FIRST BANCORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 0-17224
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Puerto Rico
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66-0561882 |
(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification number) |
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1519 Ponce de León Avenue, Stop 23
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00908 |
Santurce, Puerto Rico
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(Zip Code) |
(Address of principal executive offices) |
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(787) 729-8200
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock: 83,254,056 outstanding as of June 30, 2007.
FIRST BANCORP.
INDEX PAGE
2
EXPLANATORY NOTE
First BanCorp ( the Corporation or First BanCorp) was unable to timely file with the
Securities and Exchange Commission (SEC) this Quarterly Report on Form 10-Q for the interim
period ended June 30, 2006 and the Quarterly Reports on Form 10-Q for the interim periods ended
March 31, 2006, September 30, 2005 and June 30, 2005 as a result of the delay in completing the
restatement of the Corporations audited financial statements for the years ended December 31,
2004, 2003 and 2002, and the unaudited selected quarterly financial information for each of the
four quarters of 2004, 2003 and 2002, which resulted in delays in the filing of an amendment of
First BanCorps Annual Report on Form 10-K for the year ended December 31, 2004 and consequent
delays in the filing of the Corporations subsequent reports. For information regarding the
restatement of First BanCorps previously issued financial statements, see the Corporations
Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2004, which was
filed with the SEC on September 26, 2006, and Note 1 Restatement of Previously Issued Financial
Statements to the accompanying unaudited Consolidated Financial Statements contained in this
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by
First BanCorp with the SEC, in the Corporations press releases or in other public or shareholder
communications, or in oral statements made with the approval of an authorized executive officer,
the word or phrases would be, will allow, intends to, will likely result, are expected
to, should, anticipate and similar expressions are meant to identify forward-looking
statements.
First BanCorp wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and represent First BanCorps
expectations of future conditions or results and are not guarantees of future performance. First
BanCorp advises readers that various factors could cause actual results to differ materially from
those contained in any forward-looking statement. Such factors include, but are not limited to,
the following:
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risks associated with the Corporations inability to prepare and timely submit SEC and
other regulatory filings; |
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a reduction in the Corporations ability to attract new clients and retain existing ones; |
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general economic conditions, including prevailing interest rates and the performance of
the financial markets, which may affect demand for the Corporations products and
services and the value of the Corporations assets, including the value of the interest
rate swaps that hedge the interest rate risk mainly relating to brokered certificates of
deposit and medium-term notes; |
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risks arising from worsening economic conditions in Puerto Rico; |
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risks arising from credit and other risks of the
Corporations lending and investment activities, including the
condo conversion loans in its Miami Agency; |
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increases in the Corporations expenses associated with acquisitions and dispositions; |
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developments in technology; |
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risks associated with changes to the Corporations business strategy to no longer acquire
mortgage loans in bulk; |
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risks associated with the failure to obtain a final order
from the District Court of Puerto Rico approving the settlement of
the class-action lawsuit brought against the Corporation; |
3
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the impact of Doral Financial Corporations financial condition on its repayment of its
outstanding secured loan to the Corporation; |
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risks associated with being subject to the cease and desist order; |
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potential further downgrades in the credit ratings of the Corporations securities; |
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general competitive factors and industry consolidation; and |
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risks associated with regulatory and legislative changes for financial services companies
in Puerto Rico, the United States, and the U.S. and British Virgin Islands. |
The Corporation does not undertake, and specifically disclaims any obligation, to update any
of the forward-looking statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements except as required by the federal securities laws.
Investors should carefully consider these factors and the risk factors outlined under Item 1A,
Risk Factors, in First BanCorps 2005 Annual Report on Form 10-K and under Item 1A, Risk Factors,
in this Quarterly Report on Form 10-Q.
4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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June 30, 2004 |
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June 30, 2006 |
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December 31, 2005 |
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June 30, 2005 |
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(As Restated) |
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Assets |
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Cash and due from banks |
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$ |
154,078,088 |
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$ |
155,848,810 |
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$ |
120,388,982 |
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$ |
83,322,262 |
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Money market instruments, including $116,475,352
pledged that can be repledged (December 31, 2005 - $381,848,364;
June 30, 2005 - $26,935,605;
June 30, 2004 - $79,896,053) |
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491,216,635 |
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666,856,432 |
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298,575,528 |
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373,647,963 |
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Federal funds sold and securities
purchased
under agreements to resell |
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2,854,968,993 |
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508,967,369 |
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76,828,074 |
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71,000,000 |
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Time deposits with other financial
institutions |
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15,700,581 |
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48,967,475 |
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48,600,000 |
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600,000 |
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Total money
market
investments |
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3,361,886,209 |
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1,224,791,276 |
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424,003,602 |
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445,247,963 |
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Investment securities available for sale, at fair value: |
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Securities pledged that can be
repledged |
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1,491,948,417 |
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1,744,846,054 |
