.
Taking into consideration the above-mentioned facts for modeling purposes, the net interest income for the next twelve months under a
non-static balance sheet scenario is estimated to increase by $14.2 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 $8.7 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:
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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, 2015, the Corporation has no
interest rate swaps outstanding. In the past, most of the interest rate swaps outstanding were 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
timeframe 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 31 in the Corporation’s audited financial statements for the year ended December 31, 2015 included in Item 8 of this
Form 10-K.
The following tables summarize the fair value changes in the Corporation’s derivatives as well as the sources of the fair values:
(In thousands)
Fair value of contracts outstanding at the beginning
of the year
Fair value of new contracts entered into during the period
Changes in fair value during the year
Fair value of contracts outstanding as of
December 31, 2015
$
$
Asset Derivatives
Year Ended
December 31, 2015
Liability Derivatives
Year Ended
December 31, 2015
39
1,098
(331)
806
$
$
(187)
(1,229)
495
(921)
Sources of Fair Value
(In thousands)
As of December 31, 2015
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
$
$
-
$
15
$
791
$
(123)
(123) $
(14)
1
$
(784)
7
$
-
-
-
$
$
806
(921)
(115)
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.
114
As of December 31, 2015 and 2014, all of the derivative instruments held by the Corporation were considered economic
undesignated 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 31 of the Corporation’s audited financial statements for the year ended December 31, 2015 included in Item 8 of this
Form 10-K for additional information regarding the fair value determination of derivative instruments.
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.
115
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.
The ratio of the allowance for loan losses to total loans held for investment increased to 2.60% as of December 31, 2015 from
2.40% 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 increased from 2.57% as of December 31, 2014 to 2.86% at December 31, 2015; the
allowance to total loans for the commercial mortgage portfolio increased from 3.06% at December 31, 2014 to 4.44% at December 31,
2015; the allowance to total loans for the construction loan portfolio decreased from 10.38% at December 31, 2014 to 2.25% at
December 31, 2015; the allowance to total loans for the residential mortgage portfolio increased from 0.91% at December 31, 2014 to
1.18% at December 31, 2015; and the allowance to total consumer loans and finance leases decreased from 3.41% as of December 31,
2014 to 3.32% as of December 31, 2015.
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 shown in the following table, the allowance for loan and lease losses amounted to $240.7 million as of December 31, 2015, or
2.60% of total loans, compared with $222.4 million, or 2.40% of total loans, as of December 31, 2014. Refer to “Provision for Loan
and Lease Losses” above for additional details, including information about the adjustments to qualitative factors that stressed the historical
loss rates applied to the Corporation’s exposure to commercial loans extended to or guaranteed by the Puerto Rico Government in light of
recent events surrounding the Government’s fiscal situation and the incorporation of the charge-offs on the bulk sale of assets completed in
the second quarter of 2015 in the calculation of historical loss rates.
116
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,
(Dollars in thousands)
Allowance for loan and lease losses,
beginning of year
Provision (release) for loan and lease losses:
Residential mortgage (1)
Commercial mortgage (2)
Commercial and Industrial (3)
Construction (4)
Consumer and finance leases
Total provision for loan and lease losses (5)
Charge-offs:
Residential mortgage (6)
Commercial mortgage (7)
Commercial and Industrial (8)
Construction (9)
Consumer and finance leases
Total charge offs (10)
Recoveries:
Residential mortgage
Commercial mortgage (11)
Commercial and Industrial (12)
Construction (13)
Consumer and finance leases
Total recoveries (14)
Net charge-offs
Allowance for loan and lease losses, end
of year
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 net charge-offs related to the
bulk sale of assets ($61.4 million) in 2015, the acquisition of
mortgage loans from Doral Financial ($6.9 million) in 2014 and bulk
loan sales and loans transferred to held for sale ($232.4 million)
in 2013, to average loans outstanding during the year (15)
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 the impact of the bulk sale of assets
in 2015, the acquisition of mortgage loans from Doral Financial in 2014,
and bulk loan sales and the loans transferred
to held for sale in 2013 (15)
2015
2014
2013
2012
2011
$
222,395
$
285,858
$
435,414
$
493,917
$
553,025
30,377
66,884
34,575
(6,891)
47,100
172,045
(19,317)
(56,101)
(33,844)
(4,994)
(62,465)
(176,721)
1,209
6,534
4,316
2,582
8,350
22,991
(153,730)
17,487
(7,076)
36,681
(17,508)
79,946
109,530
(24,345)
(25,807)
(61,935)
(11,533)
(76,696)
(200,316)
1,049
10,639
3,680
6,049
5,906
27,323
(172,993)
92,755
38,048
43,608
15,461
53,879
243,751
(129,164)
(67,457)
(109,849)
(43,323)
(63,108)
(412,901)
1,165
4,855
4,636
2,076
6,862
19,594
(393,307)
36,531
(778)
38,773
10,955
35,018
120,499
(37,944)
(21,779)
(49,521)
(45,008)
(43,735)
(197,987)
1,089
810
3,605
4,267
9,214
18,985
(179,002)
45,339
54,513
78,711
40,174
17,612
236,349
(39,826)
(51,207)
(69,783)
(103,131)
(45,478)
(309,425)
835
90
2,921
2,371
7,751
13,968
(295,457)
$
240,710
$
222,395
$
285,858
$
435,414
$
493,917
2.60%
2.40%
2.97%
4.33%
4.68%
1.65%
1.81%
4.01%
1.74%
2.68%
1.00%
1.74%
1.68%
1.74%
2.68%
1.12x
0.63x
0.62x
0.67x
0.80x
1.36x
0.65x
0.69x
0.67x
0.80x
_________
(1)
(2)
Includes a provision totaling $68.8 million associated with the bulk loan sales in 2013.
Includes a provision totaling $33.8 million associated with the bulk sale of assets in 2015 and a provision totaling $28.7 million associated with
the bulk loan sales and the transfer of loans to held for sale in 2013.
Includes a provision of $10.8 million associated with the bulk sale of assets in 2015, a provision totaling $1.4 million associated with the acquisition of
mortgage loans from Doral Financial in 2014, and a provision of $20.8 million associated with the bulk loan sales in 2013.
Includes a provision totaling $2.4 million associated with the bulk sale of assets in 2015 and a provision totaling $13.6 million associated
with the bulk loan sales in 2013.
Includes a provision totaling $46.9 million associated with the bulk sale of assets in 2015, a provision of $1.4 million associated with the acquisition of
mortgage loans from Doral Financial in 2014, and a provision of $132.0 million associated with the bulk loan sales and the transfer of loans to held for sale in 2013.
(3)
(4)
(5)
117
(6)
(7)
(8)
(9)
Includes charge-offs totaling $99.0 million associated with the bulk loan sales in 2013.
Includes charge-offs totaling $43.2 million associated with the bulk sale of assets in 2015 and charge-offs totaling $54.6 million associated with
the bulk loan sales and the transfer of loans to held for sale in 2013.
Includes charge-offs totaling $22.6 million associated with the bulk sale of assets in 2015, charge-offs totaling $6.9 million associated with the acquisition of
mortgage loans from Doral Financial in 2014, and charge-offs of $44.7 million associated with the bulk loan sales in 2013.
Includes charge-offs totaling $4.1 million associated with the bulk sale of assets in 2015 and charge-offs totaling $34.2 million associated with
the bulk loan sales and the transfer of loans to held for sale in 2013.
(10) Includes charge-offs totaling $69.8 million associated with the bulk sale of assets in 2015, charge-offs totaling $6.9 million associated with the acquisition of
mortgage loans from Doral Financial in 2014, and charge-offs of $232.4 million associated with the bulk loan sales and the transfer of loans to held for sale in 2013.
(11) Includes recoveries of $5.6 million associated with the bulk sale of assets in 2015.
(12) Includes recoveries of $2.0 million associated with the bulk sale of assets in 2015.
(13) Includes recoveries of $0.8 million associated with the bulk sale of assets in 2015.
(14) Includes recoveries of $8.4 million associated with the bulk sale of assets in 2015.
(15) Refer to "Overview of Results of Operations" above and "Basis of Presentation" below for reconciliations of these measures.
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:
2015
2014
2013
2012
2011
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
Amount
Percent
of loans
in each
category
to total
loans
Amount
$
39,570
36% $
27,301
33% $
33,110
27% $
68,354
27% $
68,678
27%
68,211
3,519
16%
2%
50,894
12,822
18%
1%
73,138
35,814
19%
2%
97,692
61,600
19%
4%
108,992
91,386
15%
4%
68,768
26%
63,721
27%
85,295
31%
146,900
30%
164,490
39%
60,642
20%
67,657
21%
58,501
21%
60,868
20%
60,371
$ 240,710
100% $ 222,395
100% $ 285,858
100% $ 435,414
100% $ 493,917
15%
100%
(Dollars in thousands)
Residential mortgage loans
Commercial mortgage
loans
Construction loans
Commercial and
Industrial loans
(including loans to
local financial
institutions prior
to 2014)
Consumer loans and
finance leases
118
The following table sets forth information concerning the composition of the Corporation's allowance for loan and lease losses as
of December 31, 2015 and 2014 by loan category and by whether the allowance and related provisions were calculated individually
or through a general valuation allowance:
As of December 31, 2015
(Dollars in thousands)
Impaired loans without specific reserves:
Residential
Mortgage Loans
Commercial
Mortgage Loans
C&I Loans
Construction
Loans
Consumer and
Finance Leases
Total
Principal balance of loans, net of charge-offs
$
65,495
$
54,048
$
27,492
$
42,512
$
2,618
$
192,165
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, 2014
Impaired loans without specific reserves:
395,173
21,787
27,479
3,073
143,214
18,096
11,004
1,202
37,474
8,423
614,344
52,581
5.51 %
11.18 %
12.64 %
10.92 %
22.48 %
8.56 %
170,766
3,837
2.25 %
3,147
125
3.97 %
-
-
-
-
-
-
-
-
-
173,913
3,962
2.28 %
2,713,285
13,946
1,453,132
65,013
2,237,290
50,672
102,679
2,317
1,787,057
52,219
8,293,443
184,167
0.51 %
4.47 %
2.26 %
2.26 %
2.92 %
2.22 %
$
3,344,719
39,570
$
1,537,806
68,211
$
2,407,996
68,768
$
156,195
3,519
$
1,827,149
60,642
$
9,273,865
240,710
1.18 %
4.44 %
2.86 %
2.25 %
3.32 %
2.60 %
Residential
Mortgage Loans
Commercial
Mortgage Loans
C&I Loans
Construction
Loans
Consumer and
Finance Leases
Total
Principal balance of loans, net of charge-offs
$
74,177
$
109,271
$
41,131
$
10,455
$
3,778
$
238,812
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)
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 %
(1) Loans used in the denominator include PCI loans of $173.9 million and $102.6 million as of December 31, 2015 and 2014, respectively.
However, the Corporation separately tracks and reports PCI loans and excludes these loans from statistics for non-performing loans,
impaired loans, TDRs and non-performing assets.
119
The following tables show the activity for impaired loans held for investment and the related specific reserve during
2015, 2014 and 2013:
(In thousands)
Impaired Loans:
Balance at beginning of year
Loans determined impaired during the year
Charge-offs
Loans sold, net of charge-offs
Loans transferred from (to) held for sale
Increases to impaired loans - additional disbursements
Foreclosures
Loans no longer considered impaired
Paid in full or partial payments
2015
2014
2013
$
945,407
$
919,112
1,465,294
160,837
(99,023)
(67,836)
40,005
3,340
(57,728)
(46,489)
(72,004)
306,390
(106,154)
(4,500)
-
5,028
(40,582)
(22,333)
(111,554)
280,860
(307,428)
(201,409)
(145,415)
6,624
(45,094)
(49,299)
(85,021)
919,112
Balance at end of year
$
806,509
$
945,407
(In thousands)
Specific Reserve:
Balance at beginning of year
Provision for loan losses
Net charge-offs
Balance at end of year
2015
2014
2013
$
$
55,205
91,515
$
102,601
$
221,749
58,758
188,280
(94,139)
(106,154)
(307,428)
52,581
$
55,205
102,601
Non-performing Loans and Non-performing Assets
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.
Purchased Credit Impaired 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, TDR loans, and non-performing assets statistics.
120
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 the outstanding 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.
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 and 2015.
TDR loans 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.
121
The following table presents non-performing assets as of the dates indicated:
(Dollars in thousands)
Non-performing loans held for investment:
Residential mortgage
Commercial mortgage
Commercial and industrial
Construction (1)
Finance leases
Consumer
Total non-performing loans held for
investment
OREO
Other repossessed property
Other assets (2)
Total non-performing assets,
excluding loans held for sale
Non-performing loans held for sale (1)
Total non-performing assets,
including loans held for
sale (3)(4)
Past due loans 90 days and still
accruing (5) (6)
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
2015
2014
2013
2012
2011
$
$
$
$
169,001
51,333
137,051
54,636
2,459
28,293
442,773
146,801
12,223
-
601,797
8,135
$
180,707
148,473
122,547
29,354
5,245
37,570
523,896
124,003
14,229
-
662,128
54,641
$
$
161,441
120,107
114,833
58,866
3,082
37,220
495,549
160,193
14,865
-
670,607
54,801
313,626
214,780
230,090
178,190
3,182
35,693
975,561
185,764
10,107
64,543
1,235,975
2,243
338,208
240,414
270,171
250,022
3,485
36,062
1,138,362
114,292
15,392
64,543
1,332,589
4,764
609,932
$
716,769
$
725,408
$
1,238,218
$
1,337,353
163,197
$
162,887
$
120,082
$
142,012
$
4.85 %
5.63 %
5.73 %
9.45 %
130,816
10.19 %
4.77 %
5.66 %
5.14 %
9.70 %
$
240,710
$
222,395
$
285,858
$
435,414
$
10.78 %
493,917
54.36 %
42.45 %
57.69 %
44.63 %
43.39 %
loans held for investment,
excluding residential real estate
loans
_________
(1) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to sell a $40.0 million construction
loan in the Virgin Islands. Accordingly, the loan was transferred back from held for sale to held for investment and continues to be classified as a TDR and
a non-performing loan.
64.80 %
65.78 %
85.56 %
87.92 %
61.73 %
(2) Collateral pledged to Lehman.
(3) Purchased credit impaired loans accounted for under ASC 310-30 of $173.9 million and $102.6 million as of December 31, 2015 and December 31,
2014, 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.
(4) Non-performing assets exclude $414.9 million and $494.6 million of TDR loans that are in compliance with the modified terms and in accrual
status as of December 31, 2015 and 2014, respectively.
(5) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past due loans 90 days
and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $37.3 million of residential
mortgage loans insured by the FHA or guaranteed by the VA, which are over 15 months delinquent, that are no longer accruing interest as of
December 31, 2015. Based on an update to the analysis of historical collections from these agencies, the Corporation modified its income recognition policy
on FHA/VA loans during the fourth quarter of 2015. Previously, the Corporation discontinued the recognition of interest income on these loans
when they were 18-months delinquent as to principal or interest.
(6) Amount includes purchased credit impaired loans with individual delinquencies over 90 days and still accruing with a carrying value as of
December 31, 2015 and December 31, 2014 of approximately $23.2 million and $15.7 million, respectively, primary related to loans acquired from
Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014.
122
The following table shows non-performing assets by geographic segment:
2015
2014
2013
2012
2011
(Dollars in thousands)
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 (3)
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 (3)
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
$
$
$
$
$
$
$
$
$
147,975
34,917
131,450
11,894
2,459
26,329
355,024
133,121
12,115
-
500,260
8,135
508,395
154,915
14,228
10,073
5,601
42,590
471
72,963
5,458
32
78,453
-
78,453
8,173
6,798
6,343
-
152
1,493
14,786
8,222
76
23,084
$
$
$
$
$
$
$
$
$
156,361
121,879
116,301
24,526
5,245
35,286
459,598
111,041
14,150
-
584,789
14,636
599,425
154,375
15,483
11,770
6,246
4,064
887
38,450
6,967
22
45,439
40,005
85,444
5,281
8,863
14,824
-
764
1,397
25,848
5,995
57
31,900
$
$
$
$
$
$
$
$
$
139,771
101,255
109,224
43,522
3,082
34,660
431,514
123,851
14,806
-
570,171
14,796
584,967
118,097
8,439
6,827
5,609
11,214
514
32,603
14,894
5
47,502
40,005
87,507
1,985
13,231
12,025
-
4,130
2,046
31,432
21,448
54
52,934
$
$
$
$
$
$
$
$
$
281,086
172,534
215,985
99,383
3,182
32,529
804,699
145,683
10,070
64,543
1,024,995
2,243
1,027,238
137,288
18,054
11,232
12,905
72,648
804
115,643
24,260
17
139,920
-
139,920
4,068
14,486
31,014
1,200
6,159
2,360
55,219
15,821
20
71,060
$
$
109
3,231
Past-due loans 90 days and still accruing
________
(1) Purchased credit impaired loans accounted for under ASC 310-30 of $173.9 million and $102.6 million as of December 31, 2015 and December 31, 2014,
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, 2015 and December 31, 2014 of approximately $23.2 million and $15.7 million, respectively, primarily related to loans acquired
from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014.
(3) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its instead to sell a $40.0 million construction
loan in the Virgin Islands. Accordingly, it was transferred back from held for sale to held for investment and continues to be classified as a TDR and a
non-performing loan.
656
$
$
-
$
$
$
$
$
$
$
$
$
$
297,595
170,949
261,189
137,478
3,485
34,888
905,584
85,788
15,283
64,543
1,071,198
4,764
1,075,962
118,888
11,470
12,851
7,276
110,594
518
142,709
7,200
67
149,976
-
149,976
11,204
29,143
56,614
1,706
1,950
656
90,069
21,304
42
111,415
724
123
Total non-performing loans, including non-performing loans held for sale, were $450.9 million as of December 31, 2015. This
represents a decrease of $127.6 million, or 22%, from $578.5 million as of December 31, 2014. The decrease was driven by the bulk
sale of assets that included $91.9 million of non-performing commercial and construction loans, the restoration to accrual status of a
$24.5 million commercial mortgage facility in Puerto Rico after consideration of the borrower’s sustained historical repayment
performance and credit evaluation, the repossession of the underlying collateral related to two non-performing commercial mortgage
loans totaling $27.9 million, and decreases of $11.7 million and $12.1 million in non-performing residential mortgage and consumer
loans, partially offset by the inflow to non-performing status in the first quarter of the $75.0 million credit facility with PREPA ($71.1
million book value as of December 31, 2015). The remainder of the decrease reflects charge-offs, commercial loans brought current,
and cash collections.
Non-performing commercial mortgage loans, including non-performing commercial mortgage loans held for sale, decreased by
$104.0 million, or 67%, from December 31, 2014. The decrease was primarily attributable to the bulk sale of assets that included
$40.9 million of non-performing commercial mortgage loans, the aforementioned $24.5 million credit facility restored to accrual
status and the two commercial mortgage loans totaling $27.9 million transferred to the OREO portfolio. Additional reductions were
primarily due to loans brought current, including $5.1 million associated with two relationships, cash collections that included the
disposition through a short sale of a $6.3 million loan and charge-offs. Total inflows of non-performing commercial mortgage loans
of $18.5 million during 2015 decreased by $71.7 million compared to $90.2 million for 2014.
Non-performing C&I loans increased by $14.5 million compared to December 31, 2014, driven by the inflow of the $75.0 million
facility to PREPA (book value $71.1 million as of December 31, 2015), partially offset by the $39.9 million of non-performing C&I
loans included in the bulk sale of assets. Total inflows of non-performing C&I loans were $91.2 million for 2015. Excluding the
aforementioned PREPA credit facility, total inflows were $16.2 million for 2015 compared to inflows of $95.1 million for the same
period in 2014.
Non-performing construction loans, including non-performing construction loans held for sale, decreased by $14.4 million, or 19%,
from December 31, 2014. The decrease was primarily attributable to the bulk sale of assets that included $11.1 million of non-
performing construction loans. The inflows of non-performing construction loans of $0.9 million during 2015 decreased by $1.9
million compared to inflows of $2.8 million for 2014.
The following tables present the activity of commercial and construction non-performing loans held for investment:
(In thousands)
Year ended December 31, 2015
Beginning balance
Plus:
Additions to non-performing
Less:
Loans returned to accrual status
Non-performing loans transferred to OREO
Non-performing loans charge-offs
Loan collections
Reclassification from loans held for sale
Other reclassification
Non-performing loans sold, net of charge offs
Ending balance
$
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
$
148,473
$
122,547
$
29,354
$
300,374
18,532
91,244
866
110,642
(31,734)
(27,099)
(28,724)
(10,832)
81
398
(17,762)
51,333
(1,149)
(8,429)
(28,789)
(15,686)
-
-
$
(22,687)
137,051
$
(303)
(943)
(4,937)
(2,182)
40,005
(249)
(6,975)
54,636
$
(33,186)
(36,471)
(62,450)
(28,700)
40,086
149
(47,424)
243,020
124
(In thousands)
Year ended December 31, 2014
Beginning balance
Plus:
Additions to non-performing
Less:
Loans returned to accrual status
Non-performing loans transferred to OREO
Non-performing loans charge-offs
Loan collections
Reclassification
Non-performing loans sold, net of charge-offs
Ending balance
$
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
$
120,107
$
114,833
$
58,866
$
293,806
90,153
95,110
2,833
188,096
(2,609)
(22,984)
(24,947)
(7,782)
1,035
(4,500)
148,473
$
(8,566)
(7,344)
(46,786)
(23,665)
(1,035)
-
122,547
(11,461)
(3,086)
(11,147)
(6,651)
-
-
$
29,354
$
(22,636)
(33,414)
(82,880)
(38,098)
-
(4,500)
300,374
The following table presents the activity of commercial and construction non-performing loans held for sale:
(In thousands)
Year ended December 31, 2015
Beginning balance
(Less) add:
Collections
Reclassification to loans held for investment
Non-performing loans sold
Lower of cost or market adjustment
Ending balance
(In thousands)
Year ended December 31, 2014
Beginning balance
Less:
Loan collections
Ending balance
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
$
$
$
$
6,839
$
(55)
(81)
(6,556)
(147)
-
$
-
-
-
-
-
-
Commercial
Mortgage
Commercial &
Industrial
6,999
$
(160)
6,839
$
-
-
-
$
$
$
$
47,802
$
54,641
-
(40,005)
-
338
8,135
$
(55)
(40,086)
(6,556)
191
8,135
Construction
Total
47,802
$
54,801
-
47,802
$
(160)
54,641
125
Non-performing commercial and construction loans held for sale decreased to $8.1 million as of December 31, 2015 from $54.6
million as of December 31, 2014, due to the aforementioned reclassification of a $40.0 million construction loan back to held for
investment upon the signing of a new agreement with the borrower and the sale of a $6.6 million non-performing commercial
mortgage loan held for sale included in the bulk sale of assets.
Total non-performing commercial and construction loans, including non-performing loans held for sale, with a book value of
$251.2 million as of December 31, 2015 are being carried at 57.9% of unpaid principal balance, net of reserves and accumulated
charge-offs.
Non-performing residential mortgage loans decreased by $11.7 million, or 6%, from December 31, 2014. The decrease was
mainly driven by loans brought current, modifications through a TDR after a sustained performance period, charge-offs, foreclosures
and cash collections during 2015, partially offset by inflows of $91.8 million. The inflows of non-performing residential mortgage
loans of $91.8 million during 2015 decreased compared to inflows of $128.1 million for 2014. Approximately $53.6 million, or 32%
of total non-performing residential mortgage loans, have been written down to their net realizable value.