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1,926,356,118 |
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1,057,627,627 |
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Other investment securities |
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477,337,762 |
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203,331,449 |
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290,759,261 |
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461,231,520 |
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Total investment securities available for
sale |
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1,969,286,179 |
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1,948,177,503 |
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2,217,115,379 |
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1,518,859,147 |
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Investment securities held to maturity, at amortized cost: |
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Securities pledged that can be
repledged |
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2,860,091,466 |
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3,115,260,660 |
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3,382,457,892 |
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3,652,401,464 |
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Other investment securities |
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427,028,096 |
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323,327,297 |
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395,171,791 |
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518,998,384 |
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Total investment
securities held to
maturity |
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3,287,119,562 |
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3,438,587,957 |
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3,777,629,683 |
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4,171,399,848 |
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Other equity securities |
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23,689,185 |
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42,367,500 |
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74,480,500 |
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61,525,000 |
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Loans, net of allowance for loan and lease losses of $146,527,295
(December 31, 2005 - $147,998,733; June 30, 2005 - $146,154,217;
June
30,
2004 -
$133,677,676) |
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10,678,089,256 |
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12,436,257,993 |
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11,677,782,192 |
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7,833,278,755 |
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Loans held for sale, at lower of cost or
market |
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80,642,512 |
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101,672,531 |
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49,032,689 |
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19,053,120 |
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Total loans, net |
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10,758,731,768 |
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12,537,930,524 |
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11,726,814,881 |
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7,852,331,875 |
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Premises and equipment, net |
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124,559,046 |
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116,947,772 |
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109,609,464 |
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85,905,256 |
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Other real estate owned |
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3,435,018 |
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5,019,106 |
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8,462,735 |
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5,598,892 |
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Accrued interest receivable on loans and investments |
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98,829,053 |
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103,692,478 |
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90,915,598 |
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51,857,846 |
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Due from customers on acceptances |
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29,594 |
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353,864 |
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208,180 |
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328,003 |
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Other assets |
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399,234,133 |
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343,933,937 |
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264,648,604 |
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212,773,470 |
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Total
assets |
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$ |
20,180,877,835 |
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$ |
19,917,650,727 |
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$ |
18,814,277,608 |
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$ |
14,489,149,562 |
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Liabilities & Stockholders Equity |
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Liabilities: |
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Non-interest-bearing deposits |
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$ |
711,284,391 |
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$ |
811,006,126 |
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$ |
791,509,595 |
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$ |
601,853,783 |
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Interest-bearing deposits |
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12,801,778,910 |
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11,652,746,080 |
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10,329,950,256 |
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6,404,758,089 |
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Federal funds purchased and securities
sold
under agreements to repurchase |
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4,022,685,500 |
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4,833,882,000 |
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5,017,096,000 |
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4,358,019,937 |
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Advances from the Federal Home Loan Bank (FHLB) |
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194,000,000 |
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506,000,000 |
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638,000,000 |
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1,223,000,000 |
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Notes payable |
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176,851,393 |
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178,693,249 |
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177,925,832 |
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152,614,465 |
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Other borrowings |
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231,670,313 |
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231,622,020 |
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231,572,927 |
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147,777,158 |
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Subordinated notes |
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82,554,150 |
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82,017,643 |
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Bank acceptance outstanding |
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29,594 |
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|
353,864 |
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208,180 |
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328,003 |
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Payable for unsettled investment trade |
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204,716,709 |
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198,574,653 |
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Accounts payable and other liabilities |
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678,438,050 |
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505,506,453 |
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256,478,764 |
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240,436,594 |
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Total
liabilities |
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19,021,454,860 |
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18,719,809,792 |
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17,525,295,704 |
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13,409,380,325 |
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Commitments and contingencies (Note 17) |
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Stockholders equity: |
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Preferred stock, authorized 50,000,000 shares: issued and
outstanding 22,004,000 shares at $25 liquidation value per share |
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550,100,000 |
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550,100,000 |
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550,100,000 |
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550,100,000 |
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Common stock, $1 par value, authorized
250,000,000 shares; issued
93,151,856 shares
(December 31, 2005 - 90,772,856 shares ; June 30, 2005 - 90,772,856
shares;
June 30, 2004 - 45,137,055
shares) |
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93,151,856 |
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90,772,856 |
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90,772,856 |
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45,137,055 |
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Less: Treasury Stock (at par value) |
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(9,897,800 |
) |
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(9,897,800 |
) |
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(9,897,800 |
) |
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(4,920,900 |
) |
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Common stock outstanding |
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83,254,056 |
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80,875,056 |
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80,875,056 |
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40,216,155 |
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Additional paid-in capital |
|
|
22,269,844 |
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2,322,541 |
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Capital reserve |
|
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|
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|
82,825,000 |
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|
80,000,000 |
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Legal surplus |
|
|
265,844,192 |
|
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|
265,844,192 |
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|
|
183,019,192 |
|
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|
165,709,122 |
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Retained earnings |
|
|
320,590,147 |
|
|
|
316,696,971 |
|
|
|
356,174,402 |
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|
219,360,864 |
|
Accumulated other comprehensive (loss) income, net of tax
benefit (expense) of $1,096,149 (December 31, 2005 - $16,259; June 30, 2005 - ($1,131,814); June 30, 2004 ($1,083,277)) |
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(82,635,264 |
) |
|
|
(15,675,284 |
) |
|
|
35,988,254 |
|
|
|
22,060,555 |
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Total stockholders equity |
|
|
1,159,422,975 |
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|
|
1,197,840,935 |
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|
|
1,288,981,904 |
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|
1,079,769,237 |
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Total liabilities and
stockholders equity |
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$ |
20,180,877,835 |
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$ |
19,917,650,727 |
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$ |
18,814,277,608 |
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$ |
14,489,149,562 |
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The accompanying notes are an integral part of these statements.
5
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
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Quarter Ended |
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June 30, |
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|
June 30, |
|
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June 30, |
|
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2004 |
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|
2006 |
|
|
2005 |
|
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(As Restated) |
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Interest income: |
|
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|
|
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Loans |
|
$ |
247,603,929 |
|
|
$ |
173,727,352 |
|
|
$ |
106,648,154 |
|
Investment securities |
|
|
72,040,513 |
|
|
|
73,279,552 |
|
|
|
53,407,925 |
|
Money market investments |
|
|
24,799,009 |
|
|
|
2,149,850 |
|
|
|
546,271 |
|
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|
|
|
|
|
|
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|
Total interest income |
|
|
344,443,451 |
|
|
|
249,156,754 |
|
|
|
160,602,350 |
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Interest expense: |
|
|
|
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|
|
|
|
|
|
|
|
Deposits (Note 11) |
|
|
157,153,731 |
|
|
|
(2,293,618 |
) |
|
|
115,946,948 |
|
Federal funds purchased and repurchase agreements |
|
|
51,133,513 |
|
|
|
43,683,484 |
|
|
|
31,859,683 |
|
Advances from FHLB |
|
|
2,867,071 |
|
|
|
10,864,801 |
|
|
|
5,816,720 |
|
Notes payable and other borrowings |
|
|
7,051,194 |
|
|
|
3,831,914 |
|
|
|
1,995,260 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
218,205,509 |
|
|
|
56,086,581 |
|
|
|
155,618,611 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
126,237,942 |
|
|
|
193,070,173 |
|
|
|
4,983,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses |
|
|
9,354,590 |
|
|
|
11,074,364 |
|
|
|
13,200,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan and lease losses |
|
|
116,883,352 |
|
|
|
181,995,809 |
|
|
|
(8,216,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges on loans |
|
|
1,467,127 |
|
|
|
1,537,338 |
|
|
|
950,278 |
|
Service charges on deposit accounts |
|
|
3,278,109 |
|
|
|
3,022,163 |
|
|
|
2,742,265 |
|
Mortgage banking activities |
|
|
427,171 |
|
|
|
3,060,375 |
|
|
|
216,512 |
|
Loss on partial extinguishment of a secured commercial loan
to a local financial institution |
|
|
(11,640,344 |
) |
|
|
|
|
|
|
|
|
Net gain (loss) on investments and impairments |
|
|
134,224 |
|
|
|
(1,181,245 |
) |
|
|
551,249 |
|
Rental income |
|
|
837,380 |
|
|
|
842,926 |
|
|
|
702,269 |
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
297,141 |
|
Other operating income |
|
|
7,279,281 |
|
|
|
6,137,747 |
|
|
|
6,687,174 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
1,782,948 |
|
|
|
13,419,304 |
|
|
|
12,146,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Employees compensation and benefits |
|
|
29,869,779 |
|
|
|
26,273,340 |
|
|
|
21,238,355 |
|
Occupancy and equipment |
|
|
13,623,498 |
|
|
|
11,765,517 |
|
|
|
9,441,913 |
|
Business promotion |
|
|
4,324,181 |
|
|
|
5,085,493 |
|
|
|
4,587,629 |
|
Professional fees |
|
|
10,143,207 |
|
|
|
1,512,345 |
|
|
|
1,206,648 |
|
Taxes, other than income taxes |
|
|
2,558,071 |
|
|
|
2,285,305 |
|
|
|
1,950,640 |
|
Insurance and supervisory fees |
|
|
1,909,550 |
|
|
|
1,126,818 |
|
|
|
1,010,108 |
|
Other operating expenses |
|
|
8,611,833 |
|
|
|
8,024,006 |
|
|
|
6,149,355 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