The following table presents the activity of residential non-performing loans held for investment in 2015 and 2014:
Year ended
Year ended
December 31, 2015
December 31, 2014
(In thousands)
Beginning balance
Plus:
Additions to non-performing
Less:
Loans returned to accrual status
Non-performing loans transferred to OREO
Non-performing loans charge-offs
Loan collections
Other reclassification
Ending balance
$
$
180,707 $
91,817
(52,564)
(29,940)
(13,972)
(6,808)
(149)
169,091 $
161,441
128,063
(71,851)
(9,095)
(17,965)
(9,886)
-
180,707
The amount of non-performing consumer loans, including finance leases, decreased by $12.1 million during 2015 mainly related
to charge-offs and collections, primarily in auto loans and boat financings. The inflows of non-performing consumer loans of $54.0
million decreased by $19.4 million compared to inflows of $73.4 million for 2014.
As of December 31, 2015, approximately $147.4 million of the loans placed in non-accrual status, mainly commercial loans, were
current, or had delinquencies of less than 90 days in their interest payments, including $118.2 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, 2015, interest income of approximately $5.4 million related to non-performing loans with a
carrying value of $245.4 million as of December 31, 2015, mainly non-performing construction and commercial loans, including the
credit facility with PREPA, was applied against the related principal balances under the cost-recovery method.
126
The allowance to non-performing loans held for investment ratio as of December 31, 2015 was 54.36%, compared to 42.45% as
of December 31, 2014. As of December 31, 2015, approximately $137.0 million, or 31%, 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, 2015
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
for investments
Allowance to non-performing loans held
for investments, excluding non-
performing loans charged off to
realizable value
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
$
53,612
$
15,190
$
27,492
$
39,466
$
1,282
$
137,042
115,389
36,143
109,559
15,170
29,470
305,731
$
169,001
$
51,333
$
137,051
$
54,636
$
30,752
$
442,773
23.41 %
132.88 %
50.18 %
6.44 %
197.20 %
54.36 %
34.29 %
188.73 %
62.77 %
23.20 %
205.78 %
78.73 %
$
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
25.63 %
81.24 %
77.85 %
55.33 %
164.44 %
70.52 %
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, 2015, the
Corporation’s total TDR loans of $661.6 million consisted of $382.7 million of residential mortgage loans, $150.3 million of
commercial and industrial loans, $44.5 million of commercial mortgage loans, $45.7 million of construction loans, and $38.4 million
of consumer loans.
The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of
the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments, 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.
127
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 TDR when the trial offer is made and continue to be classified as TDR regardless of whether the
borrower enters into a permanent modification. As of December 31, 2015, the Corporation classified an additional $6.7 million of
residential mortgage loans as TDR 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 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 SAG 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 are not considered to be concessions, and the loans
continue to be recorded as performing.
TDRs are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their
contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in
full under the restructured terms is expected, the loan may remain on accrual status. Otherwise, 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 loan 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.
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 limit 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.
128
The following table provides a breakdown of accrual and nonaccrual TDR loans:
(In thousands)
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage Loans
Commercial and Industrial Loans
Construction Loans:
Construction-Land
Construction-Commercial
Construction-Residential
Consumer Loans - Auto
Finance Leases
Consumer Loans - Other
Total Troubled Debt Restructurings
As of December 31, 2015
Accrual
Nonaccrual (1)
Total TDRs
$
$
303,885
29,121
48,392
924
-
3,046
14,823
1,980
12,737
414,908
$
$
78,787
15,377
101,862
1,842
39,466
436
6,759
97
2,057
246,683
$
$
382,672
44,498
150,254
2,766
39,466
3,482
21,582
2,077
14,794
661,591
(1)Included in nonaccrual loans are $118.2 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.
The OREO portfolio, which is part of non-performing assets, increased by $22.8 million. The following table shows the activity
during the year ended December 31, 2015 of the OREO portfolio by geographic region and type of property:
(In thousands)
Beginning Balance
Additions
Sales
Fair value adjustments
Ending balance
As of December 31, 2015
$
Puerto Rico
Virgin Islands
Residential Commercial Construction Residential Commercial Construction Residential Commercial Construction
1,723
$
-
-
(40)
1,683
25,667
35,766
(16,587)
(7,345)
37,501
74,532
32,771
(10,292)
(10,588)
86,423
10,841
1,581
(1,065)
(2,160)
9,197
648
1,711
(1,485)
(36)
838
3,264
4,144
(2,126)
(58)
5,224
6,206
385
(1,961)
(121)
4,509
1,008
367
-
(60)
1,315
114
-
-
(3)
111
Florida
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Consolidated
$
$
124,003
76,725
(33,516)
(20,411)
146,801
Net Charge-offs and Total Credit Losses
Total net charge-offs for 2015 were $153.7 million, or 1.65% of average loans, compared to net charge-offs of $173.0 million, or
1.81%, for 2014. The bulk sale of assets in 2015 and fair value adjustments related to mortgage loans acquired in 2014 from Doral in
full satisfaction of secured borrowings owed by such entity to FirstBank added $61.4 million and $6.9 million in net charge-offs in
2015 and 2014, respectively. Excluding the impact of net charge-offs related to the bulk sale in 2015 and net charge-offs related to the
acquisition of mortgage loans from Doral Financial in the second quarter of 2014, total net charge-offs in 2015 were $92.3 million, or
1.00% of average loans on an annualized basis, compared to $166.1 million, or an annualized 1.74%, for the same period in 2014,
reflecting decreases in all major loan categories.
C&I loans net charge-offs in 2015 totaled $29.5 million, or 1.23% of related average loans, compared to $58.3 million, or 2.13%,
for 2014. C&I loans net charge-offs in 2015 include $20.6 million associated with the bulk sale of assets and net charge-offs for 2014
include $6.9 million associated with the acquisition of mortgage loans from Doral. Excluding the impact of net charge-offs related to
the bulk sale in 2015 and the acquisition of mortgage loans from Doral in 2014, C&I net charge-offs for 2015 were $9.0 million, or
$42.4 million lower than net charge-offs of $51.4 million in 2014. Substantially all of the charge-offs recorded in 2015 were in Puerto
Rico.
Commercial mortgage loans net charge-offs in 2015 were $49.6 million, or 3.12% of related average loans, compared to $15.2
million, or 0.84%, for 2014. Commercial mortgage loans net charge-offs in 2015 included $37.6 million associated with the bulk sale
of assets. Excluding the impact of net charge-offs related to the bulk sale, commercial mortgage loans net charge-offs in 2015 were
$12.0 million, or $3.2 million lower than net charge-offs for 2014.
Construction loans net charge-offs in 2015 were $2.4 million, or 1.42% of related average loans, compared to $5.5 million, or
2.76%, for 2014. Construction loans net charge-offs in 2015 included $3.3 million of net charge-offs related to the bulk sale of assets.
Excluding the impact of net charge-offs related to the bulk sale, net recoveries on construction loans in 2015 were $0.9 million,
primarily reflecting loan loss recoveries of $1.6 million in the Florida region.
129
Residential mortgage loans net charge-offs in 2015 were $18.1 million, or 0.55% of related average loans, compared to $23.3
million, or 0.85%, for 2014. Approximately $11.3 million in charge-offs in 2015 resulted from valuations for impairment purposes of
residential mortgage loans considered homogeneous given high delinquency and loan-to-value levels, compared to $17.6 million for
2014. Net charge-offs on residential mortgage loans also included $6.6 million related to foreclosures, compared to $4.7 million for
2014.
Net charge-offs of consumer loans and finance leases in 2015 were $54.1 million, or 2.85% of related average loans, compared to
$70.8 million, or 3.46% of average loans, in 2014. The decrease is mainly attributable to the auto loan portfolio and to loan loss
recoveries of $2.7 million on the sale of certain loans that has been fully charged-off in prior periods.
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 (5)
Total loans (6)
2015
0.55 %
3.12 %
1.23 %
1.42 %
2.85 %
1.65 %
For the year ended December 31,
2013
2012
2014
0.85 %
0.84 %
2.13 %
2.76 %
3.46 %
1.81 %
4.77 %
3.44 %
3.52 %
15.11 %
2.76 %
4.01 %
1.32 %
1.41 %
1.21 %
10.49 %
1.92 %
1.74 %
2011
1.32 %
3.21 %
1.57 %
16.33 %
2.33 %
2.68 %
(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.
(2) Includes net charge-offs totaling $37.6 million associated with the bulk sale of assets in 2015. The ratio of commercial mortgage net charge-offs to average
loans, excluding net charge-offs associated with the bulk sale of assets, was 0.77% in 2015. Also 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.
(3) Includes net charge-offs totaling $20.6 million associated with the bulk sale of assets in 2015. The ratio of commercial and industrial net charge-offs to
average loans, excluding net charge-offs associated with the bulk sale of assets, was 0.38% in 2015. Includes net charge-offs totaling $6.9 million associated
with the acquisition of mortgage loans from Doral Financial 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 Financial, was 1.95% in 2014. Also 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.
(4) Includes net charge-offs totaling $3.3 million associated with the bulk sale of assets in 2015. The ratio of construction net charge-offs to average loans,
excluding net charge-offs associated with the bulk sale of assets, was (0.52)% in 2015. Also 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.
(5) Includes lease financing.
(6) Includes net charge-offs totaling $61.4 million associated with the bulk sale of assets in 2015. The ratio of total net charge-offs to average loans, excluding
net charge-offs associated with the bulk sale of assets, was 1.00% in 2015. Includes net charge-offs totaling $6.9 million associated with the acquisition of
mortgage loans from Doral Financial in 2014. The ratio of total net charge-offs to average loans, excluding charge-offs associated with the acquisition of
mortgage loans from Doral Financial, was 1.74% in 2014. Also 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.
130
The following table presents net charge-offs to average loans held in various portfolios by geographic segment for the last five years:
December 31,
2015
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
PUERTO RICO:
Residential mortgage (1)
Commercial mortgage (2)(3)
Commercial and Industrial (4) (5)(6)
Construction (7)(8)
Consumer and finance leases (9)
Total loans (10)(11)(12)
VIRGIN ISLANDS:
Residential mortgage (13)
Commercial mortgage
Commercial and Industrial (14)
Construction (15)
Consumer and finance leases
Total loans (16)
FLORIDA:
Residential mortgage
Commercial mortgage (17)
Commercial and Industrial (18)
Construction (19)
Consumer and finance leases
Total loans (20)
0.70%
3.90%
1.50%
5.33%
2.96%
2.01%
0.04%
0.00%
0.23%
0.21%
0.29%
0.11%
0.03%
0.26%
0.00%
-5.98%
1.11%
-0.04%
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%
1.32%
4.10%
1.64%
11.60%
2.39%
2.40%
0.09%
0.00%
0.31%
25.87%
1.08%
4.79%
3.09%
1.56%
1.83%
22.35%
1.66%
3.34%
________
(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% in 2013.
(2) For 2015, includes net charge-offs totaling $37.6 million associated with the bulk sale of assets. The ratio of
commercial mortgage net charge-offs to average loans in Puerto Rico, excluding net charge-offs associated with
the bulk sale of assets, was 0.90% in 2015.
(3) 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% in 2013.
(4) For 2015, includes net charge-offs totaling $20.6 million associated with the bulk sale of assets. The ratio of
commercial and industrial net charge-offs to average loans in Puerto Rico, excluding net charge-offs associated
with the bulk sale of assets, was 0.44% in 2015.
(5) For 2014, includes net charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from
Doral Financial. 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 Financial, was 2.29% in
2014.
(6) 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% in
2013.
(7) For 2015, includes net charge-offs totaling $3.3 million associated with the bulk sale of assets. The ratio of
construction net charge-offs to average loans in Puerto Rico, excluding net charge-offs associated with the bulk
sale of assets, was 0.83% in 2015.
(8) 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% in 2013.
(9) Includes lease financing.
(10) For 2015, includes net charge-offs totaling $61.4 million associated with the bulk sale of assets. The ratio of total
net charge-offs to average loans in Puerto Rico, excluding net charge-offs associated with the bulk sale of assets,
was 1.20% in 2015.
(11) For 2014, includes net charge-offs totaling $6.9 million associated with the acquisition of mortgage loans from
Doral Financial. The ratio of net charge-offs to average loans in Puerto Rico, excluding charge-offs associated
with the acquisition of mortgage loans from Doral Financial, was 2.18% in 2014.
131
(12) 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% in 2013.
(13) 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% in 2013.
(14) For 2014, recoveries in C&I loans in the Virgin Islands exceeded charge-offs.
(15) 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% in
2013.
(16) 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% in 2013.
(17) For 2014, recoveries in commercial mortgage loans in Florida exceeded charge-offs.
(18) For 2012, recoveries in commercial and industrial loans in Florida exceeded charge-offs.
(19) For 2015, 2014 and 2012, recoveries in construction loans in Florida exceeded charge-offs.
(20) For 2015 and 2014, recoveries in total loans in Florida exceeded charge-offs.
Total credit losses (equal to net charge-offs plus losses on OREO operations) for 2015 amounted to $169.5 million, or 1.75% of
average loans and repossessed assets, in contrast to credit losses of $193.6 million, or 2.00% of average loans for 2014.
132
The following table presents OREO inventory and credit losses for the periods indicated:
(Dollars in thousands)
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
TOTAL CREDIT LOSSES (1)
Year Ended
December 31,
2015
2014
$
$
43,563
87,849
15,389
146,801
$
$
29,579
75,654
18,770
124,003
458
344
(253)
549
328
468
1,222
505
(4,296)
(7,609)
(902)
(12,807)
(2,981)
(15,788)
(18,108)
(79,095)
(2,412)
(54,115)
(153,730)
(169,518)
$
$
496
209
(247)
458
526
382
870
490
(5,145)
(8,327)
(1,380)
(14,852)
(5,744)
(20,596)
(23,296)
(73,423)
(5,484)
(70,790)
(172,993)
(193,589)
$
$
LOSS RATIO PER CATEGORY (2):
Residential
Commercial
Construction
Consumer
TOTAL CREDIT LOSS RATIO (3)
________
(1)
(2) Calculated as net charge-offs plus market adjustments and gains (losses) on sale of OREO divided by average loans and
Equal to OREO operations (losses) plus charge-offs, net.
0.68%
2.14%
1.77%
2.83%
1.79%
1.02%
1.77%
3.06%
3.43%
2.00%
repossessed assets.
(3) Calculated as net charge-offs plus net loss on OREO operations divided by average loans and repossessed assets.
133
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, 2015, approximately 81% have credit risk concentration in Puerto Rico,
12% in the United States, and 7% in the Virgin Islands.
Exposure to the Puerto Rico Government
As of December 31, 2015, the Corporation had $316.0 million of credit facilities, excluding investment securities, granted to the
Puerto Rico government, its municipalities and public corporations, of which $314.6 million was outstanding (book value of $311.0
million), compared to $308.0 million outstanding as of December 31, 2014. Approximately $199.5 million of the granted credit
facilities outstanding consisted of loans to municipalities in Puerto Rico whose revenues are independent of the central government.
The good faith, credit, and unlimited taxing power of the applicable municipality have been pledged to their repayment.
Approximately 88% of the Corporation’s municipality exposure consists primarily of senior priority loans concentrated on five of the
largest municipalities in Puerto Rico (San Juan, Carolina, Bayamon, Mayaguez and Guaynabo). These municipalities are required by
law to levy special property taxes in such amounts as shall be required for the payment of all its general obligation bonds and loans.
Late in 2015, GDB and the CRIM signed a deed of trust. Through this deed the GDB, as fiduciary, is bound to keep the CRIM funds
separate from any other deposits and the funds should be distributed by the GDB pursuant to the applicable law. In addition to
municipalities, loans extended to the Puerto Rico Government include $18.9 million of loans to units of the Puerto Rico central
government, and approximately $96.3 million ($92.6 million book value) of loans to public corporations, including the direct exposure
to PREPA with a book value of $71.1 million as of December 31, 2015. The PREPA credit facility was placed in non-accrual status in
the first quarter of 2015, and interest payments are now recorded on a cost-recovery basis.
Furthermore, as of December 31, 2015, the Corporation had $129.4 million outstanding in financings to the hotel industry in Puerto
Rico where the borrower and the operations of the underlying collateral are the primary sources of repayment and the TDF provides a
secondary guarantee for payment performance, compared to $133.3 million as of December 31, 2014. The TDF is a subsidiary of the
GDB that facilitates private-sector financings to Puerto Rico’s hotel industry. As a result of liquidity risk and uncertainty regarding the
Puerto Rico government fiscal situation, the Corporation adversely classified this $129.4 million exposure during the third quarter of
2015. Since late 2012, the Corporation has received combined payments from the borrowers and TDF as guarantor sufficient to cover
contractual payments on these loans, including collections of principal and interest from TDF of approximately $5.3 million in 2015
and $6.1 million in 2014. These loans were current and remained in accrual status as of December 31, 2015.
134
On March 1, 2016, the Working Group in an updated public presentation indicated that the Commonwealth expects to have
insufficient liquidity to make upcoming debt service payments and that a substantial restructuring of the Commonwealth’s existing
debt is required to allow the Commonwealth to bring its fiscal accounts into balance, to give it time and the financial flexibility to
implement structural reforms and growth initiatives so as to stimulate the Puerto Rican economy and thereby to make the restructured
debt sustainable in the long term. We continue to monitor the Puerto Rico government fiscal and economic situation and its potential
impact on the Corporation's financial condition, including its potential impact on our TDF-guaranteed exposure. Although TDF has
continued to cover its contractually required payments as guarantor during the first quarter of 2016, we are currently assessing,
together with our regulators, whether recent developments related to the Puerto Rico government fiscal situation introduce additional
uncertainty regarding TDF's ability to honor its guarantee, which could require that some or all of our TDF-guaranteed exposure be
placed in nonaccrual status. If we determine to treat some or all of such loans as nonaccrual, then the Corporation’s asset quality
metrics and capital ratios could be adversely impacted, we could be required to prospectively apply principal and interest payments
received to the outstanding principal of the loans, and the affected loans would need to be individually evaluated for impairment with
specific reserves allocated as deemed necessary. In the event these loans are individually evaluated for impairment, based on present
appraised values and assumptions as to recovery rates on Puerto Rico government obligations, the required specific reserves are not
expected to deviate materially from the general reserves associated with these loans as of December 31, 2015.
In 2015, the Corporation increased by approximately $35 million the general reserve for commercial loans extended to or
guaranteed by the Puerto Rico Government, including a $19.2 million charge related to increased qualitative reserve factors applied to
commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities). As of December 31, 2015 the
total reserve coverage ratio (general and specific reserves) related to commercial loans extended to or guaranteed by the Puerto Rico
Government (excluding municipalities) was 19%.
In addition, the Corporation had $124.6 million in indirect exposure to residential mortgage loans to individual borrowers that are
guaranteed by the Puerto Rico Housing Finance Authority. Residential mortgage loans guaranteed by the Puerto Rico Housing
Finance Authority are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a
borrower default. The Puerto Rico Government guarantees up to $75 million of the principal insured by the mortgage loans insurance
program. According to the most recently released audited financial statements, as of June 30, 2014, the Puerto Rico Housing Finance
Authority mortgage loans insurance program covered loans aggregating to approximately $546 million. The regulations adopted by
the Puerto Rico Housing Finance Authority, requires the establishment of adequate reserves to guarantee the solvency of the mortgage
loans insurance fund. As of June 30, 2014, Puerto Rico Housing Finance Authority had restricted net position for such purposes of
approximately $72.5 million.
Furthermore, as of December 31, 2015, the Corporation had $390.4 million of public sector deposits in Puerto Rico compared to
$227.4 million as of December 31, 2014. Approximately 45% came from municipalities and municipal agencies in Puerto Rico and
55% came from public corporations and the central government and agencies.
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 GAAP, 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 a $2.5 million prepayment penalty
collected on a commercial mortgage loan paid off in the fourth quarter of 2014; (ii) the calculation of the tangible common equity ratio
and the tangible book value per common share; and (iii) certain other financial measures adjusted to exclude the effect of the bulk sale
of assets in 2015, the acquisition of mortgage loans from Doral in 2014, the acquisition of assets and assumption of deposits from
Doral in 2015, the conversion costs related to the 2015 Doral transaction, OTTI on Puerto Rico Government Securities recorded in
2015, the gain on the sale of merchant contrats realized in 2015, the costs associated with a voluntary early retirement program
implemented in 2015, the bulk sale of assets and the transfer of loans to held for sale in 2013, and the write-off of the colateral
pledged to Lehman and the related loss contingency for attorneys’ fees awarded to the other party in the Lehman litigation. Investors
135
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 (“valuations”) and the $2.5 million prepayment penalty collected on a commercial mortgage loan paid off in the fourth
quarter of 2014, and on a tax-equivalent basis in order to provide additional information about the Corporation’s net interest income
and facilitates comparability and analysis. The changes in the fair value of derivative instruments 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 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 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 financial 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.
To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation provides additional
adjustments to the provision for loan and lease losses, provision for loan and lease losses to net charge-offs, net charge-offs, net
charge-offs to average loans, adjusted non-interest income, adjusted non-interest expenses, and adjusted pre-tax income:
(cid:120) Adjusted 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 exclude the effect of the $46.9 million charge to the provision for loan and lease losses and net
charge-offs of $61.4 million recorded in 2015 related to the bulk sale of assets, net charge-offs of $6.9 million associated
with the acquisition of mortgage loans from Doral Financial in satisfaction of borrowings owed by such institution in 2014
and the $132.0 million charge to the provision for loan and lease losses and net charge-offs of $232.4 million related to the
two separate bulk sales of assets and the transfer of certain loans to held for sale in 2013.
(cid:120) Adjusted non-interest income excludes OTTI charges of $15.9 million on Puerto Rico Government debt securities recorded
in 2015, the $13.4 million bargain purchase gain related to assets acquired and deposits assumed from Doral in 2015, the $7.0
million gain on the sale of merchant contracts in 2015, and the $66.6 million write-off of the collateral pledged to Lehman
recorded in 2013.
(cid:120) Adjusted non-interest expenses exclude costs of approximately $2.2 million related to the voluntary early retirement
program, acquisition and conversion costs of $4.6 million related to the Doral Bank transaction, and expenses and losses
amounting to $1.2 million directly related to the bulk sale of assets completed in 2015.
(cid:120) Adjusted pre-tax income excludes the effect of all the aforementioned unusual non-recurring or non-core operating items as
well as, for the year ended December 31, 2013, expenses of $8.8 million directly attributable to the bulk sales of assets
completed in 2013 as well as the $2.5 million loss contingency of attorneys’ fees awarded to the counterparty related to the
Lehman matter.
Management believes that these non-GAAP financial 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.
136
Refer to Overview of Results of Operations above for the reconciliation of these non-GAAP financial measures to the GAAP
financial measures, except for the reconciliation with respect to the non-GAAP financial measures: (i) “provision for loan and lease
losses to net charge-offs ratio, excluding the impact of the bulk sale of assets in 2015, the mortgage loans acquired from Doral in
2014, and the bulk sales and transfer of certain loans to held for sale in 2013” with the provision for loan and lease losses to net
charge-offs ratio calculated and presented in accordance with GAAP, (ii) net charge-offs excluding the impact of charge-offs recorded
in 2014 in the acquisition of mortgage loans from Doral in satisfaction of debt, (iii) adjusted non-interest income with GAAP non-
interest income, and (iv) adjusted non-interest expenses to GAAP non-interest expenses, which are set forth below:
(In thousands)
Provision for Loan and Lease
Losses to Net Charge-Offs,
(Non GAAP to GAAP reconciliation)
Year Ended
December 31, 2015
December 31, 2013
Provision for
Loan
and Lease Losses
Net Charge-
Offs
Provision for
Loan
and Lease Losses
Net Charge-
Offs
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)
$
$
125,098
46,947
172,045
$
$
92,295
61,435
153,730
$
$
111,749
$
160,863
132,002
243,751
232,444
393,307
$
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)
135.54 %
111.91 %
69.47 %
61.97 %
(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
$
6,908
$
1.81%
58,255
2.13%
6,908
166,085
1.74%
51,347
1.95%
137
The following tables reconcile non-GAAP financial measures adjusted non-interest income and adjusted non-interest expenses to the
corresponding measures presented in accordance with GAAP:
(Dollars in thousands)
2015
As Reported
(GAAP)
Gain on sale
of Merchant
Contracts
OTTI on Puerto
Rico
Government
Debt Securities
Bargain
purchase
gain
Bulk sale
Transaction
expenses
Voluntary Early
Retirement
Program-non-
recurring expenses
Acquisition
and conversion
costs
Adjusted
(Non-GAAP)
Non-interest income
Non-interest expenses
$
$
81,325 $
(7,000) $
15,889 $
(13,443) $
-
$
-
$
-
$
76,771
383,830 $
-
$
-
$
-
$
(1,168) $
(2,238) $
(4,646) $
375,778
(Dollars in thousands)
2013
As Reported (GAAP)
Write-off collateral
pledged to Lehman and
related expenses
Bulk sale Transaction
Expenses
Adjusted (Non-GAAP)
Non-interest income
Non-interest expenses
$
$
(15,489) $
415,028 $
66,574 $
(2,500) $
-
$
(8,840) $
51,085
403,688
138
Selected Quarterly Financial Data
Financial data showing results of the 2015 and 2014 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
2015
Interest income
Net interest income
Provision for loan losses
Net income (loss)
Net income (loss) attributable to common stockholders -
basic
Net income (loss) attributable to common stockholders -
diluted
Earnings (loss) per common share-basic
Earnings (loss) per common share-diluted
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
$
$
$
$
$
$
(In thousands, except for per share results)
$
$
$
151,632
126,477
74,266
(34,074)
149,812
124,929
31,176
14,758
152,485
125,647
32,970
25,646
151,640
125,213
33,633
14,967
25,646
(34,074)
14,758
14,967
25,646
0.12
0.12
$
$
(34,074)
(0.16)
(0.16)
$
$
14,758
0.07
0.07
$
$
14,967
0.07
0.07
March 31
June 30
September 30
December 31
2014
(In thousands, except for per share results)
$
$
$
158,423
129,907
26,744
21,225
156,662
127,694
26,999
23,201
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
330,778
0.08
0.08
$
$
0.11
0.11
$
$
0.11
0.11
$
$
1.57
1.56
139
Some infrequent transactions that significantly affected quarterly periods include:
Fourth quarter of 2015: (i) a $19.2 million pre-tax charge to the provision for loan and lease losses related to qualitative factor
adjustments to the reserves for commercial loans extended to or guaranteed by the Puerto Rico Government; (ii) a $7.0 million pre-tax
gain associated with a long-term strategic marketing alliance as part of the sale of the Bank’s merchant contracts portfolio; (iii) a $3.0
million pre-tax OTTI charge on Puerto Rico Government securities; and (iv) pre-tax costs of $2.2 million related to a voluntary early
retirement program.
Second quarter of 2015: (i) a $48.7 million pre-tax loss, including transactional expenses, on the bulk sale of assets, primarily
adversely classified commercial and construction loans; (ii) a $12.9 million pre-tax OTTI charge on Puerto Rico Government
securities; and (iii) pre-tax conversion costs of $2.6 million associated with the conversion of deposit and loan accounts acquired from
Doral to the FirstBank’s systems.
First quarter of 2015: (i) the $13.4 million bargain purchase gain related to the acquisition of assets and assumption of liabilities
from Doral Bank; and (ii) $2.1 million of related acquisition and conversion costs.
Fourth quarter of 2014, the $302.9 million partial reversal of FirstBank’s deferred tax assets valuation allowance.
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 2015, First BanCorp’s Chief Executive Officer provided to the NYSE his annual certification, as required for all
NYSE listed companies, 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.
140
Item 8. Financial Statements and Supplementary Data
FIRST BANCORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
142
Report of Independent Registered Public Accounting Firm………………………………………………….
Management’s Report on Internal Control over Financial Reporting………………………………………… 143
Report of Independent Registered Public Accounting Firm - Internal…..……...…………………………….
Control over Financial Reporting………………..………………………………………………………….
144
145
Consolidated Statements of Financial Condition……………………………………………………………...
146
Consolidated Statements of Income (Loss) …………………………………………………………………...
Consolidated Statements of Comprehensive Income (Loss) ………………………………………………….
147
Consolidated Statements of Cash Flows……………………………………………………………………… 148
149
Consolidated Statements of Changes in Stockholders’ Equity………………………………………………..
150
Notes to Consolidated Financial Statements…………………………………………………………………..
141
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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each
of the three years in the three-year period ended December 31, 2015, 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, 2015, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 14, 2016 expressed an unqualified opinion on the effectiveness of the Corporation’s internal
control over financial reporting.
/s/ KPMG LLP
San Juan, Puerto Rico
March 14, 2016
Stamp No. E196953 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
142
Management’s Report on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of First BanCorp.:
The management of First BanCorp. (the “Corporation”) is responsible for establishing and maintaining adequate internal control
over financial reporting. The Corporation’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 accounting principles generally accepted in the United States of America (“GAAP”). 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
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 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 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.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2015
based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2015, the
Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control-Integrated
Framework (2013).
The Corporation’s internal control over financial reporting as of December 31, 2015, has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their accompanying report dated March 14, 2016 which expressed an
unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2015.
First BanCorp.
/s/ Aurelio Alemán
Aurelio Alemán
President and Chief Executive Officer
Date: March 14, 2016
/s/ Orlando Berges
Orlando Berges
Executive Vice President
and Chief Financial Officer
Date: March 14, 2016
143
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, 2015, based on
criteria established in Internal Control-Integrated Framework (2013) 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, 2015, based on criteria established in Internal Control-Integrated Framework (2013) 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, 2015 and 2014, 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, 2015, and our report dated March 14, 2016, expressed an unqualified opinion
on those consolidated financial statements.
/s/ KPMG LLP
San Juan, Puerto Rico
March 14, 2016
Stamp No. E196952 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
144
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
Loans, net of allowance for loan and lease losses of $240,710
(2014 - $222,395)
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 27 and 30)
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,
aggregate liquidation value of $36,104
Common stock, $0.10 par value, authorized, 2,000,000,000 shares; issued,
216,051,128 shares (2014 - 213,724,749 shares issued)
Less: Treasury stock (at par value)
Common stock outstanding, 215,088,698 shares outstanding
(2014 - 212,984,700 shares outstanding)
Additional paid-in capital
Retained earnings, includes legal surplus reserve of $42.8 million (2014 - $40.0 million)
Accumulated other comprehensive loss, net of tax of $7,752
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, 2015 December 31, 2014
(In thousands, except for share information)
$
532,985
$
779,147
3,000
216,473
219,473
793,562
1,092,833
1,886,395
32,169
9,033,155
35,869
9,069,024
161,016
146,801
48,697
476,459
12,573,019
1,336,559
8,001,565
9,338,124
700,000
455,000
226,492
159,269
10,878,885
$
$
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
36,104
21,605
(96)
21,509
926,348
737,922
(27,749)
1,694,134
12,573,019
$
36,104
21,372
(74)
21,298
916,067
716,625
(18,351)
1,671,743
12,727,835
$
$
$
The accompanying notes are an integral part of these statements.
145
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Year Ended December 31,
2014
2015
(In thousands, except per share information)
2013
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
Non credit-related impairment portion on debt securities not expected to be sold
(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
Bargain purchase gain
Gain on sale of merchant contracts
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 (expense)benefit
Net income (loss)
Net income (loss) attributable to common stockholders
Net income (loss) per common share:
Basic
Diluted
Dividends declared per common share
$
555,980 $
47,441
2,148
605,569
579,176 $
52,881
1,892
633,949
69,250
22,431
4,171
7,451
103,303
502,266
172,045
330,221
20,330
17,217
-
(35,806)
19,289
(16,517)
-
-
7,058
13,443
7,000
32,794
81,325
150,059
59,295
15,234
55,632
12,669
29,021
15,788
16,177
7,726
22,229
383,830
27,716
(6,419)
78,127
26,989
3,561
7,199
115,876
518,073
109,530
408,543
16,709
14,685
262
-
(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
91,638
300,649
590,334
53,527
1,927
645,788
91,787
25,933
6,031
7,092
130,843
514,945
243,751
271,194
16,974
16,830
(42)
-
(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
(159,323)
(5,164)
$
$
$
$
$
21,297 $
392,287 $
(164,487)
21,297 $
393,946 $
(164,487)
0.10 $
0.10 $
- $
1.89 $
1.87 $
- $
(0.80)
(0.80)
-
The accompanying notes are an integral part of these statements.
146
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
2015
2014
(In thousands)
2013
Net income (loss)
$
21,297 $
392,287 $
(164,487)
Available-for-sale debt securities on which an other-than-
temporary impairment has been recognized:
Unrealized (loss) 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 (losses) gains on available-for-sale securities:
All other unrealized holding (losses) gains 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 related to items of other
comprehensive income
(16,841)
16,517
1,781
388
4,060
117
(9,074)
58,478
(111,381)
-
-
-
(262)
-
-
-
42
(6)
Other comprehensive (loss) income for the year, net of tax
(9,398)
60,385
(107,168)
Total comprehensive income (loss)
$
11,899 $
452,672 $
(271,655)
The accompanying notes are an integral part of these statements.
147
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 and amortization
Amortization of intangible assets
Provision for loan and lease losses
Deferred income tax expense (benefit)
Stock-based compensation
Gain on sales of investments, net
Bargain purchase gain
Gain on sale of merchant contracts
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
Unrealized gain on derivative instruments
Gain 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
Decrease (increase) in accrued interest receivable
Increase in accrued interest payable
Decrease in other assets
Increase (decrease) 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
Proceeds from sale of merchant contracts
Additions to premises and equipment
Proceeds from sales of premises and equipment and other assets
Net cash received from acquisition
Net (purchases) redemptions/sales of other equity securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net (decrease) increase in deposits
Change in securities sold under agreements to repurchase
Net FHLB advances proceeds (paid)
Repurchase of outstanding common stock
Issuance costs of common stock issued in exchange for preferred stock
Series A through E
Net cash used in financing activities
Net (decrease) increase 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
2015
Year Ended December 31,
2014
(In thousands)
2013
$
21,297
$
392,287
$
(164,487)
21,060
5,143
172,045
80
6,037
-
(13,443)
(7,000)
16,517
-
-
-
(164)
(64)
(7,379)
(6,229)
(428,348)
436,461
(191)
4,563
7,046
1,703
6,241
20,625
5,891
261,891
2,974,684
(2,964,401)
107,702
61,808
-
(250,585)
296,950
10,000
(12,456)
4,035
217,659
(6,417)
438,979
(673,347)
(200,000)
130,000
(1,173)
-
(744,520)
(43,650)
796,108
752,458
532,985
219,473
752,458
$
$
$
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
3,216
6,812
19,724
(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)
(62)
(378,649)
140,437
655,671
796,108
779,147
16,961
796,108
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
(2,341)
3,631
43,680
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)
-
(201,417)
(291,180)
946,851
655,671
454,302
201,369
655,671
$
$
$
$
$
$
The accompanying notes are an integral part of these statements.
148
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31,
2015
2014
(In thousands)
2013
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 issued in exchange for Series A through E preferred stock
Common stock issued in exchange for trust preferred securities
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 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
Common stock issued in exchange for trust preferred securities
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 (loss) income, net of tax
Balance at end of year
Total stockholders' equity
$
$
36,104
-
36,104
$
63,047
(26,943)
36,104
21,298
48
(22)
-
85
102
(2)
21,509
916,067
6,037
(1,151)
-
-
-
5,543
(102)
(48)
2
926,348
716,625
21,297
-
737,922
(18,351)
(9,398)
(27,749)
20,707
32
(18)
459
-
122
(4)
21,298
888,161
4,221
(928)
23,904
921
(62)
-
(122)
(32)
4
916,067
322,679
392,287
1,659
716,625
(78,736)
60,385
(18,351)
63,047
-
63,047
20,624
22
(7)
-
-
74
(6)
20,707
885,754
2,930
(433)
-
-
-
-
(74)
(22)
6
888,161
487,166
(164,487)
-
322,679
28,432
(107,168)
(78,736)
$
1,694,134
$
1,671,743
$
1,215,858
The accompanying notes are an integral part of these statements.
149
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,
2015, 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. The Consumer Financial Protection Bureau (“CFBP”) regulates
FirstBank’s consumer financial products and services.
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, 51 banking branches in Puerto Rico as of
December 31, 2015, 11 branches in the USVI and BVI, and 10 branches in the state of Florida (USA). As of December 31, 2015,
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 securities underwriting and selling for local Puerto Rico municipal bond issuers and other investment
banking activities, such as advisory services, capital raise efforts on behalf of clients and assist in financial transaction structuring.
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 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.
On February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank through an alliance with Banco Popular of
Puerto Rico (“Popular”), who was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders (the
“Doral Bank transaction”). This transaction is described in more detail in Note 2 - Business Combination, to the consolidated financial
statements. The Doral Bank transaction solidified FirstBank as the second largest bank in Puerto Rico.
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.
150
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 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, 2015 and 2014, 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, 2015 and 2014, 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 non-
interest 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.
151
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 an 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 the latest information available about the financial
health and prospects of the issuer, credit ratings, the failure of the issuer to meet scheduled principal or interest payments, recent
legislation, government actions affecting the issuer’s industry, and actions taken by the issuer to deal with the economic climate. The
Corporation also takes into consideration 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. 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, and
included as a component of stockholders’ equity 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. Debt securities held
by the Corporation at year end primarily consisted of securities issued by U.S. government-sponsored entities, bonds issued by the
Puerto Rico Government and private label mortgage-backed securities (“MBS”). Given the explicit and implicit guarantees provided
by the U.S. Federal government, the Corporation believes the credit risk in securities issued by the U.S. government-sponsored entities
is low. The Corporation’s OTTI assessment is concentrated on Puerto Rico Government debt securities, with an amortized cost of
$49.7 million as of December 31, 2015, and on private label MBS with an amortized cost of $34.9 million as of December 31, 2015.
The discounted cash flow analyses applied to the Puerto Rico Government debt securities are calculated based on the probability of
default and loss severity assumptions. The valuation for private label MBS is derived from a discounted cash flow analysis that
considers relevant assumptions such as the prepayment rate, default rate, and loss severity on a loan level basis. For further
information, refer to Note 5 - Investment Securities, 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 and credit ratings, if applicable, 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.
152
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. Purchased credit-impaired (“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 15 months delinquent.
Based on an update to the analysis of historical collections from these agencies performed in the fourth quarter of 2015, the
Corporation determined to discontinue the recognition of income for FHA/VA loans once loans are over 15 months delinquent.
Previously, the Corporation discontinued the recognition of interest income on these loans when they were 18-months delinquent as to
principal or interest. The impact of this change in estimate was not material to the Corporation’s consolidated statement of financial
position, results of operations or cash flows. 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 after a
sustained period of repayment performance (6 months) and the loan is well secured, is in the process of collection, and full repayment
of the remaining contractual principal and interest is expected. PCI loans are not reported as non-performing as these loans were
written down to fair value at the acquisition date and the accretable yield is recognized in interest income over the remaining life of
the loans. 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, or the loan has been modified in a Troubled Debt Restructuring (“TDR”). 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 TDR. 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 TDR loans.
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
153
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 a specific
allowance for the loan or by adjusting the specific 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. TDR loans 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 to a rate that is below market on the loan, 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. Residential
mortgage loans for which a binding offer to restructure has been extended are also classified as TDR loans. PCI loans are not
classified as TDR.
TDR loans are classified as either accrual or nonaccrual. Loans in accrual status may remain in accrual status when their contractual
terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the
restructured terms is expected. Otherwise, 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. Refer to
Note 8 – Loans Held for Investment, to the consolidated financial statements for additional qualitative and quantitative information
about TDR loans.
In connection with commercial loan 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 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 collectability 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 residential and consumer
restructurings, a nonperforming loan will be returned to accrual status when current as to principal and interest, under the 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. Refer to Note 8 – Loans Held for Investment, to the consolidated financial statements for additional information about
loan splits.
154
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A loan that had previously been modified in a TDR and is subsequently refinanced under current underwriting standards at a market
rate with no concessionary terms is accounted for as a new loan and is no longer reported as a TDR.
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, credit scores, and revised loan terms. 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 continues to estimate cash flows expected to be collected over the life of the PCI loans
using models that incorporate current key assumptions such as default rates, loss severity, and prepayment speeds. Decreases in
expected cash flows 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 at its relative carrying amount. The carrying
amount is defined as the loan’s current contractually required payments receivable less its remaining nonaccretable difference and
accretable yield, but excluding any post-acquisition loan loss allowance. To determine the carrying value, the Corporation performs a
pro-rata allocation of the pool’s total remaining nonaccretable difference and accretable yield to an individual loan in proportion to the
loan’s current contractually required payments receivable compared to the pool’s total contractually required payments receivable.
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 the remaining effective yield caused by this removal method is
addressed by the Corporation’s quarterly cash flow evaluation process for each pool. 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.
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 the 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
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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 aggregate cost or fair value. 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 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 from/to held for sale or held for investment based on a change in strategy.
If such a change in holding strategy is made, significant adjustments to the loans’ carrying values may be necessary. Reclassification
of loans held for sale to held for investment are made at fair value on the date of transfer. Any difference between the carrying value
and the fair value of the loan is recorded as an adjustment to non-interest income. Meanwhile, reclassification of loans held for
investment to held for sale are made 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.
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 does not include amounts related to accrued interest receivable, other than
billed interest and fees on credit card loans, as accrued interest receivable is reversed when a loan is placed on nonaccrual status. 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 residential 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 geography (Puerto Rico, Florida or the Virgin
Islands), 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
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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, and commercial and industrial portfolios and certain boat loans, residential mortgage loans, and home equity lines of
credit, 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.
Commercial mortgage, construction, commercial and industrial, and boat loans with individual principal balances of $1 million or
more, TDR loans, as well as residential mortgage loans and home equity lines of credit considered impaired based on their
delinquency and loan-to-value levels are individually evaluated for impairment. When foreclosure of a collateral dependent loan is
probable, 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 according to the Corporation’s appraisal policy. In addition, appraisals and/or appraiser 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 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 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 attributes that are most significant to the probability of default include present collection status (current, delinquent, in
bankruptcy, in foreclosure stage), vintage, loan-to-values, and geography (Puerto Rico, Florida or the Virgin Islands).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.
For commercial loans, historical charge-offs 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). The allowance is calculated using the base rate average of the last 8 quarters. A qualitative factor adjustment is applied to the
base rate average utilizing a resulting factor derived from a set of risk-based ratings and weights assigned to credit and economic
indicators over a reasonable period applied to a developed expected range of historical losses. This factor may be stressed to reflect
other elements not reflected in the historical data underlying the loss estimates, such as the prolonged uncertainty surrounding how the
Puerto Rico Government might restructure its debt and the effect of recent payment defaults and other unprecedented measures
implemented by the Puerto Rico Government to deal with its fiscal condition. In the fourth quarter of 2015, the Corporation recorded a
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$19.2 million charge to the provision for loan and lease losses related to qualitative factor adjustments that stressed the historical loss
rates applied to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities).
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. In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA,
which generally securitize the transferred loans into mortgage-backed securities for sale into the secondary market. Also, certain
conventional conforming loans are sold to FNMA or FHLMC with servicing retained. When the Corporation sells mortgage loans, it
recognizes any retained servicing right, 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 MSRs. Unlike highly liquid investments, the
market value of MSRs cannot be readily determined because these assets are not actively traded in securities markets. The initial
carrying value of the MSRs 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.
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.
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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 and amortization. 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.
Accounting for acquisitions
The Corporation account for acquisitions in accordance with the authoritative guidance for business combinations. Under the
guidance for business combinations, the accounting differs depending on whether the acquired set of activities and assets meets the
definition of a business. A business is considered to be an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing economic benefits directly to investors or other owners, members or participants. If the acquired
set of activities and assets meets the definition of a business, the transaction is accounted for as a business combination. Otherwise, it
is accounted for as an asset acquisition.
In a business combination, identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are
recorded at fair value as of the acquisition date. Goodwill is recognized as the excess of the acquisition price over the estimated fair
value of the net assets acquired. Likewise, if the fair value of the net assets acquired is higher than the acquisition price, a bargain
purchase gain is recognized and recorded in non-interest income in the statement of income (loss). The Corporation may
retrospectively adjust the initially recorded fair values to reflect new information obtained during the measurement period (not to
exceed 12 months) about facts and circumstances that existed as of the acquisition date that, if known, would have affected the
acquisition date fair value measurements. The Doral Bank transaction completed in 2015 resulted in the recognition of a bargain
purchase gain of $13.4 million. This transaction is described in more detail in Note 2 - Business Combination, to the consolidated
financial statements.
Goodwill and other intangible assets
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 an impairment. The Corporation evaluated goodwill for impairment as of
October 1, 2015. 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
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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 2015 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 then 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:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a selection of comparable publicly traded companies, based on size, performance, and asset quality;
a selection of comparable and public acquisition transactions of entities of similar size;
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, the valuation was determined based on market multiples for comparable
companies and acquisition transactions 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, 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 discounted cash flow 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, 2015 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, 2015 or 2014, nor was any goodwill written off due to impairment during 2015,
2014, and 2013.
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 core deposit intangible acquired in the February 2015 Doral Bank transaction amounted to $5.8 million ($5.1 million
as of December 31, 2015).
The Corporation performed impairment tests for the years ended December 31, 2015, 2014, and 2013 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 ($13.3 million and $16.4 million as of December 31, 2015
and 2014, 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 14 –
Goodwill and other Intangibles, to the consolidated financial statements.
Securities purchased and sold under agreements to repurchase
Securities purchased under resale agreements and securities sold under repurchase agreements are accounted for as collateralized
financing transactions. Generally, these agreements are recorded at the amount at which the securities were purchased or sold. The
Corporation monitors the fair value of securities purchased and sold, and obtains collateral from or return it to the counterparties when
appropriate. These financing transactions do not create material credit risk given the collateral provided and the related monitoring
process. The Corporation sells and acquires securities under agreements to repurchase or resell 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 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. Repurchase and resale activities might be transacted under legally
enforceable master repurchase agreements that give the Corporation, in the event of default by the counterparty, the right to liquidate
securities held and to offset receivables payables with the same counterparty. The Corporation offsets repurchase and resale
transactions with the same counterparty on the consolidated statement of financial condition where it has such a legally enforceable
master netting agreement and the transactions have the same maturity date.