71,040,119 |
|
|
|
56,072,824 |
|
|
|
45,584,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes |
|
|
47,626,181 |
|
|
|
139,342,289 |
|
|
|
(41,654,171 |
) |
Income tax (provision) benefit |
|
|
(15,823,679 |
) |
|
|
(41,936,222 |
) |
|
|
23,462,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
31,802,502 |
|
|
$ |
97,406,067 |
|
|
$ |
(18,191,618 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
21,733,503 |
|
|
$ |
87,337,068 |
|
|
$ |
(28,260,617 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.26 |
|
|
$ |
1.08 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.26 |
|
|
$ |
1.05 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
493,693,236 |
|
|
$ |
327,452,238 |
|
|
$ |
210,643,533 |
|
Investment securities |
|
|
143,681,230 |
|
|
|
130,064,347 |
|
|
|
99,512,167 |
|
Money market investments |
|
|
34,773,873 |
|
|
|
4,016,966 |
|
|
|
1,263,416 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
672,148,339 |
|
|
|
461,533,551 |
|
|
|
311,419,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (Note 11) |
|
|
343,991,804 |
|
|
|
91,688,341 |
|
|
|
102,566,520 |
|
Federal funds purchased and repurchase agreements |
|
|
104,699,042 |
|
|
|
78,057,783 |
|
|
|
60,191,371 |
|
Advances from FHLB |
|
|
7,044,803 |
|
|
|
22,289,803 |
|
|
|
11,116,741 |
|
Notes payable and other borrowings |
|
|
17,356,139 |
|
|
|
11,151,098 |
|
|
|
3,774,473 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
473,091,788 |
|
|
|
203,187,025 |
|
|
|
177,649,105 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
199,056,551 |
|
|
|
258,346,526 |
|
|
|
133,770,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses |
|
|
28,730,477 |
|
|
|
22,028,773 |
|
|
|
26,400,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan and lease losses |
|
|
170,326,074 |
|
|
|
236,317,753 |
|
|
|
107,369,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges on loans |
|
|
2,953,397 |
|
|
|
2,658,565 |
|
|
|
2,105,577 |
|
Service charges on deposit accounts |
|
|
6,555,138 |
|
|
|
5,711,715 |
|
|
|
5,525,679 |
|
Mortgage banking activities (loss) gain |
|
|
(147,676 |
) |
|
|
3,570,081 |
|
|
|
1,761,966 |
|
Loss on partial extinguishment of a secured commercial loan
to a local financial institution |
|
|
(11,640,344 |
) |
|
|
|
|
|
|
|
|
Net (loss) gain on investments and impairments |
|
|
(574,544 |
) |
|
|
8,332,319 |
|
|
|
4,515,895 |
|
Rental income |
|
|
1,610,670 |
|
|
|
1,708,824 |
|
|
|
1,318,943 |
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
5,532,684 |
|
Other operating income |
|
|
13,614,497 |
|
|
|
11,689,059 |
|
|
|
12,349,685 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
12,371,138 |
|
|
|
33,670,563 |
|
|
|
33,110,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Employees compensation and benefits |
|
|
63,994,700 |
|
|
|
49,588,472 |
|
|
|
40,973,904 |
|
Occupancy and equipment |
|
|
26,329,588 |
|
|
|
22,404,990 |
|
|
|
18,819,711 |
|
Business promotion |
|
|
8,098,241 |
|
|
|
9,633,016 |
|
|
|
8,056,683 |
|
Professional fees |
|
|
17,536,173 |
|
|
|
3,407,896 |
|
|
|
1,940,694 |
|
Taxes, other than income taxes |
|
|
5,113,340 |
|
|
|
4,554,322 |
|
|
|
3,898,663 |
|
Insurance and supervisory fees |
|
|
3,610,562 |
|
|
|
2,190,359 |
|
|
|
2,086,206 |
|
Other operating expenses |
|
|
18,095,170 |
|
|
|
17,300,901 |
|
|
|
12,538,934 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
142,777,774 |
|
|
|
109,079,956 |
|
|
|
88,314,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
39,919,438 |
|
|
|
160,908,360 |
|
|
|
52,165,495 |
|
Income tax provision |
|
|
(4,253,694 |
) |
|
|
(38,287,352 |
) |
|
|
(4,927,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
35,665,744 |
|
|
$ |
122,621,008 |
|
|
$ |
47,238,034 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
15,527,746 |
|
|
$ |
102,483,010 |
|
|
$ |
27,100,036 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
1.27 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.19 |
|
|
$ |
1.23 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
35,665,744 |
|
|
$ |
122,621,008 |
|
|
$ |
47,238,034 |
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
8,355,081 |
|
|
|
7,207,113 |
|
|
|
6,820,263 |
|
Amortization of core deposit intangible |
|
|
1,778,206 |
|
|
|
1,531,195 |
|
|
|
1,198,310 |
|
Provision for loan and lease losses |
|
|
28,730,477 |
|
|
|
22,028,773 |
|
|
|
26,400,150 |
|
Deferred income tax (benefit) provision |
|
|
(26,536,609 |
) |
|
|
6,836,248 |
|
|
|
(23,016,105 |
) |
Stock-based compensation recognized |
|
|
4,892,361 |
|
|
|
|
|
|
|
|
|
Gain on sale of investments, net |
|
|
(2,375,344 |
) |
|
|
(9,831,385 |
) |
|
|
(4,571,895 |
) |
Other-than-temporary impairments on available-for-sale securities |
|
|
2,949,888 |
|
|
|
1,499,066 |
|
|
|
56,000 |
|
Unrealized loss (gain) on derivative instruments |
|
|
66,808,911 |
|
|
|
(21,208,082 |
) |
|
|
39,099,604 |
|
Net loss (gain) on sale of loans and impairments |
|
|
412,663 |
|
|
|
(3,632,444 |
) |
|
|
(1,630,338 |
) |
Net loss on
partial extinguishment of a secured commercial loan to a local financial institution |
|
|
11,640,344 |
|
|
|
|
|
|
|
|
|
Net amortization of premiums and discounts and deferred loan fees and costs |
|
|
(921,749 |
) |
|
|
(52,556 |
) |
|
|
497,921 |
|
Amortization of broker placement fees |
|
|
8,718,909 |
|
|
|
6,458,804 |
|
|
|
6,489,595 |
|
Amortization of basis adjustments on fair value hedges |
|
|
1,303,698 |
|
|
|
|
|
|
|
|
|
Net (accretion) of discount and premiums on investment securities |
|
|
(17,820,409 |
) |
|
|
(13,578,601 |
) |
|
|
(2,063,011 |
) |
Amortization of discount on subordinated notes |
|
|
|
|
|
|
273,732 |
|
|
|
252,255 |
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
(5,532,684 |
) |
(Decrease) increase in accrued income tax payable |
|
|
(8,693,921 |
) |
|
|
10,779,823 |
|
|
|
(6,990,817 |
) |
Decrease (increase) in accrued interest receivable |
|
|
5,259,986 |
|
|
|
(31,219,146 |
) |
|
|
(10,321,401 |
) |
Increase (decrease) in accrued interest payable |
|
|
36,556,819 |
|
|
|
14,802,998 |
|
|
|
(591,982 |
) |
Increase in other assets |
|
|
(17,486,355 |
) |
|
|
(22,369,649 |
) |
|
|
(13,491,051 |
) |
Increase in other liabilities |
|
|
17,472,725 |
|
|
|
33,796,853 |
|
|
|
12,233,579 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
121,045,681 |
|
|
|
3,322,742 |
|
|
|
24,838,393 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
156,711,425 |
|
|
|
125,943,750 |
|
|
|
72,076,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal collected on loans |
|
|
4,338,010,938 |
|
|
|
1,663,180,818 |
|
|
|
1,128,004,727 |
|
Loans originated |
|
|
(2,553,227,124 |
) |
|
|
(3,321,376,774 |
) |
|
|
(2,136,304,633 |
) |
Purchase of loans |
|
|
(106,750,392 |
) |
|
|
(198,647,852 |
) |
|
|
(85,473,896 |
) |
Proceeds from sale of loans |
|
|
36,900,103 |
|
|
|
120,682,234 |
|
|
|
66,854,112 |
|
Proceeds from sale of repossessed assets |
|
|
20,920,391 |
|
|
|
15,738,479 |
|
|
|
17,001,718 |
|
Purchase of servicing assets |
|
|
(378,823 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of available for sale securities |
|
|
22,846,966 |
|
|
|
214,679,492 |
|
|
|
19,270,030 |
|
Purchase of securities held to maturity |
|
|
(208,568,307 |
) |
|
|
(1,346,491,031 |
) |
|
|
(1,518,661,039 |
) |
Purchase of securities available for sale |
|
|
(21,401,938 |
) |
|
|
(1,220,389,587 |
) |
|
|
(287,973,621 |
) |
Principal repayments and maturities of securities held to maturity |
|
|
378,026,709 |
|
|
|
961,239,896 |
|
|
|
489,374,732 |
|
Principal repayments of securities available for sale |
|
|
113,168,384 |
|
|
|
143,229,805 |
|
|
|
204,490,303 |
|
Additions to premises and equipment |
|
|
(15,966,355 |
) |
|
|
(13,377,504 |
) |
|
|
(7,456,117 |
) |
Decrease (increase) in other equity securities |
|
|
18,678,315 |
|
|
|
9,577,600 |
|
|
|
(15,500,000 |
) |
Cash paid for net assets acquired in acquisition of business |
|
|
|
|
|
|
(78,404,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
2,022,258,867 |
|
|
|
(3,050,359,228 |
) |
|
|
(2,126,373,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
1,091,566,504 |
|
|
|
2,765,590,448 |
|
|
|
229,206,892 |
|
Net (decrease) increase in federal funds purchased and securities
sold under repurchase agreements |
|
|
(811,196,500 |
) |
|
|
851,735,087 |
|
|
|
718,547,594 |
|
Net FHLB advances (paid) taken |
|
|
(312,000,000 |
) |
|
|
(1,000,000,000 |
) |
|
|
310,000,000 |
|
Net proceeds from issuance of notes payable and other borrowings |
|
|
|
|
|
|
|
|
|
|
300,543,766 |
|
Repayments of notes payable and other borrowings |