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
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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 $9.6 million and $9.0 million as of December 31, 2015 and 2014, respectively.
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 26 –
Income Taxes, 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 26 – Income Taxes, to the consolidated financial statements 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
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regarding the Corporation’s equity-based compensation and awards granted, refer to Note 21 – Stock-based Compensation, to the
consolidated financial statements.
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 33 – Segment Information, to
the consolidated financial statements). 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, 2015, 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 33 – Segment Information, to the consolidated financial statements 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’s 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, 2015 or 2014. See Note 28 – Fair
Value, to the consolidated financial statements for additional information.
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
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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 common shares issued and outstanding . Net income (loss) attributable to common stockholders represents net
income (loss) adjusted for any preferred stock dividends, including dividends declared, and any cumulative dividends related to the
current dividend period that have not been declared as of the end of the period, 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 22 – Stockholders’ equity, to the consolidated financial statements. The computation of diluted earnings
per share is similar to the computation of basic earnings per share 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 pronouncements
The FASB has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:
In January 2014, the FASB updated the Accounting Standards Codification (“ASC” or 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. 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. Refer to Notes 8 – Loans Held for Investment and Note 11 – Other Real Estate Owned, to the
consolidated financial statements for required disclosures.
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
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 that 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 new framework is effective for public business entities for annual
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periods beginning after December 15, 2017, including interim periods within those reporting periods, as a result of the FASB’s recent
amendment to the standard to defer the effective date by one year. Early adoption is permitted for interim periods beginning after
December 15, 2016. 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 require their treatment as secured borrowings. 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 treatment 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 adoption of this guidance did not have a material
effect on the Corporation’s financial statements.
In June 2014, the FASB updated the Codification to provide guidance for determining compensation cost 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, if any, that the adoption of this guidance will have on the presentation
and disclosures in its financial statements.
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 such determination. 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
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is permitted. The Corporation is currently evaluating the impact, if any, of the adoption of this guidance on its consolidated financial
statements.
In January 2015, the FASB updated the Codification to eliminate from GAAP the concept of extraordinary items as part of its
initiative to reduce complexity in accounting standards (the Simplification Initiative). 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.
In February 2015, the FASB updated the Codification to eliminate the deferral of the requirements of ASU No. 2009-17 for certain
interests in investment funds and provides a scope exception for certain investments in money market funds. While the Update is
aimed at asset managers, it will affect all reporting entities involved with limited partnerships and similar entities. In some cases,
consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosure about entities that
currently are not considered Variable Interest Entities (“VIEs”) but will be considered VIEs under the new guidance when they have a
variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered,
reporting entities will need to re-evaluate limited partnerships and similar entities for consolidation and revise their documentation.
For public business entities, the Update is effective for annual and interim periods beginning after December 15, 2015. Early adoption
is permitted, including adoption in an interim period. A reporting entity must apply the amendments retrospectively. The Corporation
is currently evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In April 2015, the FASB updated the Codification to clarify that customers should determine whether a cloud computing
arrangement includes the license of software by applying the same guidance cloud service providers use to make this determination.
Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service and other
hosting arrangements. If a hosting arrangement includes a software license for internal use software, the software license should be
accounted for by the customer under ASC 350-40. A license of software other than internal use software would be accounted for by
the customer under other GAAP (e.g., a research and development cost and software to be sold, leased or otherwise marketed). If a
hosting arrangement includes a software license, then that would be in addition to any service contract in the arrangement. Hosting
arrangements that do not include software licenses should be accounted for as service contracts. The Update also eliminates the
existing requirement for customers to account for software licenses they acquire by analogizing to the guidance on leases. Instead,
customers will account for software licenses that are in the scope of ASC 350-40 in the same manner as licenses of other intangible
assets. Entities have the option of applying the guidance (i) prospectively to all arrangements entered into or materially modified after
the effective date or (ii) retrospectively. Entities that elect prospective application are required to disclose the reason for the change in
accounting principle, the transition method, and a description of the financial statement line items affected by the change. Entities that
elect retrospective application must disclose the information required by ASC 250. For public business entities, the guidance is
effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early
adoption is permitted. The Corporation is currently evaluating the impact, if any, of the adoption of this guidance on its consolidated
financial statements.
In May 2015, the FASB updated the Codification to provide guidance on disclosures for investments in certain entities that
calculate net asset value (NAV) per share (or its equivalent). This Update removes the requirement to categorize within the fair value
hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and modifies certain
disclosure requirements. This guidance is effective for interim and annual reporting periods in fiscal years beginning after December
31, 2015, and requires retrospective adoption. Early adoption is permitted. The adoption of this pronouncement is not expected to have
an impact on the Corporation’s consolidated financial statements.
In September 2015, the FASB updated the Codification to simplify the accounting for adjustments made to provisional amounts
recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This Update
allows the acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect
on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the acquisition date. Also, this Update requires entities to present
separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by
line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been
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recognized as of the acquisition date. Prior to this Update, GAAP required that, during the measurement period, the acquirer
retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. The
acquirer also had to revise comparative information for prior periods presented in financial statements as needed, including revising
depreciation, amortization, or other income effects as a result of changes made to provisional amounts. For public business entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within
those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur
after the effective date of this Update with earlier application permitted for financial statements that have not been issued. The
Corporation is currently evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In January 2016, the FASB updated the codification to require an entity to: (i) measure equity investments at fair value through net
income, with certain exceptions, (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured
using the fair value option, (iii) present financial assets and financial liabilities by measurement category and form of financial asset
(iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price, and (v) assess a valuation
allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax
assets. The Update provides an election to subsequently measure certain nonmarketable equity investments at cost less any
impairment, adjusted for certain observable price changes. The Update also requires a qualitative impairment assessment of such
equity investments and amends certain fair value disclosure requirements. For public companies, the Update is effective for fiscal
years beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific credit risk
and the fair value disclosure exemption provided to nonpublic entities. The Corporation is currently evaluating the impact of the
adoption of this guidance on its consolidated financial statements.
In February 2016, the FASB updated the codification to provide guidance for the financial reporting about leasing transactions.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12
months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a
lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which
requires only capital leases to be recognized on the balance sheet, the guidance will require both types of leases to be recognized on
the balance sheet. The guidance will also require disclosures to help investors and other financial statement users better understanding
the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative
requirements, providing additional information about the amounts recorded in the financial statements. The guidance on leases will
take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
Early application is permitted. The Corporation is currently evaluation the impact of the adoption of this guidance on its consolidated
financial statements.
NOTE 2 – BUSINESS COMBINATION
On February 27, 2015, FirstBank acquired 10 Puerto Rico branches of Doral Bank, assumed $522.7 million in deposits related to
such branches, acquired loans that have an approximate principal balance of $324.8 million, primarily residential mortgage loans,
acquired $5.5 million of property, plant and equipment and received $217.7 million of cash, through an alliance with Popular, who
was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders. This transaction solidified
FirstBank as the second largest bank in Puerto Rico, enhanced FirstBank’s presence in geographical areas in Puerto Rico with growth
potential for deposits and mortgage originations (two of the main business strategies of FirstBank), and provided a stable source of
low-cost deposits that are expected to support and enhance future growth activities.
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
assumption agreements with the alliance co-bidders, including FirstBank, for the transferred assets and deposits. There is no loss-share
arrangement with the FDIC related to the acquired assets, meaning that FirstBank will assume all losses with respect to such assets,
with no financial assistance from the FDIC.
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The Corporation accounted for this transaction as a business combination. The following table identifies the fair
values of assets acquired and liabilities assumed from Doral Bank on February 27, 2015:
(In thousands)
ASSETS
Cash
Loans
Premises and equipment, net
Core Deposit Intangible
Total assets acquired
LIABILITIES
Deposits
Other liabilities
Net assets - Bargain purchase gain
Asset/Liabilities
(at Fair Value)
$
$
217,659
311,410
5,450
5,820
540,339
523,517
3,379
13,443
The application of the acquisition method of accounting resulted in a bargain purchase gain of $13.4 million, which is included in
non-interest income in the Corporation’s consolidated statement of income for year ended December 31, 2015, and a core deposit
intangible of $5.8 million ($5.1 million as of December 31, 2015). Before the bargain purchase gain recognition, the Corporation
reassessed whether all of the assets acquired and liabilities assumed had been appropriately identified, recognized and measured. The
net after-tax gain of $8.2 million represents the excess of the estimated fair value of the assets acquired (including cash payments
received from the FDIC) over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted
transaction process.
The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above:
Cash and due from banks – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature
of these assets. This balance primarily represents the cash settlement received from Popular for the net equity received, the discount
bid for the assets and other customary closing adjustments.
Loans – Fair values for loans were based on a discounted cash flow methodology that uses market-driven assumptions such as
prepayment rate, default rate, and loss severity on a loan level basis. The forecasted cash flows are then discounted by yields observed
in sales of similar portfolios in Puerto Rico and the continental U.S.
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The Corporation evaluated the residential mortgage loans acquired and determined that $227.9 million are non-credit impaired
purchased loans, which have been accounted for in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees
and Other Costs, and were recorded with a premium of $1.3 million. The remaining approximately $93.3 million of residential
mortgage loans were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality, and were recorded with a $13.4 million discount. These purchased credit
impaired loans will recognize interest income through accretion of the difference between the fair value of the loans and the expected
cash flows.
Core deposit intangible – This intangible asset represents the value of the relationships that Doral Bank had with its deposit
customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate
consideration to expected customer attrition rates, the cost of the deposit base, and the net maintenance cost attributable to customer
deposits. The Corporation recorded at acquisition $5.8 million of core deposit intangible.
Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition,
equal the amounts payable on demand at the acquisition date. The fair value adjustment of $0.8 million was applied for time deposits
because the estimated weighted-average interest rate of the assumed certificates of deposits was estimated to be above the current
market rates.
ASC Topic 805 requires the measurement of all recognized assets acquired and liabilities assumed in a business combination at
their acquisition-date fair values. Accordingly, the Corporation initially recorded amounts for the fair values of the assets acquired and
liabilities assumed based on the best information available at the acquisition date. The Corporation may retrospectively adjust these
amounts to reflect new information obtained during the measurement period (not to exceed 12 months) about facts and circumstances
that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. Any
retrospective adjustments to acquisition date fair values will affect the bargain purchase gain recognized.
During 2015, the Corporation incurred $4.6 million for acquisition and conversion costs related to loans and deposit accounts
acquired from Doral Bank that are considered non-recurring in nature, and $3.6 million on interim servicing costs until the completion
in May 2015 of the conversion to the FirstBank systems. These expenses are primarily included as part of professional fees in the
consolidated statement of income.
The Corporation’s operating results for the year ended December 31, 2015 include the operating results of the acquired assets and
assumed liabilities subsequent to the acquisition date. The Corporation also considered the pro forma requirements of ASC 805 and
deemed it not necessary to provide pro forma financial information pursuant to that standard for the Doral Bank transaction as it was
not material to the Corporation.
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NOTE 3 – RESTRICTIONS ON CASH 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, 2015 was
$251.7 million (2014 — $124.8 million). As of December 31, 2015 and 2014, 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, 2015, 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 4 – 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, 2015 and 2014 were as follows:
(Dollars in thousands)
Time deposits with other financial institutions, weighted-average interest rate 0.92%
(2014- 0.18%)
Other short-term investments, weighted-average interest rate of 0.34%
(2014 - weighted-average interest rate of 0.15%)
2015
2014
$
3,000 $
300
216,473
$ 219,473 $
16,661
16,961
As of December 31, 2015, the Corporation’s money market investments that were pledged as collateral amounted to $8.8 million,
primarily related to letters of credit (2014 - $0.2 million pledged as collateral for interest rate swaps).
170
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 5 – 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, and weighted-average yield of investment securities available for sale by contractual maturities as of
December 31, 2015 and 2014 were as follows:
(Dollars in thousands)
U.S. Treasury securities:
After 1 to 5 years
Obligations of U.S.
government-sponsored
agencies:
Due within one year
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 5 to 10 years
After 10 years
GNMA certificates:
Due within one year
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
securities
Other
After 1 to 5 years
Total investment securities
available for sale
Noncredit Loss
Component of
OTTI Recorded
in OCI
Amortized cost
December 31, 2015
Gross
Unrealized
Gains
Losses
Fair value
Weighted-
average
yield%
$
7,530
$
-
$
-
$
33
$
7,497
0.57
14,624
384,323
58,150
25,663
855
23,162
-
-
-
14,662
-
5,255
514,307
19,917
336
287,711
288,047
2
109
120,298
165,175
285,584
2,552
21,557
759,247
783,356
92
34,905
34,997
1,391,984
100
-
-
-
-
-
-
-
-
-
-
-
-
-
9,691
9,691
9,691
-
4
174
343
-
-
134
655
31
1,073
1,104
-
5
3,182
12,822
16,009
74
433
5,628
6,135
1
-
1
10
4,305
242
-
-
1,680
14,618
380,192
58,251
11,001
855
16,361
6,270
488,775
-
1,706
1,706
-
-
-
20
20
-
233
6,063
6,296
-
-
-
367
287,078
287,445
2
114
123,480
177,977
301,573
2,626
21,757
758,812
783,195
93
25,214
25,307
23,249
8,022
1,397,520
-
-
100
$
1,906,391
$
29,608
$
23,904
$
14,292
$
1,886,395
0.68
1.32
2.34
4.38
5.20
5.40
1.75
4.95
2.14
2.15
1.70
4.26
3.07
4.38
3.83
3.32
2.73
2.34
2.35
7.26
2.26
2.26
2.61
1.50
2.38
171
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Noncredit Loss
Component of
OTTI Recorded
in OCI
Amortized cost
December 31, 2014
Gross
Unrealized
Gains
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
111
45,677
45,788
1,568,429
-
12,141
12,141
12,141
42
246
-
1
-
4,219
2,077
12,419
-
5,571
256,712
76,403
27,408
887
14,927
290
24,286
383,836
1,743
1
501
20,957
21,459
181
521
7,756
8,458
1
-
1
1,260
-
-
-
-
-
5
4,854
4,859
-
-
-
315,794
40
17,609
359,799
377,448
4,341
10,100
840,499
854,940
112
33,536
33,648
31,661
6,119
1,581,830
$
1,976,261
$
12,141
$
31,951
$
30,405
$
1,965,666
1.22
1.72
4.49
5.20
5.83
1.86
2.17
3.26
3.65
3.83
3.83
3.40
3.49
2.36
2.37
7.27
2.17
2.17
2.66
2.49
(Dollars in thousands)
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
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.
172
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The aggregate amortized cost and approximate market value of investment securities available for sale
as of December 31, 2015 by contractual maturity, are shown below:
(Dollars in thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total investment securities available for sale
Amortized Cost
Fair Value
$
$
14,626
420,277
201,288
1,270,200
1,906,391
$
$
14,620
401,530
204,803
1,265,442
1,886,395
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, 2015 and 2014. 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 was recognized and the related credit loss was charged against the
amortized cost basis of the debt security.
(In thousands)
Debt securities:
Puerto Rico Government
obligations
U.S Treasury and U.S. government
agencies obligations
Mortgage-backed securities:
FNMA
FHLMC
GNMA
Other mortgage pass-through trust
certificates
(In thousands)
Debt securities:
Puerto Rico Government
obligations
U.S Treasury and U.S. government
obligations
Mortgage-backed securities:
FNMA
FHLMC
Other mortgage pass-through trust
certificates
Less than 12 months
Fair Value
Unrealized
Losses
As of December 31, 2015
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
-
$
-
$
23,008 $
21,597 $
23,008 $
21,597
198,243
929
210,504
3,661
408,747
437,305
141,890
1,047
4,516
1,338
20
88,013
19,306
-
-
778,485 $
$
-
6,803 $
25,214
366,045 $
1,780
368
-
9,691
525,318
161,196
1,047
25,214
37,097 $ 1,144,530 $
4,590
6,296
1,706
20
9,691
43,900
Less than 12 months
Fair Value
Unrealized
Losses
As of December 31, 2014
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
- $
- $
42,335 $
17,990 $
42,335 $
17,990
46,436
2,038
-
-
74
257,996
6,222
304,432
5
-
-
541,642
135,277
33,536
6,296
4,859
1,260
4,854
1,260
543,680
135,277
12,141
42,467 $ 1,059,260 $
33,536
12,141
42,546
$
48,474 $
79 $ 1,010,786 $
173
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 97% of the total available-for-sale portfolio as of December 31, 2015 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 Puerto Rico Government debt securities, with an amortized cost of $49.7 million, and on
private label MBS with an amortized cost of $34.9 million for which credit losses are evaluated on a quarterly basis. The Corporation
considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to
recover:
The length of time and the extent to which the fair value has been less than the amortized cost basis;
(cid:120)
(cid:120) Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information
available about the financial health and prospects of the issuer, credit ratings, the failure of the issuer to make scheduled
principal or interest payments, recent legislation and government actions affecting the issuer’s industry and actions taken by
the issuer to deal with the present economic climate;
Changes in the near term prospects of the underlying collateral for a security, if any, such as changes in default rates, loss
severity given default, and significant changes in prepayment assumptions; and
The level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments of the
debt securities
(cid:120)
(cid:120)
The Corporation recorded OTTI losses on available-for-sale debt securities as follows:
(In thousands)
Total other-than-temporary impairment losses
Noncredit-related impairment portion recognized in OCI
Portion of other-than-temporary impairment losses
previously recognized in OCI
Net impairment losses recognized in earnings (1)
$
$
2015
Year Ended
2014
2013
(35,806) $
19,917
(628)
(16,517) $
$
-
-
(388)
(388) $
-
-
(117)
(117)
(1) For the year ended December 31, 2015, approximately $15.9 million of the credit impairment recognized in earnings consisted of
credit losses on Puerto Rico Government debt securities and $0.6 million was associated with credit losses on private label MBS.
174
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an
OTTI is recognized in OCI:
Cumulative OTTI credit losses recognized in earnings on securities still held
December 31,
2014
Balance
Credit impairments
recognized in earnings
on securities not
previously impaired
Credit impairments
recognized in earnings on
securities that have been
previously impaired
December 31,
2015
Balance
(In thousands)
Available for sale securities
Puerto Rico Government obligations
Private label MBS
Total OTTI credit losses for available-for-sale
debt securities
$
$
- $
5,777
5,777 $
15,889 $
-
15,889 $
- $
628
628 $
15,889
6,405
22,294
(In thousands)
Available for sale securities
Private label MBS
(In thousands)
Available for sale securities
Private label MBS
Cumulative OTTI credit losses recognized in earnings on securities still held
December 31,
2013
Balance
Credit impairments
recognized in earnings
on securities not
previously impaired
Credit impairments
recognized in earnings on
securities that have been
previously impaired
December 31,
2014
Balance
$
5,389 $
-
$
388 $
5,777
Cumulative OTTI credit losses recognized in earnings on securities still held
December 31,
2012
Balance
Credit impairments
recognized in earnings
on securities not
previously impaired
Credit impairments
recognized in earnings on
securities that have been
previously impaired
December 31,
2013
Balance
$
5,272 $
-
$
117 $
5,389
As of December 31, 2015, the Corporation owns Puerto Rico Government debt securities with an aggregate amortized cost of $49.7
million (net of a $15.9 million OTTI), carried on its books at a fair value of $28.2 million. During 2015, the fair value of these
obligations decreased by $19.4 million. In February and March 2014, Standard & Poor’s (“S&P”), Moody’s Investor Service
(“Moody’s”) and Fitch Ratings (“Fitch”) downgraded the Puerto Rico Government general obligation bonds and other obligations of
Puerto Rico instrumentalities to non-investment grade categories. In June and July 2015, the three major credit rating agencies
downgraded Puerto Rico’s general obligation debt further into non-investment grade after the government’s announcements about
concerns on its ability to pay its financial obligations. The issuers of Puerto Rico government and agencies bonds held by the
Corporation, primarily bonds of the Government Development Bank for Puerto Rico (“GDB”) and of the Puerto Rico Public
Buildings Authority, have not defaulted, and the contractual payments on these securities have been made as scheduled. However, in
2015 and 2016, the Puerto Rico Government has defaulted on other bonds and implemented “clawback” measures to redirect revenues
pledged to support bonds from certain government agencies to service the general obligation debt.
During 2015, in consideration of the latest available market-based evidence implied in security valuations and information about
the Puerto Rico Government’s financial condition, including statements as to its intentions to restructure its outstanding bond
obligations, credit ratings, payment defaults and “clawback” measures, the Corporation applied a discounted cash flow analysis to its
Puerto Rico Government debt securities in order to calculate the cash flows expected to be collected and to determine if any portion of
the decline in market value of these securities was considered a credit-related other-than-temporary impairment. The analysis derives
an estimate of value based on the present value of risk-adjusted cash flows of the underlying securities and included the following
components:
175
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(cid:120)
(cid:120)
(cid:120)
The contractual future cash flows of the bonds are projected based on the key terms as set forth in the official
statements for each security. Such key terms include, among others, the interest rate, amortization schedule, if any, and
maturity date.
The risk-adjusted cash flows are calculated based on a probability of default analysis and recovery rate assumptions,
including the weighting of different scenarios of ultimate recovery, considering the credit rating of each security.
Constant monthly default rates are assumed throughout the life of the bonds, which considers the respective security's
credit rating as of the date of the analysis.
The adjusted future cash flows are then discounted at the original effective yield of each investment based on the
purchase price and expected risk-adjusted future cash flows as of the purchase date of each investment.
The discounted risk-adjusted cash flow analysis for three of the bonds held by the Corporation as part of its available-for-sale
securities portfolio resulted in a cumulative default probability in the range of 67% to 87% (weighted average of 81%), thus reflecting
that it is more likely than not that these three bonds will default during their remaining terms. Based on this analysis, the Corporation
determined that it is unlikely to receive all the remaining contractual interest and principal amounts when due on these bonds and
recorded, in 2015, other-than-temporary credit-related impairment charges amounting $15.9 million, assuming recovery rates ranging
from 35% to 80% (weighted average of 64%).
The Corporation does not have the intention to sell these securities and has sufficient capital and liquidity to hold these securities
until a recovery of the fair value occurs; as such, only the credit loss component was reflected in earnings. Given the significant and
prolonged uncertainty of a debt restructuring process, the Corporation cannot be certain that future impairment charges will not be
required against these securities.
In addition, during 2015, the Corporation recorded a $0.6 million credit-related impairment loss associated with private label MBS,
which are collateralized by fixed-rate mortgages on single-family residential properties in the United States. The interest rate on these
private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The
underlying mortgages are fixed-rate, single-family loans with original high FICO scores (over 700) and moderate original loan-to-
value ratios (under 80%), as well as moderate delinquency levels.
Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the
securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss
component was reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:
Discount rate
Prepayment rate
Projected Cumulative Loss Rate
As of
December 31, 2015
As of
December 31, 2014
Weighted
Average
14.5%
Range
14.5%
Weighted
Average
14.5%
Range
14.5%
28% 15.92% - 100.00%
7.0%
0.18% - 80.00%
32% 19.89% - 100.00%
7.9%
0.64% - 80.00%
Refer to Note 28 – Fair Value, for additional information about the valuation model for private label MBS.
No sales of securities available for sale were completed during 2015 and 2013. Total proceeds from the sale of securities available
for sale during 2014 amounted to approximately $4.9 million. 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.
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 the Corporation’s 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.
176
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of
December 31, 2015
As of
December 31, 2014
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
323,437
285,584
954,178
223,049
$
322,772
301,573
953,866
219,320
$
340,227
355,989
922,883
232,733
340,723
377,448
926,189
227,003
(In thousands)
FHLMC
GNMA
FNMA
FHLB
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, 2015 and 2014, the Corporation had no outstanding securities held to maturity that were classified as
cash and cash equivalents.
NOTE 6 – 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, 2015 and 2014, the Corporation had investments in FHLB stock with a book value of $31.3 million and $25.5
million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from
FHLB stock for 2015, 2014, and 2013 amounted to $1.1 million, $1.2 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, 2015 and 2014 was $0.9 million and $0.3 million, respectively.
177
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 7 – INTEREST AND DIVIDEND ON INVESTMENTS AND MONEY MARKET INSTRUMENTS
The following provides information about interest on investments and FHLB dividend income:
(In thousands)
Mortgage-backed securities:
Taxable
Exempt
PR government obligations, U.S. Treasury securities, and U.S.
government agencies:
Taxable
Exempt
Other investment securities (including FHLB dividends)
Taxable
Total interest income on investment securities
Interest on money market instruments:
Taxable
Exempt
Total interest income on money market instruments
Total interest and dividend income on investments and money
Year Ended December 31,
2015
2014
2013
$ 13,520
23,779
37,299
$ 16,303
28,606
44,909
$
19,566
25,955
45,521
2,628
6,439
9,067
1,357
5,446
6,803
1,075
47,441
1,169
52,881
1,490
658
2,148
1,734
158
1,892
1,218
5,429
6,647
1,359
53,527
1,231
696
1,927
market instruments
$ 49,589
$ 54,773
$
55,454
The following table summarizes the components of interest and dividend income on investments:
(In thousands)
Interest income on investment securities and money
market investments
Dividends on FHLB stock
Year Ended December 31,
2015
2014
2013
$
48,514 $
1,075
53,604 $
1,169
54,095
1,359
Total interest income and dividends on investments
$
49,589 $
54,773 $
55,454
178
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 8 – LOANS HELD FOR INVESTMENT
The following provides information about the loan portfolio held for investment:
(In thousands)
Residential mortgage loans, mainly secured by first mortgages
$
3,344,719
$
3,011,187
As of
December 31,
2015
As of
December 31,
2014
Commercial loans:
Construction loans
Commercial mortgage loans
Commercial and Industrial loans (1)
Total commercial loans
Finance leases
Consumer loans
Loans held for investment
Allowance for loan and lease losses
Loans held for investment, net
156,195
1,537,806
2,407,996
4,101,997
229,165
1,597,984
9,273,865
123,480
1,665,787
2,479,437
4,268,704
232,126
1,750,419
9,262,436
(240,710)
(222,395)
$
9,033,155
$
9,040,041
(1) As of December 31, 2015 and 2014, includes $1.0 billion and $1.1 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, 2015 and 2014, the Corporation had net deferred origination costs on its loan portfolio amounting to $6.5
million and $9.3 million, respectively. The total loan portfolio is net of unearned income of $32.9 million and $35.1 million as of
December 31, 2015 and 2014, respectively.
As of December 31, 2015, the Corporation was servicing residential mortgage loans owned by others aggregating $2.4 billion
(2014 — $2.3 billion), construction and commercial loans owned by others aggregating $0.1 million (2014 — $2.7 million), and
commercial loan participations owned by others aggregating $364.9 million (2014 — $349.0 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 $2.0 billion as of December 31, 2015 (2014 — $1.6 billion).
179
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Loans held for investment on which accrual of interest income had been discontinued were as follows:
(In thousands)
Non-performing loans:
Residential mortgage
Commercial mortgage
Commercial and Industrial
Construction:
Land
Construction-commercial (1)
Construction-residential
Consumer:
Auto loans
Finance leases
Other consumer loans
Total non-performing loans held for investment (2)(3)(4)
As of
December 31,
2015
As of
December 31,
2014
$
$
169,001 $
51,333
137,051
12,174
39,466
2,996
17,435
2,459
10,858
442,773 $
180,707
148,473
122,547
15,030
-
14,324
22,276
5,245
15,294
523,896
________________
(1)During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to
sell a $40.0 million construction loan in the Virgin Islands. Accordingly, the loan was transferred back from held for sale to held
for investment and continues to be classified as a TDR and a non-performing loan.
(2)As of December 31, 2015 and December 31, 2014, excludes $8.1 million and $54.6 million, respectively, of non-performing loans
held for sale.
(3) Amount excludes PCI loans with a carrying value of approximately $173.9 million and $102.6 million as of December 31, 2015
and 2014, respectively, primarily mortgage loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial 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 loans will accrete interest income over the remaining life of the loans using an estimated cash flow
analysis.
(4) Non-performing loans exclude $414.9 million and $494.6 million of TDR loans that are in compliance with the modified terms and
in accrual status as of December 31, 2015 and 2014, respectively.
If these loans were accruing interest, the additional interest income realized would have been $37.8 million (2014— $48.9 million;
2013 — $40.3 million).
Loans in Process of Foreclosure
As of December 31, 2015, the recorded investment of residential mortgage loans collateralized by residential real estate property
that are in the process of foreclosure amounted to $152.7 million. The Corporation commences the foreclosure process on residential
real estate loans when a borrower becomes 120 days delinquent in accordance with the guidelines of the Consumer Financial
Protection Bureau (CFPB). Foreclosure procedures and timelines vary depending on whether the property is located in a judicial or
non-judicial state. Judicial states (Puerto Rico) require the foreclosure to be processed through the state’s court while foreclosure in
non-judicial states is processed without court intervention. Foreclosure timelines vary according to state law and Investor Guidelines.
Occasionally foreclosures may be delayed due to mandatory mediations, bankruptcy, court delays and title issues, among other
reasons.
180
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, 2015
(In thousands)
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 (5)
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
Total loans
held for
investment
90 days past
due and still
accruing (2)
Current
$
-
-
$
6,048
90,406
90,168
185,018
$
96,216
275,424
$
-
170,766
$
46,925
2,755,388
$
143,141
3,201,578
$
5,577
-
-
-
-
6,412
24,729
161
11,722
-
70,836
7,664
9,462
93,539
$
16,787
3,100
5,524
164,889
$
150,893
63,805
12,350
39,466
6,042
17,435
2,459
15,124
582,760
$
162,882
88,534
12,511
51,188
6,042
105,058
13,223
30,110
841,188
-
3,147
2,245,114
1,446,125
2,407,996
1,537,806
-
-
-
39,363
32,142
14,949
51,874
83,330
20,991
90,168
16,017
13,842
12,472
176
-
3,046
-
-
-
173,913
$
829,922
215,942
632,894
8,258,764
$
934,980
229,165
663,004
9,273,865
$
-
-
4,266
139,987
$
(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 $37.3 million of residential mortgage loans insured by the FHA or guaranteed by the VA
which are over 15 months delinquent, and are no longer accruing interest as of December 31, 2015. Based on an update to the analysis of historical collections from these agencies performed in
the fourth quarter of 2015, the Corporation determined to discontinue the recognition of income for FHA/VA loans once loans are over 15 months delinquent. Previously, the
Corporation discontinued the recognition of interest income on these loans when they were 18 months delinquent as to principal or interest.
(3) As of December 31, 2015, includes $38.5 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 as of December 31, 2015 amounted to $11.0 million, $162.9 million, $38.6 million, $5.7 million, and $0.8 million, respectively.
(5) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to sell a $40.0 million construction loan in the Virgin Islands.
Accordingly, the loan was transferred back from held for sale to held for investment.
181
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2014
(In thousands)
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
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
$
22,217
-
-
-
-
7,445
15,482
210
-
-
143,928
171,281
15,264
-
14,324
173,590
186,763
15,474
-
14,324
-
3,393
2,305,847
1,475,631
2,479,437
1,665,787
-
-
-
40,447
24,562
28,673
55,921
24,562
42,997
81,055
18,371
21,381
22,808
234
-
-
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
$
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 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.
182
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s credit quality indicators by loan type as of December 31, 2015 and 2014 are summarized below:
December 31, 2015
(In thousands)
Commercial Mortgage
Construction:
Land
Construction-commercial (2)
Construction-residential
Commercial and Industrial
December 31, 2014
(In thousands)
Commercial Mortgage
Construction:
Land
Construction-commercial
Construction-residential
Commercial and Industrial
Commercial Credit Exposure-Credit Risk Profile based on Creditworthiness
Category:
Substandard
Doubtful
Loss
Total
Adversely
Classified (1)
Total Portfolio
$
252,941
$
140
$
-
$
253,081
$
1,537,806
14,035
39,466
2,996
140,827
1
-
-
71,341
-
-
-
354
14,036
39,466
2,996
212,522
51,874
83,330
20,991
2,407,996
Commercial Credit Exposure-Credit Risk Profile based on Creditworthiness
Category:
Substandard
Doubtful
Loss
Total
Adversely
Classified (1)
Total Portfolio
$
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
(1) Excludes $8.1 million (construction-land loans) and $54.6 million ($7.8 million land, $39.1 million construction-commercial,$0.9 million
construction-residential and $6.8 million commercial mortgage) as of December 31, 2015 and 2014, respectively, of non-performing loans
held for sale.
(2) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to sell a
$40.0 million construction loan in the Virgin Islands. Accordingly, the loan was transferred back from held for sale to held for investment
and continues to be classified as a TDR and a non-performing loan.
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 that it is not
practical or desirable to defer writing off this basically worthless asset even though partial recovery may be obtained in the future.
There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.
183
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2015
(In thousands)
Performing
Purchased Credit-Impaired (2)
Non-performing
Total
Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity
Residential Real-Estate
Other
residential
loans
Finance
Leases
Other
Consumer
FHA/VA/
Guaranteed (1)
Consumer
Auto
$
$
143,141
-
-
143,141
$
$
2,861,811
170,766
169,001
3,201,578
$
$
917,545
-
17,435
934,980
$
$
226,706
-
2,459
229,165
$
$
652,146
-
10,858
663,004
(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 $37.3 million of
residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 15 months delinquent, and are no longer accruing
interest as of December 31, 2015. Based on an analysis of historical collections from these agencies performed in the fourth quarter of 2015,
the Corporation determined to discontinue the recognition of income for FHA/VA loans once loans are over 15 months delinquent. Previously,
the Corporation discontinued the recognition of interest income on these loans when they were 18 months delinquent as to principal or interest.
(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, 2014
Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity
(In thousands)
Performing
Purchased Credit-Impaired (2)
Non-performing
Total
Residential Real-Estate
Other
residential
loans
FHA/VA/
Guaranteed (1)
Consumer
Auto
Finance
Leases
Other
Consumer
$
$
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
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.
184
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
(In thousands)
As of December 31, 2015
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 on
Accrual Basis
Interest
Income
Recognized
on Cash Basis
$
$
$
$
$
$
-
65,495
54,048
27,492
-
39,466
3,046
-
-
2,618
192,165
-
395,173
$
$
$
-
74,146
66,448
29,957
-
40,000
3,046
-
-
4,300
217,897
-
440,947
$
$
$
27,479
40,634
-
-
-
-
-
-
-
-
-
-
-
-
21,787
3,073
$
$
$
-
67,282
54,967
28,326
-
39,736
3,098
-
-
2,766
196,175
-
398,790
30,518
143,214
164,050
18,096
148,547
9,578
-
1,426
21,581
2,077
13,816
614,344
-
460,668
$
$
13,758
-
2,180
21,581
2,077
14,043
699,270
-
515,093
$
$
81,527
107,082
1,060
-
142
6,653
86
1,684
52,581
-
21,787
3,073
$
$
9,727
-
1,476
23,531
2,484
14,782
629,855
-
466,072
85,485
170,706
194,007
18,096
176,873
1,060
-
142
6,653
86
1,684
52,581
$
9,727
39,736
4,574
23,531
2,484
17,548
826,030
$
9,578
39,466
4,472
21,581
2,077
16,434
806,509
$
13,758
40,000
5,226
21,581
2,077
18,343
917,167
185
$
$
$
$
$
$
$
-
558
1,329
-
-
-
164
-
-
21
2,072
-
17,543
347
2,338
44
-
-
1,494
170
1,592
23,528
-
18,101
1,676
2,338
44
-
164
1,494
170
1,613
25,600
$
$
$
$
$
-
688
832
693
-
-
-
-
-
115
2,328
-
1,640
501
1,939
70
-
-
-
-
25
4,175
-
2,328
1,333
2,632
70
-
-
-
-
140
6,503
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Recorded
Investment
Unpaid
Principal
Balance
Related
Specific
Allowance
Average
Recorded
Investment
Interest Income
Recognized
Accrual Basis
Interest
Income
Recognized
Cash Basis
(In thousands)
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
$
-
75,711
$
-
1,118
$
113,674
42,011
3,030
-
8,123
-
-
3,924
246,473
-
357,129
104,191
198,930
10,734
11,867
8,130
18,504
2,367
12,291
724,143
-
432,840
217,865
240,941
13,764
11,867
16,253
18,504
2,367
16,215
970,616
$
$
$
$
$
$
$
$
$
$
846
-
38
-
167
-
-
75
2,244
-
15,852
1,891
5,097
64
-
-
1,173
198
1,634
25,909
-
16,970
2,737
5,097
102
-
167
1,173
198
1,709
28,153
$
$
$
$
$
-
461
2,670
751
1
-
8
-
-
79
3,970
-
1,853
638
564
25
515
-
-
-
40
3,635
-
2,314
3,308
1,315
26
515
8
-
-
119
7,605
-
-
-
-
-
-
-
-
-
-
-
-
10,854
14,289
21,314
794
790
993
2,787
253
3,131
55,205
-
10,854
14,289
21,314
794
790
993
2,787
253
3,131
55,205
$
-
74,177
$
-
80,522
$
109,271
132,170
41,131
2,994
-
7,461
-
-
3,778
238,812
-
350,067
$
$
47,647
6,357
-
10,100
-
-
5,072
281,868
-
396,203
101,467
116,329
195,240
226,431
9,120
11,790
8,102
16,991
2,181
11,637
706,595
-
424,244
$
$
12,821
11,790
8,834
16,991
2,181
12,136
803,716
-
476,725
210,738
248,499
236,371
274,078
12,114
11,790
15,563
16,991
2,181
15,415
945,407
19,178
11,790
18,934
16,991
2,181
17,208
1,085,584
$
$
$
$
$
$
$
$
$
$
$
186
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables show the activity for impaired loans during 2015, 2014 and 2013 and the related specific
reserves:
(In thousands)
Impaired Loans:
Balance at beginning of year
Loans determined impaired during the year
Charge-offs (1)
Loans sold, net of charge-offs
Reclassification from (to) loans 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
2015
2014
2013
$
$
945,407
160,837
(99,023)
(67,836)
40,005
3,340
(57,728)
(46,489)
(72,004)
806,509
$
$
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
(1) For the year ended December 31, 2015, includes $63.9 million of charge-offs related to a bulk sale of assets, mostly comprised
of non-performing and adversely classified commercial loans, further discussed below.
(In thousands)
Specific Reserve:
Balance at beginning of year
Provision for loan losses
Net charge-offs
Balance at end of year
PCI Loans
2015
2014
2013
$
$
55,205
91,515
(94,139)
52,581
$
$
102,601
58,758
(106,154)
55,205
$
$
221,749
188,280
(307,428)
102,601
As described in Note 2 - Business Combination, the Corporation acquired PCI loans as part of the Doral Bank transaction and in
previously completed asset acquisitions, which are accounted for under ASC 310-30. These previous transactions include the
acquisition from Doral Financial in the second quarter of 2014 of all its rights, title and interest in first and second residential
mortgages loans in full satisfaction of secured borrowings owed by such entity to FirstBank, and the acquisition in 2012 of a
FirstBank-branded credit card loans portfolio from FIA Card Services (“FIA”).
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. Since the loans are accounted for by the Corporation under ASC 310-30, they 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 recognizes additional losses on this portfolio when it is probable that the Corporation will be unable to
collect all cash flows expected as of the acquisition date plus additional cash flows expected to be collected arising from changes in
estimates after the acquisition date.
187
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The carrying amount of PCI loans follows:
(In thousands)
Residential mortgage loans
Commercial mortgage loans
Credit Cards
Total PCI loans
Allowance for loan losses
Total PCI loans, net of allowance for loan losses
As of
As of
December 31,
December 31,
2015
2014
$
$
$
170,766
$
3,147
-
173,913
(3,962)
169,951
$
$
98,494
3,393
717
102,604
-
102,604
The following tables present PCI loans by past due status as of December 31, 2015 and 2014:
As of December 31, 2015
(In thousands)
Residential mortgage loans (1)
Commercial mortgage loans (1)
30-59 Days
60-89 Days
90 days or
more
Total Past
Due
Current
Total PCI
loans
$
$
-
-
-
$
$
16,094
-
16,094
$
$
22,218
992
23,210
$
$
38,312
992
39,304
$
$
132,454
2,155
134,609
$
$
170,766
3,147
173,913
_____________
(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 past due 30-59 days as of
December 31, 2015 amounted to $23.6 million.
As of December 31, 2014
30-59 Days
60-89 Days
(In thousands)
Residential mortgage loans (1)
$
Commercial mortgage loans (1)
Credit Cards
$
90 days or
more
Total Past
Due
(In thousands)
Current
Total PCI
loans
-
-
47
47
$
$
12,571
$
15,176
$
27,747
$
70,747
$
356
25
443
42
799
114
2,594
603
98,494
3,393
717
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.
188
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 Bank in the first quarter of 2015 accounted for
pursuant to ASC 310-30 as of the acquisition date:
(In thousands)
Contractually- required principal and interest
Less: Nonaccretable difference
Cash flows expected to be collected
Less: Accretable yield
Fair value of loans acquired in 2015 (1)
$
$
166,947
(48,739)
118,208
(38,319)
79,889
_________
(1) Amounts are estimates based on the best information available at the acquisition date and adjustments in future quarters may occur
up to one year from the date of acquisition.
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 yield. 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 2015, the Corporation established
a $4.0 million reserve related to PCI loans acquired from Doral Financial in 2014. The reserve is driven by the revisions to the
expected cash flows of the portfolio for the remaining term of the loan pool based on market conditions.
Changes in the accretable yield of PCI loans for the years ended December 31, 2015 and 2014 were as follows:
(In thousands)
Balance at beginning of year
Additions (accretable yield at acquisition
of loans from Doral)
Accretion recognized in earnings
Reclassification from non-accretable
Balance at end of period
December 31, 2015
December 31, 2014
$
$
82,460
$
38,319
(11,188)
8,794
118,385
$
-
86,759
(4,299)
-
82,460
189
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Changes in the carrying amount of loans accounted for pursuant to ASC 310-30 follows:
(In thousands)
Balance at beginning of period
Additions (1)
Accretion
Collections
Foreclosures
Ending balance
Allowance for loan losses
Ending balance, net of allowance for loan losses
Year ended
Year ended
December 31, 2015
December 31, 2014
$
$
$
102,604
79,889
11,188
(19,572)
(196)
173,913
(3,962)
169,951
$
$
$
4,791
102,831
4,299
(9,317)
-
102,604
-
102,604
(1) Represents the estimated fair value of the PCI loans acquired from Doral Bank in 2015 and Doral Financial in 2014 at the date of
acquisition.
The outstanding principal balance of PCI loans, including amounts charged off by the Corporation, amounted to $218.1 million as
of December 31, 2015 (December 31, 2014- $135.5 million, December 31, 2013- $22.7 million).
Purchases and Sales of Loans
As described in Note 2 - Business Combination, to the consolidated financial statements, on February 27, 2015, FirstBank acquired
$324.8 million in principal of loans, primarily residential mortgage loans through an alliance with other co-bidders on the failed Doral
Bank, a portion of which was accounted for as PCI loans, as described above. 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, through an FDIC-
facilitated transaction. The transaction was accounted for under ASC Topic 820, which requires all recognized assets acquired and
liabilities assumed in a business combination to be measured at their acquisition-date fair values. The fair value of the loans acquired
in this transaction was $311.4 million at the acquisition date.
In addition, during 2015, the Corporation purchased $91.9 million of residential mortgage loans consistent with a strategic progra m
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. Also during 2015, the Corporation purchased a $21.1 million participation in a commercial
mortgage loan.
In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA and GSEs
such as FNMA and FHLMC, which generally securitize the transferred loans into mortgage-backed securities for sale into the
secondary market. The Corporation sold approximately $141.8 million of performing residential mortgage loans to FNMA and
FHLMC during 2015. Also during 2015, the Corporation sold approximately $286.0 million of FHA/VA mortgage loans to GNMA,
which packages them into mortgage-backed securities. 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 the delinquent loan, it is
considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase
liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan.
190
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
During 2015, 2014, and 2013, the Corporation repurchased pursuant to its repurchase option with GNMA $19.2 million, $37.8
million, and $28.3 million, respectively, of loans previously sold to GNMA. The principal balance of these loans is fully guaranteed
and the risk of loss related to the repurchased loans 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 $1.4 million, $2.3 million, and $6.1 million during
2015, 2014, and 2013, 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. No losses related to breaches of representations and warranties
were incurred in 2015. Historically, losses experienced on these loans have been immaterial. As a consequence, as of December 31,
2015, 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 $20.0 and $53.0 million of commercial mortgage loan participations during 2015 and 2014, respectively.
Bulks Sale of Assets
During the second quarter of 2015, the Corporation completed the sale of commercial and construction loans with a book value of
$147.5 million ($90.7 million of commercial mortgage loans, $45.8 million of commercial and industrial, and $11.0 million of
construction loans), comprised mostly of non-performing and adversely classified loans, as well as other real estate owned (“OREO”)
with a book value of $2.9 million, in a cash transaction. The sale price of this bulk sale was $87.3 million. Approximately $15.3
million of reserves had been allocated to the loans. This transaction resulted in total charge-offs of $61.4 million and an incremental
pre-tax loss of $48.7 million, including $0.9 million in professional service fees directly attributable to the bulk sale.
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, 2015, approximately 81% have credit risk concentration in Puerto Rico, 12% in the United States, and 7%
in the USVI and BVI.
As of December 31, 2015, the Corporation had $316.0 million of credit facilities, excluding investment securities, granted to the
Puerto Rico government, its municipalities and public corporations, of which $314.6 million was outstanding (book value of $311.0
million), compared to $308.0 million outstanding as of December 31, 2014. In addition, the outstanding balance of facilities granted to
the government of the Virgin Islands amounted to $126.2 million as of December 31, 2015, compared to $57.7 million as of
December 31, 2014. Approximately $199.5 million of the granted credit facilities outstanding consisted of loans to municipalities in
Puerto Rico whose revenues are independent of the central government. 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 88% of the Corporation’s municipality exposure consists primarily of senior priority loans concentrated on five of the
largest municipalities in Puerto Rico (San Juan, Carolina, Bayamon, Mayaguez and Guaynabo). These municipalities are required by
law to levy special property taxes in such amounts as shall be required for the payment of all its general obligation bonds and loans.