|
|
|
|
|
|
(45,167,616 |
) |
|
|
|
|
Dividends paid |
|
|
(31,772,568 |
) |
|
|
(31,454,295 |
) |
|
|
(29,781,163 |
) |
Exercise of stock options |
|
|
19,756,483 |
|
|
|
2,094,354 |
|
|
|
2,242,556 |
|
Treasury stock acquired |
|
|
|
|
|
|
(965,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(43,646,081 |
) |
|
|
2,541,832,899 |
|
|
|
1,530,759,645 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,135,324,211 |
|
|
|
(382,582,579 |
) |
|
|
(523,537,612 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,380,640,086 |
|
|
|
926,975,163 |
|
|
|
1,052,107,837 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,515,964,297 |
|
|
$ |
544,392,584 |
|
|
$ |
528,570,225 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents include: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
154,078,088 |
|
|
$ |
120,388,982 |
|
|
$ |
83,322,262 |
|
Money market instruments |
|
|
3,361,886,209 |
|
|
|
424,003,602 |
|
|
|
445,247,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,515,964,297 |
|
|
$ |
544,392,584 |
|
|
$ |
528,570,225 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings |
|
$ |
353,284,025 |
|
|
$ |
257,982,428 |
|
|
$ |
191,191,736 |
|
Income Taxes |
|
|
37,680,255 |
|
|
|
20,688,295 |
|
|
|
30,573,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to other real estate owned |
|
$ |
1,569,586 |
|
|
$ |
2,298,085 |
|
|
$ |
2,879,412 |
|
Additions to auto repossessions |
|
|
52,739,918 |
|
|
|
27,613,054 |
|
|
|
20,557,521 |
|
Capitalization of servicing assets |
|
|
235,191 |
|
|
|
1,477,600 |
|
|
|
903,400 |
|
Mortgage loans securitized and transferred to securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
51,107,154 |
|
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004 |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
(As Restated) |
|
Preferred Stock |
|
$ |
550,100,000 |
|
|
$ |
550,100,000 |
|
|
$ |
550,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
80,875,056 |
|
|
|
40,389,155 |
|
|
|
40,027,285 |
|
Common stock
issued under stock option plan |
|
|
2,379,000 |
|
|
|
76,373 |
|
|
|
188,870 |
|
Treasury stock acquired before stock split |
|
|
|
|
|
|
(28,000 |
) |
|
|
|
|
Shares issued as a result of stock split |
|
|
|
|
|
|
40,437,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
83,254,056 |
|
|
|
80,875,056 |
|
|
|
40,216,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In-Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
|
|
|
|
4,863,299 |
|
|
|
268,855 |
|
Shares issued under stock option plan |
|
|
17,377,483 |
|
|
|
2,017,981 |
|
|
|
2,053,686 |
|
Stock-based compensation recognized |
|
|
4,892,361 |
|
|
|
|
|
|
|
|
|
Treasury stock acquired |
|
|
|
|
|
|
(937,079 |
) |
|
|
|
|
Adjustment for stock split |
|
|
|
|
|
|
(5,944,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
22,269,844 |
|
|
|
|
|
|
|
2,322,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Reserve |
|
|
|
|
|
|
82,825,000 |
|
|
|
80,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Surplus |
|
|
265,844,192 |
|
|
|
183,019,192 |
|
|
|
165,709,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
316,696,971 |
|
|
|
299,501,016 |
|
|
|
201,903,993 |
|
Net income |
|
|
35,665,744 |
|
|
|
122,621,008 |
|
|
|
47,238,034 |
|
Cash dividends declared on common stock |
|
|
(11,634,570 |
) |
|
|
(11,316,297 |
) |
|
|
(9,643,165 |
) |
Cash dividends declared on preferred stock |
|
|
(20,137,998 |
) |
|
|
(20,137,998 |
) |
|
|
(20,137,998 |
) |
Adjustment for stock split |
|
|
|
|
|
|
(34,493,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
320,590,147 |
|
|
|
356,174,402 |
|
|
|
219,360,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive (Loss) Income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(15,675,284 |
) |
|
|
43,635,624 |
|
|
|
35,812,500 |
|
Other comprehensive loss, net of tax |
|
|
(66,959,980 |
) |
|
|
(7,647,370 |
) |
|
|
(13,751,945 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
(82,635,264 |
) |
|
|
35,988,254 |
|
|
|
22,060,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
1,159,422,975 |
|
|
$ |
1,288,981,904 |
|
|
$ |
1,079,769,237 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Net income (loss) |
|
$ |
31,802,502 |
|
|
$ |
97,406,067 |
|
|
$ |
(18,191,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (loss) gain
arising during the period |
|
|
(36,633,176 |
) |
|
|
22,377,837 |
|
|
|
(19,739,660 |
) |
Less: Reclassification adjustments for net (gain) loss
and other than temporary impairments
included in net income |
|
|
(134,224 |
) |
|
|
1,181,245 |
|
|
|
(551,249 |
) |
Income tax benefit (expense) related to items of
other comprehensive income |
|
|
623,433 |
|
|
|
(578,742 |
) |
|
|
297,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income for the period, net of tax |
|
|
(36,143,967 |
) |
|
|
22,980,340 |
|
|
|
(19,993,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(4,341,465 |
) |
|
$ |
120,386,407 |
|
|
$ |
(38,185,308 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
10
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Net income |
|
$ |
35,665,744 |
|
|
$ |
122,621,008 |
|
|
$ |
47,238,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (loss) gain
arising during the period |
|
|
(68,428,461 |
) |
|
|
922,367 |
|
|
|
(8,765,854 |
) |
Less: Reclassification adjustments for net loss (gain)
and other than temporary impairments
included in net income |
|
|
574,544 |
|
|
|
(8,332,319 |
) |
|
|
(4,515,895 |
) |
Income tax benefit (expense) related to items of
other comprehensive income |
|
|
893,937 |
|
|
|
(237,418 |
) |
|
|
(470,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss for the period, net of tax |
|
|
(66,959,980 |
) |
|
|
(7,647,370 |
) |
|
|
(13,751,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(31,294,236 |
) |
|
$ |
114,973,638 |
|
|
$ |
33,486,089 |
|
|
|
|
|
|
|
|
|
|
|
11
FIRST BANCORP
PART I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
As previously reported, on December 13, 2005 the Corporation concluded that its financial
statements for the interim and annual periods from January 1, 2000 through March 31, 2005 should no
longer be relied upon and that its consolidated financial statements for some or all of the periods
included therein should be restated (the 2004 restatement). On September 26, 2006, the
Corporation filed with the SEC an Amended Annual Report on Form 10-K/A restating its audited
financial statements for the years ended December 31, 2004, 2003 and 2002. The following provides
a brief description of the principal accounting adjustments included in the 2004 restatement of the
Corporations consolidated financial statements and the effect of the adjustments on the
Corporations Consolidated Statement of Financial Condition as of June 30, 2004, its Consolidated
Statements of Income for the quarter and six month period ended June 30, 2004 and its Consolidated
Statement of Cash Flows for the six month period ended June 30, 2004. In addition, with the filing
of its 2006 Annual Report on Form 10-K, First BanCorp restated its 2005 and 2004 Statements of Cash
Flows due to some incorrect classifications. The classification errors related to three main items:
1) the treatment of discounts and the related accretion activity on certain investment securities
(mostly zero coupon securities), 2) the classification of cash flows from the disposition of
repossessed assets, and 3) purchases of zero coupon bonds and agency discount notes amounts
presented as part of investing activities (the 2006 restatement). All financial information for
the quarter and six month period ended June 30, 2004 included in any subsequent notes is presented
on a restated basis. A more detailed description of the accounting adjustments made in connection
with the 2004 restatement, as well as a background discussion of the 2004 restatement, is included
in Note 1 Restatement of Previously Issued Financial Statements to First Bancorp audited
Consolidated Financial Statements, included in the Corporations amended 2004 Annual Report on Form
10-K. A more detailed description of the accounting adjustments made in connection with the 2006
restatement, is included in Note 1 Restatement of 2005 and 2004 Consolidated Statements of Cash
Flows to First BanCorp audited Consolidated Financial Statements, included in the Corporations
2006 Annual Report on Form 10-K.
As discussed in more detail below, First BanCorp has separately quantified the impact of
various accounting adjustments on its interim unaudited Consolidated Financial Statements.