Late in 2015, GDB and the Municipal Revenue Collection Center (“CRIM”) signed a deed of trust. Through this deed, GDB, as a
fiduciary, is bound to keep the CRIM funds separate from any other deposits and the funds should be distributed by the GDB pursuant
to the applicable law. Approximately $18.9 million consisted of loans to units of the Puerto Rico central government, and
approximately $96.3 million ($92.6 million book value) consisted 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 credit facility extended to the Puerto Rico
Electric Power Authority (“PREPA”), with a book value of $71.1 million as of December 31, 2015. The PREPA credit facility was
placed in non-accrual status in the first quarter of 2015, and interest payments are now recorded on a cost-recovery basis. Major public
corporations have varying degrees of independence from the central government and many receive appropriations or other payments
191
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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, as of December 31, 2015, the Corporation had $129.4 million outstanding in financings to the hotel industry in Puerto
Rico where the borrower and operations of the underlying collateral are the primary sources of repayment and the Puerto Rico
Tourism Development Fund (the “TDF”) provides a secondary guarantee for payment performance, compared to $133.3 million as of
December 31, 2014. The TDF is a subsidiary of the GDB that facilitates private-sector financings to Puerto Rico’s hotel industry. The
TDF provides guarantees to financings and may provide direct loans. As a result of liquidity risk and uncertainty regarding the Puerto
Rico government fiscal situation, the Corporation adversely classified this $129.4 million exposure during the third quarter of 2015.
Since late 2012, the Corporation has received combined payments from the borrowers and TDF as guarantor sufficient to cover
contractual payments on these loans, including collections of principal and interest from TDF of approximately $5.3 million in 2015
and $6.1 million in 2014. These loans were current and remained in accrual status as of December 31, 2015.
During 2015, the Corporation increased by approximately $35 million the general reserve for commercial loans extended to or
guaranteed by the Puerto Rico Government (excluding municipalities), including a $19.2 million charge to the provision for loan
losses related to increased qualitative reserve factors applied to these loans in light of recent events surrounding the Puerto Rico
Government’s fiscal situation. In addition, during 2015, the specific reserve allocated to the PREPA credit facility was increased by
approximately $4.3 million. As of December 31, 2015, the total reserve coverage ratio (general and specific reserves) related to
commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 19%.
In addition, the Corporation had $124.6 million in indirect exposure to residential mortgage loans to individual borrowers that are
guaranteed by the Puerto Rico Housing Finance Authority. Residential mortgage loans guaranteed by the Puerto Rico Housing
Finance Authority are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a
borrower default. The Puerto Rico Government guarantees up to $75 million of the principal insured by the mortgage loans insurance
program. According to the most recently released audited financial statements, as of June 30, 2014, the Puerto Rico Housing Finance
Authority mortgage loans insurance program covered loans aggregating to approximately $546 million. The regulations adopted by
the Puerto Rico Housing Finance Authority, requires the establishment of adequate reserves to guarantee the solvency of the mortgage
loans insurance fund. As of June 30, 2014, the Puerto Rico Housing Finance Authority had restricted net position for such purposes of
approximately $72.5 million.
As disclosed in Note 5- Investment Securities, 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, including the government’s announcements regarding its ability to pay debt, recent
payment defaults of certain bonds, “clawback” measures implemented to redirect revenues to support bonds from certain government
agencies to service the general obligation debt, 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, 2015, the
Corporation’s total TDR loans of $661.6 million consisted of $382.7 million of residential mortgage loans, $150.3 million of
commercial and industrial loans, $44.5 million of commercial mortgage loans, $45.7 million of construction loans, and $38.4 million
of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $0.2 million as of December 31, 2015.
The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of
the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments, 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.
192
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loans 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 TDR when the trial offer is made and continue to be classified as TDR regardless of whether the
borrower enters into a permanent modification. As of December 31, 2015, the Corporation classified an additional $6.7 million of
residential mortgage loans as TDR 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 SAG 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 are not considered to be concessions, and the loans
continue to be recorded as performing.
193
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Selected information on TDR loans that includes the recorded investment by loan class and modification type is
summarized in the following tables. This information reflects all TDR loans:
(In thousands)
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-commercial (2)
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
Interest rate
below market
Maturity or
term
extension
As of December 31, 2015
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or
interest
Other (1)
Total
$
$
29,066 $
4,379
2,163
-
-
-
-
-
89
35,697 $
6,027 $
1,244
75,104
229
-
-
2,330
621
1,604
87,159 $
297,310 $
26,109
27,214
2,165
-
3,046
12,388
1,456
11,026
380,714 $
-
-
3,027
-
39,466
-
-
-
327
42,820
$
$
50,269 $
12,766
42,746
372
-
436
6,864
-
1,748
115,201 $
382,672
44,498
150,254
2,766
39,466
3,482
21,582
2,077
14,794
661,591
(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) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to sell a
$40.0 million construction loan in the Virgin Islands. Accordingly, the loan was transferred back from held for sale to held for investment
and continues to be classified as a TDR and a non-performing loan.
(In thousands)
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
As of December 31, 2014
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or
interest
Other (1)
Total
$
$
24,850 $
29,881
7,533
-
6,154
-
-
37
68,455 $
5,859 $
12,737
80,642
202
337
380
376
129
100,662 $
283,317 $
72,493
31,553
1,732
3,112
10,363
1,805
10,812
415,187 $
-
-
3,074
-
-
-
-
443
3,517
$
$
35,749 $
12,655
49,124
536
434
6,248
-
1,886
106,632 $
349,775
127,766
171,926
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 above.
(2) Excludes TDR loans held for sale amounting to $45.7 million as of December 31, 2014.
194
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands)
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
As of December 31, 2013
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or
interest
Other (1)
Total
$
$
23,428 $
36,543
12,099
878
-
6,054
-
-
227
79,229 $
6,059 $
12,985
11,341
2,012
-
160
706
1,286
256
34,805 $
274,562 $
83,993
12,835
1,760
3,924
3,173
8,350
1,072
8,638
398,307 $
-
7
3,122
-
-
994
-
-
-
4,123
$
$
33,195 $
20,048
52,554
675
-
513
5,066
-
1,743
113,794 $
337,244
153,576
91,951
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.
The following table presents the Corporation's TDR loans activity:
Year Ended
December 31, 2015
Year Ended
December 31, 2014
Year Ended
December 31, 2013
(In thousands)
Beginning balance of TDR loans
New TDR loans
Increases to existing TDR loans - additional disbursements
Charge-offs post-modification (1)
Sales, net of charge-offs
Foreclosures
Removed from TDR classification
TDR loans transferred from (to) held for sale
Paid-off and partial payments
Ending balance of TDR loans
$
$
694,453
111,890
1,018
(64,116)
(44,048)
(39,706)
-
40,005
(37,905)
661,591
$
$
$
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
(1) For the year ended December 31, 2015 includes $45.3 million of charge-offs related to TDR loans held for sale
included in the bulk sale of assets.
195
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
TDRs are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their
contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in
full under the restructured terms is expected, the loan may remain on accrual status. Otherwise, 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 loan 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.
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 limit 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 2015 and 2014.
The following table provides a breakdown between accrual and nonaccrual status of TDR loans:
(In thousands)
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Construction-commercial (2)
Construction-residential
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
As of December 31, 2015
Accrual
Nonaccrual (1)
Total TDR
loans
$
$
303,885
29,121
48,392
924
-
3,046
14,823
1,980
12,737
414,908
$
$
78,787
15,377
101,862
1,842
39,466
436
6,759
97
2,057
246,683
$
$
382,672
44,498
150,254
2,766
39,466
3,482
21,582
2,077
14,794
661,591
(1) Included in nonaccrual loans are $118.2 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) During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to sell a
$40.0 million construction loan in the Virgin Islands. Accordingly, the loan was transferred back from held for sale to held for investment
and continues to be classified as a TDR and a non-performing loan.
196
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands)
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
As of December 31, 2014
Accrual
Nonaccrual (1)(2)
Total TDR
loans
$
$
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 TDR loans held for sale with a carrying value of $45.7 million as of December 31, 2014.
TDR loans exclude restructured residential mortgage loans that are guaranteed by the U.S. federal government (i.e., FHA/VA
loans) totaling $77.6 million. The Corporation excludes FHA/VA guaranteed loans from TDR loans statistics given that, in the event
that the borrower defaults on the loan, the principal and interest (at the specified 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 TDR loans completed during 2015, 2014 and 2013 were as follows:
(In thousands)
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
Year ended December 31, 2015
Number of
contracts
Pre-modification
Outstanding Recorded
Investment
Post-modification
Outstanding Recorded
Investment
408
16
5
7
756
55
1,338
2,585
$
$
67,006
22,366
5,971
603
12,219
1,447
8,158
117,770
$
$
64,679
19,914
5,351
600
11,985
1,250
8,111
111,890
197
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands)
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans
Commercial Mortgage loans
Commercial and Industrial loans
Construction loans:
Land
Consumer loans - Auto
Finance Leases
Consumer loans - Other
Total Troubled Debt Restructurings
(In thousands)
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
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
Year ended December 31, 2013
Number of
contracts
Pre-modification
Outstanding Recorded
Investment
Post-modification
Outstanding Recorded
Investment
292
17
27
7
1
557
75
1,452
2,428
$
$
48,181
6,000
79,531
341
195
7,582
1,435
6,518
149,783
$
$
48,664
6,161
53,525
344
195
7,582
1,435
6,518
124,424
198
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 TDR that defaulted during the years ended December 31, 2015 2014, and 2013, and had become
TDR during the 12 months preceding the default date were as follows:
2015
Year ended December 31,
2014
2013
Number of
contracts
Recorded
Investment
Number of
contracts
Recorded
Investment
Number of
contracts
Recorded
Investment
(In thousands)
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
69
1
4
-
-
13
6
172
265
$
$
10,240
2,179
5,745
-
-
159
185
706
19,214
55
2
2
1
-
45
6
241
352
$
$
8,087
4,604
1,537
46
-
697
115
989
16,075
81
1
2
2
1
9
3
40
139
$
$
13,415
46,102
3,829
66
186
86
38
219
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 obligation is not forgiven to the borrower, 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, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time
of the restructuring).
The recorded investment in loans held for investment restructured using the A/B note restructure workout strategy was
approximately $39.3 million and $46.0 million at December 31, 2015 and 2014, 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 2015, 2014
and 2013:
(In thousands)
Principal balance deemed collectible at end of year
Amount (recovered) charged off
Charges (reductions) to the provision for loan losses
Allowance for loan losses at end of year
December 31, 2015
39,329
$
-
$
131
$
862
$
December 31, 2014
46,032
$
(7,501)
$
(8,341)
$
731
$
December 31, 2013
78,342
$
20,889
$
(4,084)
$
1,436
$
Of the loans comprising the $39.3 million that have been deemed to be collectible as of December 31, 2015, approximately $39.2
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.
199
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 9 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for loan and lease losses were as follows:
Year Ended December 31, 2015
(In thousands)
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, 2014
(In thousands)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Residential
Commercial
Mortgage Loans Mortgage Loans
Commercial and
Industrial Loans
Construction
Loans
Consumer
Loans
Total
27,301 $
(19,317)
1,209
30,377
39,570 $
21,787 $
3,837 $
13,946 $
50,894 $
(56,101)
6,534
66,884
68,211 $
3,073 $
125 $
65,013 $
63,721 $
(33,844)
4,316
34,575
68,768 $
18,096 $
- $
50,672 $
12,822 $
(4,994)
2,582
(6,891)
3,519 $
1,202 $
- $
2,317 $
67,657 $
(62,465)
8,350
47,100
60,642 $
8,423 $
- $
52,219 $
222,395
(176,721)
22,991
172,045
240,710
52,581
3,962
184,167
3,344,719 $
460,668 $
1,537,806 $
81,527 $
2,407,996 $
170,706 $
156,195 $
53,516 $
1,827,149 $
40,092 $
9,273,865
806,509
170,766 $
3,147 $
- $
- $
- $
173,913
2,713,285 $
1,453,132 $
2,237,290 $
102,679 $
1,787,057 $
8,293,443
Residential
Commercial
Mortgage Loans Mortgage Loans
Commercial and
Industrial Loans
Construction
Loans
Consumer
Loans
Total
33,110 $
(24,345)
1,049
17,487
27,301 $
10,854 $
- $
16,447 $
3,011,187 $
424,244 $
98,494 $
2,488,449 $
73,138 $
(25,807)
10,639
(7,076)
50,894 $
14,289 $
- $
36,605 $
1,665,787 $
210,738 $
3,393 $
1,451,656 $
85,295 $
(61,935)
3,680
36,681
63,721 $
21,314 $
- $
42,407 $
2,479,437 $
236,371 $
- $
2,243,066 $
35,814 $
(11,533)
6,049
(17,508)
12,822 $
2,577 $
- $
10,245 $
123,480 $
39,467 $
- $
84,013 $
58,501 $
(76,696)
5,906
79,946
67,657 $
6,171 $
- $
61,486 $
1,982,545 $
34,587 $
717 $
1,947,241 $
285,858
(200,316)
27,323
109,530
222,395
55,205
-
167,190
9,262,436
945,407
102,604
8,214,425
As discussed in Note 8- Loans Held For Investment, under the subheading “Bulk Sale of Assets,” during the second quarter of 2015,
the Corporation completed the sale of commercial and construction loans with a book value of $147.5 million, mostly comprised of
non-performing and adversely classified loans. This transaction resulted in charge-offs of approximately $61.4 million.
The Corporation has considered the charge-offs information related to the second quarter 2015 bulk sale in its estimates of credit
impairment for loans collectively measured. In the second quarter, the total bulk sale charge-offs were included in the determination of
historical loss rates with no reduction for the additional market discount related to the bulk sale resolution; in the past, the Corporation
had separated the market component of the loss. The decision to include total charge-offs, with no qualitative adjustment for the steep
discount on this bulk sale, took into consideration the potential use of similar credit resolution strategies in the future in light of the
current economic conditions in Puerto Rico. The effect of this position resulted in an increase of $15.5 million in the general reserve
for loan losses determined for loans collectively evaluated for impairment. During the third quarter of 2015, the Corporation further
refined its methodology by allocating the second quarter bulk sale losses over an estimated realization period of eight quarters which
would reflect a more typical loss resolution pattern. Management believes that this loss estimation process is more indicative of the
current experience related to the average period for a loan to migrate to asset classification categories and the eventual charge-off.
As of December 31, 2015, the Corporation maintained a $0.4 million reserve for unfunded loan commitments mainly related to
outstanding 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
200
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 10 – LOANS HELD FOR SALE
The Corporation’s loans held-for-sale portfolio was composed of:
(In thousands)
Residential mortgage loans
Construction loans
Commercial mortgage loans
Total
December 31,
2015
2014
$
$
27,734
8,135
-
35,869
$
$
22,315
47,802
6,839
76,956
Non-performing loans held for sale totaled $8.1 million as of December 31, 2015 and $54.6 million as of December 31, 2014.
During the third quarter of 2015, upon the signing of a new agreement with the borrower, the Corporation changed its intent to sell
a $40.0 million construction-commercial loan in the Virgin Islands. Accordingly, the loan was transferred back from held for sale to
held for investment and continues to be classified as a TDR and a non-performing loan.
During the second quarter of 2015, the Corporation completed the sale of a $6.6 million non-performing commercial mortgage loan
as part of the bulk sale of assets.
NOTE 11 – OTHER REAL ESTATE OWNED
The following table presents OREO inventory as of the dates indicated:
(In thousands)
OREO
OREO balances, carrying value:
Residential (1)
Commercial
Construction
Total
December 31,
2015
December 31,
2014
$
$
43,563
87,849
15,389
146,801
$
$
29,579
75,654
18,770
124,003
(1) As of December 31, 2015, excludes $8.9 million of foreclosures related to loans guaranteed by the FHA/VA completed in 2015 that meet
the conditions of ASC 310-40 and are presented as a receivable (other assets) in the statement of financial condition.
201
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 12 – 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:
(In thousands)
Balance at December 31, 2013
New loans
Payments
Other changes
Balance at December 31, 2014
New loans
Payments
Other changes
Balance at December 31, 2015
Amount
1,395
61
(133)
10
1,333
43
(130)
6
1,252
$
$
These loans were made subject to the provisions of Regulation O-“Loans to Executive Officers, Directors and Principal
Shareholders of Member Banks”, which governs the permissible lending relationships between a financial institution and its executive
officers, directors, principal shareholders, their families and related interests. The amounts reported as other changes include changes
in the status of those who are considered related parties, which, for 2015, was mainly related to the addition of one new executive
officer, and, for 2014, was mainly related to an addition of one new director and the resignation of one executive officer.
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 13 – PREMISES AND EQUIPMENT
Premises and equipment comprise:
(Dollars in thousands)
Buildings and improvements
Leasehold improvements
Furniture and equipment
Accumulated depreciation and amortization
Land
Projects in progress
Total premises and equipment, net
Useful Life In
Years
As of December 31,
2015
2014
10-35
1-10
2-10
$
$
142,872
61,089
162,954
366,915
(238,734)
128,181
26,932
5,903
161,016
$
$
140,592
63,065
161,865
365,522
(232,272)
133,250
25,655
8,021
166,926
Depreciation and amortization expense amounted to $21.1 million, $21.0 million, and $24.0 million for the years ended
December 31, 2015, 2014, and 2013, respectively.
202
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 14 – GOODWILL AND OTHER INTANGIBLES
Goodwill as of December 31, 2015 and 2014 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 2015. The Corporation’s goodwill is related to the acquisition of FirstBank Florida in 2005.
The Corporation bypassed the qualitative assessment in 2015 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 analyses under both
the market and discounted cash flow analyses, the estimated fair value of the 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, 2015 or 2014, nor was any
goodwill written off due to impairment during 2015, 2014, and 2013.
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 remaining
estimated life of 5.8 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 core deposit intangible acquired in the February 2015 Doral Bank transaction amounted to $5.8 million ($5.1 million as of
December 31, 2015).
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:
(Dollars in thousands)
Core deposit intangible:
Gross amount, beginning of period
Addition as a result of acquisition
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,
2015
As of
December 31,
2014
$
$
$
$
$
$
$
$
45,844
5,820
(42,498)
9,166
9.0 years
24,465
(11,146)
13,319
5.8 years
45,844
-
(40,424)
5,420
8.4 years
24,465
(8,076)
16,389
6.9 years
The following table presents the estimated aggregate annual amortization expense for intangible assets:
(In thousands)
2016
2017
2018
2019
2020 and after
$
Amount
4,884
4,270
3,313
2,915
7,103
203
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 15 – 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 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, 2015, the
Corporation serviced loans securitized through GNMA with a principal balance of $1.3 billion.
Trust Preferred Securities
In 2004, FBP Statutory Trust I, a financing trust that is wholly owned by 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 financing 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 Junior Subordinated Deferrable Debentures
issued by the Corporation in April 2004 and 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). During the second quarter of 2015, the
Corporation issued 852,831 shares of the Corporation’s common stock in exchange for $5.3 million of trust preferred securities (FBP
Statutory Trust I), which enabled the Corporation to cancel $5.5 million of the carrying value of the debentures underlying the
purchased trust preferred securities. 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. 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. The Corporation elected to defer the interest
payments that were due on quarterly periods since March 2012. The aggregate amount of payments deferred and accrued
approximates $28.7 million as of December 31, 2015. During the first quarter of 2016, the Corporation purchased $10.0 million in
trust preferred securities that had been issued by FBP Statutory Trust II. This transaction is described in more detail in Note 35 –
Subsequent Events.
Grantor Trusts
During 2004 and 2005, a third party to the Corporation, referred to in this subsection 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
204
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 its 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, 2015,
the amortized cost and fair value of the Grantor Trusts amounted to $34.9 million and $25.2 million, respectively, with a weighted-
average yield of 2.26%.
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, 2015, the carrying
amount of the loan was $9.5 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. When applying the equity method, the
Bank follows the Hypothetical Liquidation Book Value method (“HLBV”) to determine its share of CPG/GS’s earnings or loss. Under
HLBV, the Bank determines its share of 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 PRLP and FirstBank, its investors, 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. 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. The working capital line of credit was renewed and reduced to $7 million for a period of two years expiring September
2016. 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, 2015, the carrying value of the revolver agreement was $16.0 million, which was included in the
Corporation's commercial and industrial loans held for investment portfolio. The carrying value of the working capital line was $0 as
of December 31, 2015.
Cash proceeds received by CPG/GS are first used to cover operating expenses and debt service payments, including those related to
the note receivable, the advance 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.
205
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 at the time of the transaction. 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.
The following tables show summarized financial information of CPG/GS for the years ended December 31, 2015, 2014
and 2013:
(In thousands)
Cash and cash equivalents, including restricted cash
Loans Receivable
Real Estate Owned
Other assets
Total Assets
Notes Payable
Other liabilities
Total Liabilities
Members' Equity
Total Liabilities and Members' Equity
As of
December 31,
2015
December 31,
2014
$
$
$
$
$
10,896
18,662
81,346
2,403
113,307
27,942
6,899
34,841
78,466
113,307
$
$
$
$
$
6,929
65,158
83,054
987
156,128
58,044
5,160
63,204
92,924
156,128
206
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31,
2015
Year Ended
December 31,
2014
December 31,
2013
$
$
$
10,565
$
(6,232) $
(14,321) $
10,427
$
(321) $
(21,012) $
2,245
(9,982)
(6,230)
(In thousands)
Revenues, including net realized gains on sale of
investments in loans and OREO
Gross Profit (loss)
Net Loss
Servicing Assets
The Corporation sells residential mortgage loans to GNMA, which generally securitize the transferred loans into 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:
(In thousands)
Balance at beginning of year
Capitalization of servicing assets
Amortization
Adjustment to fair value
Other (1)
Balance at end of year
Year Ended December 31,
2014
2013
2015
$
$
22,838
4,919
(3,159)
(228)
(88)
24,282
$
$
21,987
4,321
(3,156)
(228)
(86)
22,838
$
$
17,524
7,649
(3,289)
460
(357)
21,987
(1) Amount represents the adjustment to fair value related to the repurchase of loans serviced for others.
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.
207
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Changes in the impairment allowance related to servicing assets were as follows:
(In thousands)
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:
(In thousands)
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
(1) Mainly consisted of compensatory fees imposed by GSEs.
Year ended December 31,
2014
2013
2015
55
285
(147)
(57)
136
$
$
212
343
(385)
(115)
55
$
$
672
277
-
(737)
212
Year ended December 31,
2014
2013
2015
7,211
765
(88)
(161)
7,727
(3,387)
4,340
$
$
6,999
695
(86)
(1,253)
6,355
(3,384)
2,971
$
$
7,164
701
(357)
(407)
7,101
(2,829)
4,272
$
$
$
$
208
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
2015:
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
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
9.2 %
9.0 %
14.4 %
11.5 %
9.5 %
13.8 %
9.6 %
9.4 %
14.0 %
11.5 %
9.5 %
13.9 %
10.5 %
10.9 %
14.3 %
12.0 %
10.0 %
14.3 %
7.8 %
7.9 %
12.9 %
11.5 %
9.5 %
13.8 %
9.1 %
8.9 %
12.7 %
11.5 %
9.5 %
13.8 %
8.9 %
8.7 %
12.3 %
11.5 %
9.5 %
13.8 %
209
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2015, 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, 2015 were as follows:
(Dollars in thousands)
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
$
$
$
$
$
$
24,282
27,516
9.48
9.07 %
896
1,742
10.65 %
1,189
2,285
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 16 – DEPOSITS AND RELATED INTEREST
The following table summarizes deposit balances as of the dates indicated:
(In thousands)
Type of account and interest rate:
Non-interest-bearing checking accounts
Savings accounts - 0.05% to 0.70% (2014- 0.05% to 0.85%)
Interest-bearing checking accounts - 0.10% to 1.06%
(2014- 0.10% to 1.06%)
Certificates of deposit- 0.10% to 5.05% (2014- 0.10% to 5.05%)
Brokered certificates of deposit- 0.45% to 2.80% (2014- 0.20% to 4.70%)
December 31,
2015
2014
$
$
1,336,559
2,459,186
1,088,651
2,356,245
2,097,483
9,338,124
$
$
900,616
2,450,484
1,054,136
2,191,663
2,887,046
9,483,945
The weighted-average interest rate on total interest-bearing deposits as of December 31, 2015 and 2014 was 0.83% and 0.82%,
respectively.
As of December 31, 2015, the aggregate amount of overdrafts in demand deposits that were reclassified as loans amounted to $1.0
million (2014 — $0.8 million).
210
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, 2015:
(In thousands)
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
1,000,823
549,453
52,819
80,953
18,640
1,702,688
$
$
As of December 31, 2015, CDs in denominations of $100,000 or higher amounted to $3.6 billion (2014 — $4.3 billion) including
brokered CDs of $2.1 billion (2014 — $2.9 billion) at a weighted-average rate of 0.97% (2014 — 0.77%) 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, 2015, unamortized broker placement fees amounted to $3.9 million (2014— $6.1 million), which are
amortized over the contractual maturity of the brokered CDs under the interest method.
Brokered CDs mature as follows:
(In thousands)
One to ninety days
Over ninety days to one year
One to three years
Three to five years
Over five years
Total
December 31,
2015
$
$
298,557
992,761
766,460
22,157
17,548
2,097,483
As of December 31, 2015, deposit accounts issued to government agencies with a carrying value of $577.3 million (2014 —
$400.7 million) were collateralized by securities and loans with an amortized cost of $678.8 million (2014 — $634.0 million) and an
estimated market value of $600.6 million (2014 — $624.8 million). As of December 31, 2015, the Corporation had $390.4 million of
government deposits in Puerto Rico (2014— $227.4 million) and $186.9 million in the Virgin Islands (2014— $173.3 million).
A table showing interest expense on deposits follows:
(In thousands)
Interest-bearing checking accounts
Savings
Certificates of deposit
Brokered certificates of deposit
Total
2015
Year Ended December 31,
2014
2013
$
$
5,440 $
6,446 $
13,660
25,246
24,904
15,416
26,371
29,894
69,250 $
78,127 $
8,419
15,852
29,264
38,252
91,787
The total interest expense on deposits includes the amortization of broker placement fees related to brokered CDs amounting to
$4.6 million, $6.7 million, and $7.9 million for 2015, 2014, and 2013, respectively, and the $0.6 million accretion of premium related
to time deposits assumed in the Doral Bank transaction in 2015.
211
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 17 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repurchase agreements) consist of the following:
December, 31
2015
2014
(Dollars in thousands)
Repurchase agreements, interest ranging from 1.96% to 3.41%
(December 31, 2014: 2.45% to 4.50%) (1)(2)
$
700,000
$
900,000
(1) Reported net of securities purchased under agreements to repurchase (reverse repurchase agreements) by counterparty, when applicable, pursuant to ASC
210-20-45-11.
(2) As of December 31, 2015, includes $600 million with an average rate of 2.73%, and that lenders have the right to call before their contractual maturities
at various dates beginning on January 11, 2016. Subsequent to December 31, 2015, no lender has exercised its call option on repurchase agreements.
In addition, $500 million is tied to variable rates.
The weighted-average interest rates on repurchase agreements as of December 31, 2015 and 2014 were 2.73% and 3.24%,
respectively. Accrued interest payable on repurchase agreements amounted to $4.0 million and $5.2 million as of December 31, 2015
and 2014, respectively.
In the first quarter of 2015, the Corporation restructured $400 million of its repurchase agreements, $200 million of which were
restructured by extending the contractual maturity and changing from a fixed interest rate to a variable rate, and entered into $200
million of reverse repurchase agreements with the same counterparty under a master netting arrangement that provides for a right to
setoff that meets the conditions of ASC 210-20-45-11. These repurchase agreements and reverse repurchase agreements are presented
net on the consolidated statement of financial condition. In addition, in the first quarter of 2015, the Corporation restructured an
additional $200 million of its repurchase agreements with a different counterparty by extending the contractual maturity and reducing
the interest rate in these agreements.
Repurchase agreements mature as follows:
(In thousands)
Over six months to one year
Over one year to three years
Over five years
Total
$
$
December 31, 2015
400,000
100,000
200,000
700,000
212
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following securities were sold under agreements to repurchase:
Underlying Securities
(In thousands)
U.S. government-sponsored agencies
Mortgage-backed securities
Total
Accrued interest receivable
Underlying Securities
(In thousands)
U.S. government-sponsored agencies
Mortgage-backed securities
Total
Accrued interest receivable
December 31, 2015
Amortized
Cost of
Underlying
Securities
Approximate
Fair Value
of Underlying
Securities
Weighted
Average
Interest Rate
of Security
Balance of
Borrowing
233,175
564,595
$
211,010
488,990
$
797,770
$
700,000
$
230,603
562,959
793,562
1.47 %
2.18 %
2,145
December 31, 2014
Amortized
Cost of
Underlying
Securities
Approximate
Fair Value
of Underlying
Securities
Weighted
Average
Interest Rate
of Security
Balance of
Borrowing
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
$
$
$
$
$
$
The maximum aggregate balance outstanding at any month-end during 2015 was $900 million (2014 — $900 million). The average
balance during 2015 was $769.0 million (2014 — $900 million). The weighted-average interest rate during 2015 and 2014 was 2.92%
and 3.00%, respectively.
As of December 31, 2015 and 2014, the securities underlying such agreements were delivered to the dealers with which the
repurchase agreements were transacted.
Repurchase agreements as of December 31, 2015, grouped by counterparty, were as follows:
(Dollars in thousands)
Counterparty
Amount
Weighted-Average
Maturity (In Months)
Credit Suisse First Boston
Citigroup Global Markets
Dean Witter / Morgan Stanley
JP Morgan Chase
7
10
22
73
$
$
100,000
300,000
100,000
200,000
700,000
213
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 18 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
The following is a summary of the advances from the FHLB:
(In thousands)
Fixed-rate advances from FHLB, with a weighted-average
interest rate of 1.30% (December 31, 2014 - 1.17%)
$
455,000
$
325,000
December 31, December 31,
2015
2014
Advances from FHLB mature as follows:
(In thousands)
Over six months to one year
Over one to three years
Three to four years
Total
December 31,
2015
$
$
100,000
225,000
130,000
455,000
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, 2015, the estimated
value of specific mortgage loans pledged as collateral amounted to $1.1 billion (2014 — $812.6 million), as computed by the FHLB
for collateral purposes. The carrying value of such loans as of December 31, 2015 amounted to $1.4 billion (2014 — $1.1 billion). As
of December 31, 2015, the Corporation had additional capacity of approximately $641.6 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.
214
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 19 – OTHER BORROWINGS
Other borrowings consist of:
(In thousands)
Junior subordinated debentures due in 2034,
interest-bearing at a floating rate of 2.75%
over 3-month LIBOR (3.28% as of December 31, 2015
and 2.99% as of December 31, 2014)
Junior subordinated debentures due in 2034,
interest-bearing at a floating rate of 2.50%
over 3-month LIBOR (3.07% as of December 31, 2015
and 2.75% as of December 31, 2014)
NOTE 20 – EARNINGS PER COMMON SHARE
December 31,
2015
December 31,
2014
$
$
97,626
$
103,093
128,866
226,492
$
128,866
231,959
The calculation of earnings (losses) per common share for the years ended December 31, 2015, 2014, and 2013 are as follows:
(In thousands, except per share information)
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
Earnings (loss) per common share:
Basic
Diluted
Year Ended December 31,
2015
2014
2013
$
21,297 $
392,287 $
(164,487)
-
21,297
211,457
1,514
212,971
1,659
393,946
208,752
1,788
210,540
-
(164,487)
205,542
-
205,542
$
$
0.10 $
0.10 $
1.89 $
1.87 $
(0.80)
(0.80)
____________
(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 22 – Stockholders’ Equity, 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 number of potential shares issued and the shares purchased
215
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
are added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options,
unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under
the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an
antidilutive effect on earnings per share. Stock options not included in the computation of outstanding shares because they were
antidilutive amounted to 69,848; 82,575, and 101,435 for the years ended December 31, 2015, 2014, and 2013, 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.
NOTE 21 – STOCK-BASED COMPENSATION
As of January 21, 2007, the Corporation’s 1997 stock option plan expired and no additional awards could be granted under that
plan. All outstanding awards granted under this plan continued in full force and effect since then, 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, 2015 is set forth below:
Beginning of year
Options expired
Options cancelled
End of year outstanding and exercisable
Number of
Options
Weighted-Average
Exercise Price
82,575 $
(11,395)
(1,332)
69,848 $
187.75
358.80
164.10
160.30
Weighted-Average
Remaining
Contractual Term
(Years)
Aggregate
Intrinsic
Value
(In thousands)
0.6 $
-
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 2015, the Corporation awarded (i) 219,531 shares of restricted stock to the Corporation’s independent
directors subject to vesting periods that range from 1 to 5 years, and (ii) 793,964 shares of restricted stock to employees subject to vesting
periods. For 40,000 of the 793,964 shares awarded to employees, the requisite service period was three months, which was satisfied in
2015. For the remaining 753,964 shares granted to employees, 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 753,964 shares of restricted stock are 615,464 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
provided that: (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 senior officers 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 2015 was based on the market price of the Corporation’s outstanding
common stock on the date of the grant. For the 615,464 shares of restricted stock granted under the TARP requirements, the market
price was discounted to account for TARP transferability restrictions. For purposes of determining the awards’ fair values, the
Corporation estimated an appreciation of 14% 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 the
216
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
common stock of the Corporation that it currently owns for a period not to exceed one year, resulting in a fair value of $3.18 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.
The following table summarizes the restricted stock activity in 2015 under the Omnibus Plan for executive
officers covered by the TARP requirements, other employees and the independent directors:
Nonvested shares at beginning of year
Granted
Forfeited
Vested
Nonvested shares at end of year
2015
Number of
shares of
restricted
stock
Weighted-
Average
Grant Date
Fair Value
2,327,156
1,013,495
(23,000)
(349,190)
2,968,461
$
$
3.39
3.86
5.58
5.02
3.34
For the years ended December 31, 2015, 2014 and 2013, the Corporation recognized $3.8 million, $2.6 million and $1.6 million,
respectively, of stock-based compensation expense related to restricted stock awards. As of December 31, 2015, there was $4.0
million of total unrecognized compensation cost related to nonvested shares of restricted stock. The weighted average period over
which the Corporation expects to recognize such cost is 1.8 years.
In 2014, the Corporation awarded to its independent directors 379,573 shares of restricted stock subject to vesting periods that
ranged from 1 to 5 years. In addition, during 2014, the Corporation granted 840,138 shares of restricted stock that 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 840,138 shares of restricted stock are 653,138 shares granted to certain senior
officers consistent with the requirements of TARP. The senior officers 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 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 post-vesting 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 the common stock of the
Corporation that it owned as of the date of the grants for an additional two years, resulting in a fair value of $2.63 for restricted shares
granted under the TARP requirements.
Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are
forfeited due to employee or director turnover. Approximately, $0.1million of compensation expense was reversed in each of years
2015, 2014 and 2013 related to forfeited awards.
Also, under the Omnibus Plan, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary
amounts paid to certain executive officers primarily by paying the increased salary amounts in the form of shares of the Corporation’s
common stock, instead of cash. During 2015, the Corporation issued 483,053 shares of common stock (2014 – 312,850 shares) with a
weighted-average market value of $4.67 (2014 - $5.20 market value) as salary stock compensation. This resulted in a compensation
expense of $2.3 million recorded in 2015 (2014 – $1.7 million).
During 2015, the Corporation withheld 149,463 shares (2014 – 105,000 shares) from the common stock paid to certain senior
officers as additional salary compensation and 72,918 shares (2014- 68,870 shares) of restricted stock that vested during 2015 and
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.
217
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 22 – STOCKHOLDERS’ EQUITY
Common Stock
As of December 31, 2015 and 2014, 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, 2015 and 2014, there were 216,051,128 and 213,724,749 shares issued, respectively, and
215,088,698 and 212,984,700, 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. Refer to Note 21 for
information about transactions related to common stock under the Omnibus Plan.
During the second quarter of 2015, the Corporation issued 852,831 shares of its common stock in exchange for trust preferred
securities with a liquidation value of $5.3 million. As a result of these transactions, common stock increased by $85 thousand, which
represents the par value of the shares issued. Also, additional paid-in capital increased by the excess of the common stock fair value
over the par value, or $5.5 million. With these exchanges, the other borrowings balance decreased by $5.5 million.
Preferred Stock
The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1.00, 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, 2015, 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.
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.
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 carrying (liquidation) value of the Series A through E preferred stock exchanged, or $26.9 million, was reduced,
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.
Treasury stock
During 2015 and 2014, the Corporation withheld an aggregate of 222,381 shares and 173,870 shares, respectively, of the common
stock paid to certain senior officers as additional compensation and restricted stock that vested during 2015 and 2014 to cover
employees’ payroll and income tax withholding liabilities; these shares are also held as treasury shares. As of December 31, 2015 and
2014, the Corporation had 962,430 and 740,049 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
218
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 2015, $2.8 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 $42.8 million as of December 31, 2015
(2014 - $40.0 million).
NOTE 23 – 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 $15,000 for each 2013, 2014 and 2015 ($17,500 for each of 2013
and 2014, and $18,000 for 2015 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,
2015, 2014 and 2013. The Bank had a total plan expense of $1.4 million for the year ended December 31, 2015, $2.2 million for 2014,
and $0.8 million for 2013.
NOTE 24 –OTHER NON-INTEREST INCOME
A detail of other non-interest income is as follows:
Year Ended December 31,
2014
2015
2013
(In thousands)
Non-deferrable loan fees
Commissions and fees-broker-dealer-related
Lower of cost or market adjustment-commercial and construction
loans held for sale
Loss on sale of commercial loans held for sale
Gain on exchange of trust preferred securities for common stock
Merchant-related income
ATM and POS fees
Credit card loans interchange and other fees
Other
$
2,687 $
-
2,414 $
459
2,384
97
191
(553)
267
9,510
7,213
6,220
7,259
-
-
-
8,181
6,627
6,047
6,763
(1,503)
-
-
7,340
6,545
6,479
6,834
Total
$
32,794 $
30,491 $
28,176
219
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 25 –OTHER NON-INTEREST EXPENSE
A detail of non-interest expenses is as follows:
(In thousands)
Supplies and printing
Provision (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
Total
NOTE 26 – INCOME TAXES
Year Ended December 31,
2013
2014
2015
$
3,101 $
261
-
5,143
961
2,140 $
(653)
-
4,943
1,619
3,014
(443)
2,500
6,078
1,601
755
12,008
737
10,253
263
15,632
$ 22,229 $ 19,039 $ 28,645
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 tax paid in the U.S. and USVI 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 consolidated tax returns 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 carry forward
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 in Puerto Rico 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 income taxation. The IBE unit 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 the corporate standard 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:
(In thousands)
Current income tax expense
Deferred income tax (expense) benefit
Total income tax (expense) benefit
2015
Year Ended December 31,
2014
2013
$
$
(6,339) $
(80)
(6,419) $
(5,361) $
306,010
300,649 $
(7,947)
2,783
(5,164)
220
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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:
Year Ended December 31,
2015
2014
2013
Amount
% of Pretax
Income
Amount
% of Pretax
Income
Amount
% of Pretax
Income
(Dollars in thousands)
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
Effect of capital losses subject to preferential rates
Disallowed NOL carryforward resulting from
net exempt income
Nontax deductible expenses
(Decrease) increase in
unrecognized tax benefits,
including interest
Return to provision adjustments
Deferred tax valuation allowance
Other-net
Total income tax
(expense) benefit
$
(10,810)
(190)
(39.0)% $
(0.7)%
(35,738)
(117)
(39.0)% $
(0.1)%
62,136
(136)
-
9,780
-
(3,019)
(7,717)
365
-
1,174
2,881
1,117
(0.0)%
35.3%
(0.0)%
(10.9)%
(27.8)%
1.3%
(0.0)%
4.2%
10.4%
4.0%
(346)
15,202
628
-
-
(193)
1,763
-
318,380
1,070
(0.4)%
17.0%
0.7%
(0.0)%
(0.0)%
(0.2)%
2.0%
(0.0)%
347.0%
1.2%
39.0%
(0.0)%
67.0%
(8.4)%
0.3%
(0.0)%
(0.0)%
(0.1)%
106,717
(13,320)
552
-
-
(146)
(3,218)
-
(157,449)
(300)
(2.0)%
(0.0)%
(98.8)%
(0.2)%
$
(6,419)
(23.2)% $
300,649
328.2% $
(5,164)
(3.2)%
For 2015, the Corporation recorded an income tax expense of $6.4 million compared to an income tax benefit of $300.6 million for
2014. The income tax benefit for the year 2014 primarily reflects a $302.9 million partial reversal of the valuation allowance of the
Bank’s deferred tax assets. Other variances are primarily related to a higher taxable income in 2015 and the reduction of $7.7 million
of NOL carryforwards due to exempt income, and changes in valuation allowance. The effective tax rate for year ended December 31,
2015 is 23%.
221
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, 2015 and 2014 were as follows:
(In thousands)
Deferred tax asset:
Net operating loss carryforward
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
Unrealized loss on available-for-sale securities, net
Reserve for insurance premium cancellations
Unrealized losses on derivatives activities
Other
Gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Differences between the assigned values and tax bases of asset
and liabilities recognized in purchase business combinations
Unrealized gain on available-for-sale securities, net
Unrealized gain on other investments
Servicing assets
Gross deferred tax liabilities
Net deferred tax assets
$
December 31,
2015
2014
378,160 $
87,769
10,714
11,633
6,236
7,313
2,953
3,178
739
631
48
17,993
527,367
(201,706)
325,661
5,712
-
468
8,218
14,398
385,955
85,048
11,659
11,517
7,752
7,313
3,239
3,212
-
560
58
11,281
527,594
(204,587)
323,007
811
1,091
468
7,593
9,963
$
311,263 $
313,044
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 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 significant operational losses driven by charges to the provision for loan losses, a three-year cumulative
loss position as of the end of the year 2010, and uncertainty regarding the amount of future taxable income that the Bank could
forecast. As of December 31, 2014, based upon the assessment of all positive and negative evidence, management concluded that it
was more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to
realize $308.2 million of its deferred tax assets and, therefore reversed $302.9 million of the valuation allowance.
222
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation’s net deferred tax assets amounted to $311.3 million as of December 31, 2015, net of a valuation allowance of
$201.7 million. The net deferred tax assets of the Corporation’s banking subsidiary, FirstBank, amounted to $306.4 million as of
December 31, 2015, net of a valuation allowance of $174.7 million. During 2015, management reassessed the need for a valuation
allowance and concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that
FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to realize $306.4 million of its
deferred tax asset. The positive evidence considered by management to conclude on the adequacy of the valuation allowance as of
December 31, 2015 includes factors such as: FirstBank’s return to profitability, forecasts of future profitability under several potential
scenarios that support the partial utilization of NOLs prior to their expiration between 2021 through 2024, the taxable year 2015 being
the first year with taxable income since 2008, sustained pre-tax pre-provision for loan losses income which demonstrates demand for
FirstBank’s products and services, the Doral Bank transaction which resulted in market share expansion, and improvements in credit
quality measures that have resulted in reduced credit exposures and have improved both sustainability of profitability and
management’s ability to forecast future losses, which in turn led to actions such as the lifting of the FDIC Consent Order during 2015.
The negative evidence considered by management includes that the Bank remains in a three-year cumulative loss position of $69.9
million due to significant charges to the provision for loan losses as a result of bulk sales of adversely classified and non-performing
loans in 2013 and 2015. However, this loss position is significantly lower than the three-year cumulative pre-tax loss position of
$860.3 million as of December 31, 2010, the year when a full valuation allowance was established. Other negative factors include
Puerto Rico’s current economic conditions and the still elevated levels of non-performing assets.
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 the 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, 2015 net deferred tax asset as
further described below.
The Corporation expects to realize approximately $182.1 million of deferred tax assets associated with FirstBank’s NOLs prior to
their expiration periods, compared to $188.4 million expected to be realized as of December 31, 2014. In addition, as of December 31,
2015, approximately $127.8 million of the deferred tax assets of the Corporation are attributable to temporary differences or tax credit
carry-forwards that have no expiration date, compared to $123.1 million in 2014. Approximately $19.4 million of other non-NOL
related deferred tax assets of the Corporation are fully reserved with a valuation allowance, compared to $16.7 million as of December
31, 2014, given limitations and uncertainties as to their future utilization. The increase in fully reserved deferred tax assets is related to
the increase in other than temporary impairments on investment securities. 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.
Management’s estimate of future taxable income is based on internal projections that 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.
223
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 UTB.
As of December 31, 2015, the Corporation did not have UTBs recorded on its books. During 2014, the Corporation reached a final
settlement with the IRS in connection with the 2007-2009 examination periods. As a result, 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.
The following table reconciles the balance of UTBs:
(In thousands)
Balance at January 1,
(Decrease) increase related to positions taken during
prior years
Decrease related to settlement with taxing authorities
Balance at December 31,
2015
2014
2013
$
$
-
-
-
-
$
$
4,310 $
(1,763)
(2,547)
-
$
2,374
1,936
-
4,310
During the second quarter of 2015, the Corporation settled the previously accrued interest of $1.3 million related to the
aforementioned IRS examination. The Corporation classifies all interest and penalties, if any, related to tax uncertainties as income tax
expense. 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 statute of limitations for each of Virgin Islands and U.S. income tax purposes is 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 the 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 2011 remain open to examination. The 2012 U.S.
federal tax return is currently under examination by the IRS. For Puerto Rico tax purposes, all tax years subsequent to 2011 remain
open to examination.
During 2013, the Puerto Rico Government approved Act No. 40, which imposed a national gross receipts tax. The national gross
receipts tax for financial institutions was computed on the basis of 1% of gross income net of allowable exclusions. Subject to certain
limitations, a financial institution was able to claim a credit of 0.5% of its gross income against its regular income tax or the
alternative minimum tax. However, on December 22, 2014, the Governor of Puerto Rico signed Act No. 238, which amended the
2011 PR Code. Act No. 238 clarified that the national gross receipts tax was not applicable to taxable years starting after December
31, 2014. Accordingly, the Corporation did not record a national gross receipts tax expense for 2015. During the year 2014, a $5.7
million gross receipts tax expense was included as part of “Taxes, other than income taxes” in the consolidated statement of income
and a $2.9 million benefit related to this credit was recorded as a reduction to the provision for income taxes.
On May 28 and September 30, 2015, the Puerto Rico legislature approved Act 72-2015 and Act 159-2015, respectively, which
enacted amendments to the 2011 PR Code. The amendments related to the income tax provision include changes to the alternative
minimum tax computation, and changes to the use limitation on NOLs and capital losses for 2015 and future taxable years. The
change in the tax law affected the Corporation’s income tax computation by limiting the NOL deduction to 80% of taxable income,
compared to a 90% limitation in prior years.