12
RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
(In thousands) |
|
2004 |
|
Cash and due from banks (no adjustment required) |
|
$ |
83,322 |
|
|
|
|
|
|
|
|
|
|
Money market investments, as previously reported |
|
$ |
442,929 |
|
Impact of accounting errors and corrections: |
|
|
|
|
Reclassifications |
|
|
2,319 |
|
|
|
|
|
|
|
|
|
|
Money market investments, as restated |
|
$ |
445,248 |
|
|
|
|
|
|
|
|
|
|
Investment securities including FHLB Stock, as previously reported |
|
$ |
5,854,954 |
|
Impact of accounting errors and corrections: |
|
|
|
|
Accounting for investment securities |
|
|
(4,025 |
) |
Recharacterization of pass-through certificates as secured loans |
|
|
(96,826 |
) |
Reclassifications |
|
|
(2,319 |
) |
|
|
|
|
|
|
|
|
|
Investment securities including FHLB stock, as restated |
|
$ |
5,751,784 |
|
|
|
|
|
|
|
|
|
|
Total loans, net of allowance for loan and lease losses, as previously reported |
|
$ |
7,758,586 |
|
Impact of accounting errors and corrections: |
|
|
|
|
Accounting for derivative instruments and broker placement fees |
|
|
232 |
|
Accounting for origination fees and costs and premiums and discounts on loans |
|
|
(2,067 |
) |
Recharacterization of pass-through certificates as secured loans |
|
|
96,826 |
|
Reclassifications |
|
|
539 |
|
Other accounting adjustments |
|
|
(1,784 |
) |
|
|
|
|
|
|
|
|
|
Total loans, net of allowance for loan and lease losses, as restated |
|
$ |
7,852,332 |
|
|
|
|
|
|
|
|
|
|
Total other assets, as previously reported |
|
$ |
325,029 |
|
Impact of accounting errors and corrections: |
|
|
|
|
Accounting for derivative instruments and broker placement fees |
|
|
708 |
|
Tax impact of accounting adjustments |
|
|
30,413 |
|
Reclassifications |
|
|
(1,318 |
) |
Valuation of financial instruments |
|
|
1,200 |
|
Other accounting adjustments |
|
|
431 |
|
|
|
|
|
|
|
|
|
|
Total other assets, as restated |
|
$ |
356,463 |
|
|
|
|
|
|
|
|
|
|
Total assets, as restated |
|
$ |
14,489,149 |
|
|
|
|
|
|
|
|
|
|
Total liabilities, as previously reported |
|
$ |
13,335,970 |
|
Impact of accounting errors and corrections: |
|
|
|
|
Accounting for derivative instruments and broker placement fees |
|
|
73,858 |
|
Tax impact of accounting adjustments |
|
|
1,456 |
|
Reclassifications |
|
|
(779 |
) |
Other accounting adjustments |
|
|
(1,125 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities, as restated |
|
$ |
13,409,380 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity, as previously reported |
|
$ |
1,128,850 |
|
Impact of accounting errors and corrections: |
|
|
|
|
Accounting for derivative instruments and broker placement fees |
|
|
(73,372 |
) |
Accounting for investment securities |
|
|
(2,922 |
) |
Accounting for origination fees and costs and premiums and discounts on loans |
|
|
(2,067 |
) |
Valuation of financial instruments |
|
|
1,200 |
|
Tax impact of accounting adjustments |
|
|
28,957 |
|
Impact of accounting adjustments in other comprehensive income |
|
|
(649 |
) |
Other accounting adjustments |
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
Stockholders equity, as restated |
|
$ |
1,079,769 |
|
|
|
|
|
13
RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Month Period Ended |
|
(In thousands, except per share amounts) |
|
June 30, 2004 |
|
|
June 30, 2004 |
|
Net interest income, as previously reported |
|
$ |
94,278 |
|
|
$ |
178,481 |
|
Impact of accounting errors and corrections: |
|
|
|
|
|
|
|
|
Accounting for derivative instruments and broker placement fees |
|
|
(86,898 |
) |
|
|
(47,163 |
) |
Accounting for investment securities |
|
|
(4,885 |
) |
|
|
(4,312 |
) |
Accounting for origination fees and costs and premiums and discounts on loans |
|
|
155 |
|
|
|
294 |
|
Reclassification of late charges, penalty fees on loans and other |
|
|
2,226 |
|
|
|
6,242 |
|
Other accounting adjustments |
|
|
108 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, as restated |
|
$ |
4,984 |
|
|
$ |
133,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses (no adjustment required) |
|
$ |
13,200 |
|
|
$ |
26,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income, as previously reported |
|
$ |
13,650 |
|
|
$ |
37,648 |
|
Impact of accounting errors and corrections: |
|
|
|
|
|
|
|
|
Accounting for derivative instruments and broker placement fees |
|
|
962 |
|
|
|
1,386 |
|
Accounting for origination fees and costs and premiums and discounts on loans |
|
|
(671 |
) |
|
|
(1,299 |
) |
Reclassification of late charges, penalty fees on loans and other |
|
|
(2,226 |
) |
|
|
(6,242 |
) |
Valuation of financial instruments |
|
|
|
|
|
|
1,200 |
|
Other accounting adjustments |
|
|
431 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income, as restated |
|
$ |
12,146 |
|
|
$ |
33,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses, as previously reported |
|
$ |
45,510 |
|
|
$ |
88,668 |
|
Impact of accounting errors and corrections: |
|
|
|
|
|
|
|
|
Accounting for origination fees and costs and premiums and discounts on loans |
|
|
(274 |
) |
|
|
(525 |
) |
Other accounting adjustments |
|
|
349 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses, as restated |
|
$ |
45,585 |
|
|
$ |
88,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, as previously reported |
|
$ |
(9,283 |
) |
|
$ |
(20,922 |
) |
Impact of accounting errors and corrections |
|
|
32,746 |
|
|
|
15,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense), as restated |
|
$ |
23,463 |
|
|
$ |
(4,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, as restated |
|
$ |
(18,192 |
) |
|
$ |
47,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share, as previously reported |
|
$ |
0.37 |
|
|
$ |
0.75 |
|
Effect of adjustments |
|
|
(0.72 |
) |
|
|
(0.41 |
) |
|
|
|
|
|
|
|
Basic (loss) earnings per common share, as restated |
|
$ |
(0.35 |
) |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share, as previously reported |
|
$ |
0.36 |
|
|
$ |
0.73 |
|
Effect of adjustments |
|
|
(0.71 |
) |
|
|
(0.40 |
) |
|
|
|
|
|
|
|
Diluted (loss) earnings per common share, as restated |
|
$ |
(0.35 |
) |
|
$ |
0.33 |
|
|
|
|
|
|
|
|
The Corporation classified the accounting practices and related adjustments that were affected
by the restatement into the categories described below.
Accounting for Derivative Instruments and Broker Placement Fees. As part of the restatement, the
Corporation reviewed its accounting for derivative instruments and concluded that its use of the
short-cut method of hedge accounting under Statement of Financial Accounting Standard No.
(SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, for interest rate
swaps that economically hedge mainly brokered certificates of deposit (CDs) was not consistent
with generally accepted accounting principles in the United States of America (GAAP) because the
fee received from the swap counterparty at the inception of the relationship caused the swap not to
have a fair value of zero at inception (which is required under SFAS 133 to qualify for the
short-cut method). In connection with the evaluation of hedge accounting transactions, the
Corporation concluded that the short-cut method was also incorrectly used for certain interest rate
swaps hedging medium-term notes, certain corporate bonds and certain commercial loan receivables.
14
Prior to the restatement, the Corporation recorded, under the short-cut method, the effective
portion of the change in fair value of the hedged item as an adjustment to income that offsets the
fair value adjustment on the related interest rate swap. Furthermore, prior to the restatement,
the broker placement fees were offset with the upfront fees received from the swap counterparties
at inception with no separate accounting recognition.
The adjustments related to the correction of the accounting for derivative instruments and
broker placement fees primarily consisted of: (1) eliminating the fair value adjustments previously
made to the brokered CDs, medium-term notes and other hedged items; (2) recognizing the fair value
of the interest rate swaps at inception, which is the equivalent of the upfront fees received from
swap counterparties; (3) recognizing the placement fees paid to the brokers that placed the
brokered CDs and medium-term notes as deferred costs required to be amortized over the expected
maturities of the related economically hedged items; and (4) correcting the fair value of the
interest rate swaps as of the end of each reporting period.
The net cumulative pre-tax effect through June 30, 2004 related to the correction of the
accounting for derivative instruments and broker placement fees was a decrease of $73.4 million.
The following table details the components of the pre-tax income effect from the correction in the
accounting for interest rate swaps and broker placement fees for the quarter and six month period
ended June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Month Period Ended |
|
|
|
June 30, 2004 |
|
|
June 30, 2004 |
|
Elimination of fair value adjustments previously made to hedged items |
|
$ |
(88,770 |
) |
|
$ |
(49,154 |
) |
Recognition of interest rate swap up-front fees |
|
|
7,521 |
|
|
|
12,741 |
|
Broker placement fees amortization |
|
|
(1,240 |
) |
|
|
(5,535 |
) |
Corrections to interest rate swap valuations |
|
|
(3,447 |
) |
|
|
(3,829 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(85,936 |
) |
|
$ |
(45,777 |
) |
|
|
|
|
|
|
|
Recharacterization of purchases of mortgage loans and pass-through trust certificates as
commercial loans secured by mortgage loans. Prior to the restatement, the Corporation had
inaccurately recorded as purchases of residential mortgages, commercial mortgage loans and
pass-through trust certificates certain mortgage-related transactions with local financial
institutions. Certain of these transactions included or likely included recourse provisions, which
had not been analyzed as part of the Corporations financial reporting process. The Corporation
determined that such transactions did not satisfy the reasonable assurance standard of SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
regarding the isolation of assets in bankruptcy, with the result that they did not qualify as a
true sale for accounting purposes. The
restatement reflects these mortgage-related transactions as commercial loans secured by mortgage
loans and pass-through trust certificates. This conclusion resulted in the revised classification
of approximately $2.7 billion in mortgage-related loans to secured loans to local financial
institutions as of June 30, 2004 and $96.8 million pass-through trust certificates to secured loans
to local financial institutions as of June 30, 2004. The recharacterization of the
mortgage-related transactions did not impact the Corporations retained earnings as of June 30,
2004.
Accounting for Investment Securities. The Corporation historically amortized premiums and
discounts related to most of its investment securities into interest income over the life of the
related securities using a straight-line method adjusted for prepayment of securities. As part of
the restatement, the Corporation concluded that it needed to correct its methodology and adjust its
financial statements to reflect the amortization of premiums and discounts into interest income
over the terms of the securities using the effective interest method instead of the straight-line
method. The cumulative effect of this correction on the Corporations pre-tax income through June
30, 2004 was a decrease of $2.9 million. For the quarter and six month period ended June 30, 2004
the effect for the correction of the accounting for investment securities was a decrease on the
Corporations pre-tax income of $4.9 million and $4.3 million, respectively.
15
In addition, the Corporation identified other types of investment instruments that had not
been recognized in the Consolidated Statement of Financial Condition in accordance with the
provisions of SFAS 115 Accounting for Certain Investments in Debt and Equity Securities.
Accounting for deferral and recognition of origination fees and costs on loans. As part of the
restatement process, the Corporation reviewed the methodology used to measure origination fees and
costs associated with its loans origination, in accordance with SFAS 91, Accounting for
Nonrefundable Fees and Costs Associated with Origination or Acquiring Loans and Initial Direct
Costs of Leases, which establishes the accounting treatment for nonrefundable fees and costs
associated with lending, committing to lend or purchasing loans. The Corporation concluded that
throughout the restatement period, it did not apply SFAS 91 requirements to one of its consumer
loans portfolios. Accordingly, the Corporation concluded that, in order to comply with SFAS 91, it
needed to defer and amortize loan origination fees and costs on this portfolio using the interest
method. The cumulative effect of this correction on the Corporations pre-tax income through June
30, 2004 was a decrease of approximately $2.1 million, of which $0.2 million and $0.5 million was
recorded as a reduction in pre-tax income for the quarter and six month period ended June 30, 2004,
respectively.