224
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 27 – LEASE COMMITMENTS
As of December 31, 2015, 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, 2015, the obligation under various leases is as follows:
(In thousands)
2016
2017
2018
2019
2020
2021 and later years
Total
Amount
10,175
9,320
8,767
7,903
5,777
46,166
88,108
$
$
Rental expense for offices and premises included in occupancy and equipment expense was $10.9 million in 2015 (2014 - $10.6
million; 2013- $10.2 million).
NOTE 28 – 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 judgments estimation.
For 2015, there were no transfers into or out of Level 1, Level 2, or Level 3 measurement classification of the fair value hierarchy.
225
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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,
U.S. 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. During 2015, the
Corporation recorded OTTI charges of $15.9 million on certain Puerto Rico Government debt securities, specifically bonds of GDB
and the Puerto Rico Public Buildings Authority. The credit impairment loss was based on the probability of default and loss severity in
the event of default in consideration of the latest information available about the Puerto Rico Government’s financial condition. Refer
to Note 5- Investments Securities, for significant assumptions used to determine the credit impairment portion, including default rates
and recovery rates, which are unobservable inputs. 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.
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.
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 2015, 2014 and 2013 was
immaterial.
226
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Assets and liabilities measures at fair value on a recurring basis as of the indicated dates 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, 2015
Fair Value Measurements Using
As of December 31, 2014
Fair Value Measurements Using
Assets:
Securities available for sale :
U.S. Treasury Securities
Noncallable U.S. agency debt
Callable U.S. agency debt and MBS
Puerto Rico government obligations
Private label MBS
Other investments
Derivatives, included in assets:
Interest rate swap agreements
Purchased interest rate cap agreements
Liabilities:
Derivatives, included in liabilities:
Interest rate swap agreements
Written interest rate cap agreement
Forward contracts
$
$
7,497
-
-
-
-
-
$
-
315,467
1,509,807
26,327
-
-
$
-
-
-
1,890
25,307
100
$
7,497
315,467
1,509,807
28,217
25,307
100
$
$
7,499
-
-
-
-
-
-
228,157
1,653,140
40,658
-
-
$
-
-
-
2,564
33,648
-
7,499
228,157
1,653,140
43,222
33,648
-
-
-
-
-
-
-
806
-
798
123
-
-
-
-
-
-
806
-
798
123
-
-
-
-
-
33
6
33
6
148
-
-
-
-
-
33
6
33
6
148
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, 2015, 2014, and 2013:
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
___________________
2015
Securities Available
for Sale (1)
2014
Securities Available
for Sale (1)
2013
Securities Available
for Sale (1)
$
$
36,212
$
43,292
$
(628)
1,623
100
-
(10,010)
27,297
$
(388)
2,404
5,123
(4,855)
(9,364)
36,212
$
54,617
(117)
2,795
-
-
(14,003)
43,292
(1) Amounts mostly related to private label mortgage-backed securities.
227
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, 2015:
(In thousands)
Fair Value
Valuation Technique
Unobservable Input
December 31, 2015
Investment securities available for sale:
Private label MBS
$
25,214 Discounted cash flows
Discount rate
Range
14.5%
Puerto Rico Government Obligations
1,890 Discounted cash flows
Prepayment rate
3.00%
Prepayment rate
Projected Cumulative Loss Rate
15.92% -100.0% (Weighted
Average 28.0%)
0.18% - 80.0% (Weighted
Average 7.0%)
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 obligations are 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, 2015,
2014, and 2013 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, 2015)
Securities Available
for Sale
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
$
(628) $
(388) $
(117)
228
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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).
As of December 31, 2015, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-
recurring basis as shown in the following table:
(In thousands)
Loans receivable (1)
OREO (2)
Mortgage servicing rights (3)
Loans Held for Sale (4)
Carrying value as of December 31, 2015
Level 3
Level 2
Level 1
(Losses) Gain recorded for the Year
Ended December 31, 2015
$
- $
-
-
-
- $
-
-
-
303,095 $
146,801
24,282
8,135
(27,245)
(10,494)
(228)
338
(1) Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the
collateral. The fair value was 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) that 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
9.07%, Discount rate 10.65%.
(4) The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans.
As of December 31, 2014, impairment or valuation adjustments were recorded for assets recognized at fair value on a nonrecurring
basis as shown in the following table:
(In thousands)
Loans receivable (1)
OREO (2)
Mortgage servicing rights (3)
Loans Held For Sale (4)
Carrying value as of December 31, 2014
Level 3
Level 2
Level 1
(Losses) recorded for the Year Ended
December 31, 2014
$
- $
-
-
-
- $
-
-
-
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 value was 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) that 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 9.74%, Discount rate 10.60%.
(4) The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans.
229
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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:
(In thousands)
Loans receivable (1)
OREO (2)
Mortgage servicing rights (3)
Loans Held For Sale (4)
Carrying value as of December 31, 2013
Level 3
Level 2
Level 1
(Losses) Gain recorded for the Year
Ended December 31, 2013
$
- $
-
-
-
- $
-
-
-
465,191 $
160,193
21,897
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 value was 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) that 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.
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
Mortgage servicing rights Discounted Cash Flows
December 31, 2015
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
Weighted-average prepayment rate of 9.07%; weighted average discount
rate of 10.65%
230
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
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 prepayment model that
combined both 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 Bank in the first quarter of 2015 was derived from a model of forecasted cash flows
that uses market-driven assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The forecasted cash
flows are then discounted by yields observed in sales of similar portfolios in Puerto Rico and the continental U.S.
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.
231
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The fair value of brokered CDs, which are included within deposits, is determined using discounted cash flow analyses over the full
term of 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.
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.
232
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents the estimated fair value and carrying value of financial instruments as of December 31, 2015 and
2014:
(In thousands)
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
(In thousands)
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, 2015
Fair Value Estimate
December 31, 2015
Level 1
Level 2
Level 3
$
$
752,458
$
752,458
$
752,458
$
-
$
-
1,886,395
32,169
35,869
9,273,865
(240,710)
9,033,155
806
1,886,395
32,169
36,844
8,899,696
806
9,338,124
9,334,073
700,000
455,000
226,492
921
752,048
453,182
142,846
921
7,497
-
-
1,851,601
32,169
28,709
27,297
-
8,135
-
-
-
-
-
-
-
-
806
8,899,696
-
9,334,073
752,048
453,182
-
921
-
-
-
142,846
-
Total Carrying Amount in
Statement of Financial Condition
December 31, 2014
Fair Value Estimate
December 31, 2014
Level 1
Level 2
Level 3
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
-
-
-
-
-
-
-
-
39
8,844,659
-
9,486,325
-
958,715
324,376
-
187
-
-
162,344
-
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
233
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 29 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
(In thousands)
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
Loans held for sale transferred to loans held for investment
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
Trust preferred securities exchanged for new common stock issued:
Trust preferred securities exchanged
New common stock issued
Fair value of assets acquired (liabilities assumed) in the Doral Bank transaction:
Loans
Premises and equipment, net
Core deposit intangible
Deposits
Year Ended December 31,
2014
2013
2015
$
93,053
4,494
$
102,402
7,751
$
76,725
75,279
4,919
285,995
-
40,086
-
-
-
5,303
5,628
311,410
5,450
5,820
(523,517)
48,601
92,266
4,321
198,712
-
-
-
26,022
24,363
-
-
-
-
-
-
119,312
4,447
104,144
69,069
7,649
355,506
181,620
-
2,225
-
-
-
-
-
-
-
-
234
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 30 – 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 adverse 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 and liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporation’s capital amounts and classification are also subject to qualitative judgments and adjustment by
the regulators with respect to minimum capital requirements, components, risk weightings, and other factors.
FirstBank was notified by the FDIC that the Consent Order under which the Bank had been operating since June 2, 2010 was
terminated effective April 29, 2015. Although the Consent Order has been terminated, First BanCorp. is still subject to the Written
Agreement that the Corporation entered into with the New York FED on June 3, 2010.
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 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 required that the holding company submit a capital plan that reflected
sufficient capital at First BanCorp. on a consolidated basis, which was required to 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 its plans for how to improve its capital positions to comply with 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, 2015, the Corporation had completed all of the items
included in the Capital Plan and is continuing to work on reducing non-performing loans. The Written Agreement also requires the
submission to the regulators of quarterly progress reports.
In July 2013, the 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 introduced new minimum capital ratios and capital conservation buffer
requirements, change the composition of regulatory capital, required a number of new adjustments to and deductions from regulatory
capital, and introduced a new “Standardized Approach” for the calculation of risk-weighted assets. 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 phase-in period for certain deductions and adjustments to regulatory capital began on January
1, 2015 and will be completed on January 1, 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, were allowed to make a one-time permanent election in early 2015 to continue to exclude AOCI items.
The Corporation and FirstBank elected to permanently exclude capital in AOCI 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 require the Corporation to maintain an additional CET1 capital conservation buffer of 2.5%. The capital conservation buffer
must be maintained to avoid limitations on both (i) capital distributions (e.g. repurchases of capital instruments or dividend or interest
payments on capital instruments), and (ii) discretionary bonus payments to executive officers and heads of major business lines. Under
the fully phased-in 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%, (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%, (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%, 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 phase-in of the capital
conservation buffer began 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.
235
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 certain intangible assets, and deferred tax assets dependent upon future taxable income; the four-year phase-in period for
these adjustments generally began on January 1, 2015. Mortgage servicing assets and deferred tax assets attributable to temporary
differences, among others, are 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 began to phase out TRuPs from Tier 1 capital on January 1, 2015. The Corporation was allowed to include
25% of the $220 million outstanding qualifying TRuPs as Tier 1 capital in 2015 and the TRuPs were required to 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 previous 6%); and (iii) eliminating the provision that allowed 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.
The Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules. The
Standardized Approach for risk-weightings has expanded the risk-weighting categories from the four major risk-weighting categories
under the previous 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 results in higher risk weights for a variety of
asset categories. Specific changes to the risk-weightings of assets include, among other things: (i) applying a 150% risk weight instead
of a 100% risk weight for 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%), (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 and (iv)
requiring capital to be maintained against on-balance-sheet and off-balance-sheet exposures that result from certain cleared
transactions, guarantees and credit derivatives, and collateralized transactions (such as repurchase agreement transactions).
236
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation's and its banking subsidiary's regulatory capital positions as of December 31, 2015 and
2014 were as follows:
Regulatory Requirements
Actual
For Capital Adequacy Purposes
To be Well-Capitalized-Regular
Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
At December 31, 2015 (Basel III)
Total Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Common Equity Tier 1 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, 2014 (Basel I)
Total Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Tier I Capital (to
Risk-Weighted Assets)
First BanCorp.
FirstBank
Leverage ratio
First BanCorp.
FirstBank
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,828,559
1,802,711
20.01% $
19.73% $
731,164
730,824
8.0%
8.0% $
N/A
913,530
N/A
10.0%
1,546,678
1,493,478
16.92%
16.35%
411,280
411,088
4.5%
4.5%
1,546,678
1,685,656
16.92% $
18.45% $
1,546,678
1,685,656
12.22% $
13.33% $
548,373
548,118
506,322
505,648
6.0%
6.0% $
4.0%
4.0% $
N/A
593,794
N/A
730,824
N/A
632,060
N/A
6.5%
N/A
8.0%
N/A
5.0%
1,748,120
1,717,432
19.70% $
19.37% $
709,723
709,395
8.0%
8.0% $
N/A
886,744
N/A
10.0%
1,636,004
1,605,367
18.44% $
18.10% $
1,636,004
1,605,367
13.27% $
13.04% $
354,861
354,698
493,159
492,468
4.0%
4.0% $
4.0%
4.0% $
N/A
532,046
N/A
615,585
N/A
6.0%
N/A
5.0%
The following table summarizes commitments to extend credit and standby letters of credit, and commitments to sell loans as of
the indicated dates:
(In thousands)
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
237
December 31,
2015
2014
$
$
59,747
687,585
361,226
24,359
3,577
49,998
76,235
682,994
383,015
38,555
3,791
129,369
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 involve the execution of 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, 2015 and 2014, was
not significant.
The Corporation obtained from GNMA commitment authority to issue GNMA mortgage-backed securities. Under this program, for
2015, the Corporation sold approximately $286.0 million of FHA/VA mortgage loan production into GNMA mortgage-backed
securities.
As of December 31, 2015, 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.
NOTE 31 – 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, 2015 and 2014, 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, 2015, the Corporation has no
interest rate swaps outstanding. In the past, most of the interest rate swaps were 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.
238
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 frame 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 non-hedging transactions. On these transactions, generally, the
Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and
conditions.
In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these
are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair
value, and designated as a trading or non-hedging derivative instrument.
The following table summarizes the notional amounts of all derivative instruments as of the indicated dates:
(In thousands)
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,
2015
December 31,
2014
$
$
-
120,816
120,816
30,000
271,632
$
$
5,440
37,132
37,132
19,000
98,704
Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.
239
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes the fair value of derivative instruments and the location of the derivative instruments in the statement
of financial condition as of the indicated dates:
Statement of
Financial
Condition
Location
Asset Derivatives
December 31, December 31,
2015
Fair
Value
2014
Fair
Value
Liability Derivatives
Statement of Financial Condition
Location
December 31, December 31,
2015
Fair
Value
2014
Fair
Value
(In thousands)
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
Other assets
Other assets
Other assets
Other assets
$
$
- $
-
806
-
806 $
33 Accounts payable and other liabilities
- Accounts payable and other liabilities
6 Accounts payable and other liabilities
- Accounts payable and other liabilities
39
$
$
- $
798
-
123
921 $
33
6
-
148
187
The following table summarizes the effect of derivative instruments on the statement of income (loss) as of the indicated dates:
Gain (or Loss) Year ended
December 31,
2014
(In thousands)
2013
2015
$
$
- $
139
25
164 $
1,258 $
-
(322)
936 $
1,685
10
176
1,871
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
240
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Derivative instruments 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.
A summary of interest rate swaps as of the indicated dates is as follows:
(Dollars in thousands)
Pay fixed/receive floating:
Notional amount (1)
Weighted-average receive rate at period-end
Weighted-average pay rate at period-end
December 31, December 31,
2015
2014
$
$
-
-
-
5,440
2.03%
3.45%
____________
(1) The remaining interest rate swap with a notional amount of $5.4 million matured during the second quarter of 2015.
As of December 31, 2015, 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 Management Investment and Asset Liability Committee of the Corporation (“MIALCO”) 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 Corporation has a policy of diversifying derivatives counterparties to reduce the consequences of counterparty
default.
The Corporation has credit risk of $0.8 million as of December 31, 2015 (2014 — $39 thousand) 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 2015, 2014, or 2013. As of
December 31, 2015, there was no net interest settlement payable (2014 — net interest settlement payable of $11 thousand related to
swaps transactions).
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.
241
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 32 – OFFSETTING OF ASSETS AND LIABILITIES
The Corporation enters into master agreements with counterparties, primarily related to derivatives and repurchase agreements,
that may allow for netting of exposures in the event of default. 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, 2015
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
Financial
Instruments
Cash
Collateral Net Amount
(In thousands)
Description
Derivatives
Securities purchased under agreement
to resell
Total
$
$
806 $
-
$
806 $
(806) $
200,000
200,806 $
(200,000)
(200,000) $
-
806 $
-
(806) $
$
-
-
- $
-
-
-
As of December 31, 2014
(In thousands)
Description
Derivatives
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
Financial
Instruments
Cash
Collateral Net Amount
$
6 $
-
$
6 $
(6) $
-
$
-
242
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Offsetting of Financial Liabilities and Derivative Liabilities
As of December 31, 2015
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)
Description
Securities sold under agreements to repurchase
$
600,000 $
(200,000) $
400,000 $ (400,000) $
- $
-
As of December 31, 2014
(In thousands)
Description
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
Cash
Financial
Instruments
Collateral Net Amount
Derivatives
Securities sold under agreements to repurchase
Total
$
33 $
600,000
$
600,033 $
- $
-
- $
33 $
(33) $
600,000
(600,000)
600,033 $
(600,033) $
- $
-
- $
-
-
-
243
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 33 – 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, 2015, 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. Other 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, to the consolidated financial statements.
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 years ended December 31, 2015, 2014, and 2013:
(In thousands)
For the year ended December 31, 2015:
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 (loss)
Average earnings assets
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
$
$
$
141,820 $
(49,149)
-
92,671
(30,017)
16,027
(37,345)
41,336 $
194,961 $
17,260
(23,774)
188,447
(46,657)
41,854
(133,397)
50,247 $
133,067 $
(17,299)
-
115,768
(101,604)
12,487
(42,470)
(15,819) $
49,534 $
36,908
(60,221)
26,221
-
(15,897)
(3,840)
6,484 $
46,804 $
12,280
(16,192)
42,892
7,955
2,795
(28,674)
24,968 $
39,383 $
-
(3,116)
36,267
(1,722)
10,616
(34,231)
10,930 $
605,569
-
(103,303)
502,266
(172,045)
67,882
(279,957)
118,146
2,607,230 $
1,951,047 $
2,891,987 $
2,740,120 $
1,024,939 $
646,966 $
11,862,290
244
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands)
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
(In thousands)
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
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
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
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
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
$
$
$
$
$
$
245
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:
(In thousands)
Net income (loss) :
Total income (loss) for segments and other
Other non-interest income (loss) (1)
Other operating expenses (2)
Income (loss) before income taxes
Income tax(expense) benefit
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
2015
Year Ended December 31,
2014
2013
$
$
$
$
118,146
13,443
(103,873)
27,716
(6,419)
21,297
11,862,290
-
919,263
12,781,553
$
$
$
$
193,190
(7,279)
(94,273)
91,638
300,649
392,287
12,046,932
1,943
598,570
12,647,445
$
$
$
$
(48,579)
(16,691)
(94,053)
(159,323)
(5,164)
(164,487)
12,164,188
18,089
630,184
12,812,461
(1) The bargain purchase gain on the acquisition of assets and assumption of deposits from Doral Bank in 2015 as
well as the activities related to FirstBank's equity interest in CPG/GS are presented as an Other non-interest income
(loss) and the investment in CPG/GS is presented as Other average earning assets in the tables 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:
2015
2014
2013
(In thousands)
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
$
$
$
$
$
$
$
$
$
$
575,016
61,879
49,999
686,894
10,648,179
1,202,318
722,522
7,493,757
1,125,501
690,476
6,747,638
1,606,723
983,763
$
$
$
$
$
588,744
58,979
47,574
695,297
10,969,305
1,072,962
685,568
7,706,866
982,713
649,813
6,687,844
1,836,430
959,671
533,302
47,551
49,446
630,299
10,993,743
940,590
722,592
8,173,873
865,414
672,852
7,053,053
1,895,394
931,477
(1) For 2015, 2014, and 2013, includes $2.1 billion, $2.9 billion, and $3.1 billion, respectively, of brokered CDs allocated to Puerto Rico operations.
246
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 34- 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,
2015 and 2014, and the results of its operations and cash flows for the years ended on December 31, 2015, 2014, and 2013:
Statements of Financial Condition
(In thousands)
Assets
Cash and due from banks
Money market 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,
2015
2014
29,103
6,111
285
266
1,888,036
14,382
2,929
3,866
4,632
1,949,610
226,492
28,984
255,476
1,694,134
1,949,610
$
$
$
$
30,380
6,111
285
322
1,866,090
11,890
3,093
3,866
4,357
1,926,394
231,959
22,692
254,651
1,671,743
1,926,394
$
$
$
$
247
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Statements of Income (Loss)
(In thousands)
Income
Interest income on money market investments
Other income
Expense
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 (loss) income, net of tax
Comprehensive income (loss)
Year Ended December 31,
2014
2013
2015
$
$
20
498
518
$
20
220
240
22
88
110
7,450
2,412
9,862
-
(9,344)
30,641
21,297
(9,398)
7,199
2,614
9,813
(29)
(9,602)
401,889
392,287
60,385
7,092
5,813
12,905
(42)
(12,837)
(151,650)
(164,487)
(107,168)
$
11,899
$
452,672
$
(271,655)
248
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Statements of Cash Flows
(In thousands)
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:
Repurchase of common stock
Issuance costs of common stock issued in exchange for preferred
stock Series A through E
Net cash used in 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
NOTE 35 – SUBSEQUENT EVENTS
Year Ended December 31,
2014
2013
2015
$
21,297
$
392,287
$
(164,487)
2,835
(30,641)
-
(7)
(293)
6,643
(166)
63
-
-
63
(1,174)
-
(1,174)
(1,277)
36,491
35,214
29,103
6,111
35,214
$
$
$
1,962
(401,889)
29
(3)
(260)
7,261
(613)
38
6
-
44
(946)
(62)
(1,008)
(1,577)
38,068
36,491
30,380
6,111
36,491
$
$
$
1,471
151,650
186
-
774
7,146
(3,260)
-
-
533
533
(455)
-
(455)
(3,182)
41,250
38,068
31,957
6,111
38,068
$
$
$
During the first quarter of 2016, the Corporation completed the repurchase of trust preferred securities that were being auctioned in
a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled $10 million in trust
preferred securities of the FBP Statutory Trust II, resulting in a commensurate reduction in the related Floating Rate Junior
Subordinated Debenture.
The Corporation’s winning bid equated to 70% of the $10 million par value. The 30% discount, plus accrued interest, resulted in a
pre-tax gain of approximately $4.2 million. As trust preferred securities no longer qualify for Tier 1 capital, the realized gain on the
transaction contributed to an increase of approximately 5 basis points in the Common Equity Tier 1 and Tier 1 capital ratios, an
increase of approximately 4 basis points in the Leverage capital ratio, and a decrease of approximately 6 basis points in the Total
Regulatory capital ratio.
The Corporation has performed an evaluation of all other events occurring subsequent to December 31, 2015; management has
determined there are no additional events occurring in this period that required disclosure in or adjustment to the accompanying
financial statements.
249
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, 2015, 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, 2015 based
on the criteria established in Internal Control – Integrated Framework (2013) 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, 2015.
The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2015 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, 2015 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over
financial reporting.
Item 9B. Other Information.
None.
250
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 2016 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the SEC
within 120 days of the close of First BanCorp.’s 2015 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 2015 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 2015 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 2015 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
2015 fiscal year.
251
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 14, 2016, 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, 2015 and 2014.
–Consolidated Statements of Income (Loss) for Each of the Three Years in the Period Ended December 31, 2015.
– Consolidated Statements of Comprehensive Income (Loss) for each of the Three Years in the Period Ended December 31,
2015.
– Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2015.
– Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31,
2015.
– 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.
252
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.
253
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
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.
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.
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.
254
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
12.1
12.2
14.1
21.1
23.1
31.1
31.2
32.1
32.2
99.1
99.2
Exhibit 101.INS
Exhibit 101.SCH
Exhibit 101.CAL
Exhibit 101.LAB
Exhibit 101.PRE
Exhibit 101.DEF
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.
Revised 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.
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.
Purchase and Assumption Agreement between First BanCorp. and Banco Popular de Puerto Rico dated as of February 18,
2015, incorporated by reference from Exhibit 10.1 on the Form 10-Q for the quarter ended March 31, 2015 filed on May
11, 2015.
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
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.
XBRL Instance Document, filed herewith.
XBRL Taxonomy Extension Schema Document, filed herewith.
XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith.
XBRL Taxonomy Extension Label Linkbase Document, filed herewith.
XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith.
XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith.
255
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: 3/14/16
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
256
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
Date: 3/14/16
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 15
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.1firstbank.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 25, 2015, 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 2015 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