Valuation of financial instruments. In connection with a loan restructuring, First BanCorp became
the holder of warrants. The warrant certificate gives the Corporation the right to purchase common
stock from a privately held company at a fixed price. This transaction was not formally evaluated
or documented as part of the Corporations financial reporting process. As part of the restatement
process, the Corporation concluded that this transaction meets the definition of a derivative
instrument as stated in SFAS 133. Accordingly, the warrant was marked to market and the valuation
recognized in earnings as part of Other operating income. The cumulative effect of this
correction on the Corporations pre-tax income through June 30, 2004 was an increase of $1.2
million, all of which related to the quarter ended March 31, 2004.
Other Accounting Adjustments and Reclassifications. As part of the restatement, the Corporation
also made corrections to various other aspects of its Consolidated Financial Statements, including
adjustments to the gain on sale of credit card portfolios, accrual of rental expense on lease
contracts and income from a loan origination subsidiary. The cumulative effect of all these other
adjustments on the Corporations pre-tax income through June 30, 2004 was a decrease of $0.2
million, of which approximately $0.2 million was recorded as an increase to pre-tax income for the
quarter ended June 30, 2004 and $0.5 million was recorded as an increase to pre-tax income for the
six month period ended June 30, 2004.
The reclassifications made to conform to GAAP included, among other things, reclassifying late
charges and prepayment fees on loans from non-interest income to interest income on loans, and
reclassifying dividends on
equity securities from non-interest income to interest income on investments. Other
reclassifications included reclassifying loans receivable balances within loan categories,
reclassifying certain amounts previously reported as repurchase agreements to other borrowings, and
reclassifying certain short-term investments previously reported as part of the available for sale
and held to maturity investment portfolio to money market investments.
Income Taxes. As a result of the corrections reflected in the restatement, the Corporations
cumulative income tax expense through June 30, 2004 was reduced by approximately $29.0 million, of
which $32.7 million was recorded as a reduction to income tax expense for the quarter ended June
30, 2004 and $16.0 million was recorded as a decrease to income tax expense for the six month
period ended June 30, 2004. The cumulative reduction through June 30, 2004 resulted principally
from changes in deferred taxes. See Note 15 for additional details regarding the Corporations
income taxes.
16
The following table shows the impact of all restatement adjustments on the previously
reported unaudited Consolidated Statement of Financial Condition as of June 30, 2004.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004 |
|
|
|
|
|
|
June 30, 2004 |
|
(Dollars in thousands) |
|
(As Previously Reported) |
|
|
Adjustments |
|
|
(As Restated) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
83,322 |
|
|
$ |
|
|
|
$ |
83,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market instruments |
|
|
371,329 |
|
|
|
2,319 |
|
|
|
373,648 |
|
Federal funds sold and securities purchased
under agreements to resell |
|
|
71,000 |
|
|
|
|
|
|
|
71,000 |
|
Time deposits with other financial institutions |
|
|
600 |
|
|
|
|
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
Total money market investments |
|
|
442,929 |
|
|
|
2,319 |
|
|
|
445,248 |
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale, at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged |
|
|
1,154,453 |
|
|
|
(96,825 |
) |
|
|
1,057,628 |
|
Other investment securities |
|
|
461,382 |
|
|
|
(151 |
) |
|
|
461,231 |
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale |
|
|
1,615,835 |
|
|
|
(96,976 |
) |
|
|
1,518,859 |
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity, at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged |
|
|
3,656,370 |
|
|
|
(3,968 |
) |
|
|
3,652,402 |
|
Other investment securities |
|
|
521,599 |
|
|
|
(2,601 |
) |
|
|
518,998 |
|
|
|
|
|
|
|
|
|
|
|
Total investment securities held to maturity |
|
|
4,177,969 |
|
|
|
(6,569 |
) |
|
|
4,171,400 |
|
|
|
|
|
|
|
|
|
|
|
Other equity securities |
|
|
61,150 |
|
|
|
375 |
|
|
|
61,525 |
|
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance for loan and lease losses |
|
|
7,736,191 |
|
|
|
97,088 |
|
|
|
7,833,279 |
|
Loans held for sale, at lower of cost or market |
|
|
22,395 |
|
|
|
(3,342 |
) |
|
|
19,053 |
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
|
7,758,586 |
|
|
|
93,746 |
|
|
|
7,852,332 |
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
85,905 |
|
|
|
|
|
|
|
85,905 |
|
Other real estate owned |
|
|
5,599 |
|
|
|
|
|
|
|
5,599 |
|
Accrued interest receivable |
|
|
52,149 |
|
|
|
(291 |
) |
|
|
51,858 |
|
Due from customers on acceptances |
|
|
328 |
|
|
|
|
|
|
|
328 |
|
Other assets |
|
|
181,048 |
|
|
|
31,725 |
|
|
|
212,773 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,464,820 |
|
|
$ |
24,329 |
|
|
$ |
14,489,149 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits |
|
$ |
600,217 |
|
|
$ |
1,637 |
|
|
$ |
601,854 |
|
Interest-bearing deposits |
|
|
6,352,120 |
|
|
|
52,638 |
|
|
|
6,404,758 |
|
Federal funds purchased and securities sold
under agreements to repurchase |
|
|
4,413,070 |
|
|
|
(55,050 |
) |
|
|
4,358,020 |
|
Advances from the Federal Home Loan Bank (FHLB) |
|
|
1,223,000 |
|
|
|
|
|
|
|
1,223,000 |
|
Notes payable |
|
|
153,701 |
|
|
|
(1,087 |
) |
|
|
152,614 |
|
Other borrowings |
|
|
102,610 |
|
|
|
45,167 |
|
|
|
147,777 |
|
Subordinated notes |
|
|
82,820 |
|
|
|
(802 |
) |
|
|
82,018 |
|
Bank acceptance outstanding |
|
|
328 |
|
|
|
|
|
|
|
328 |
|
Payable for unsettled investment trade |
|
|
198,575 |
|
|
|
|
|
|
|
198,575 |
|
Accounts payable and other liabilities |
|
|
209,529 |
|
|
|
30,907 |
|
|
|
240,436 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,335,970 |
|
|
|
73,410 |
|
|
|
13,409,380 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, authorized 50,000,000 shares: issued and
outstanding 22,004,000 shares at $25 liquidation value per share |
|
|
550,100 |
|
|
|
|
|
|
|
550,100 |
|
Common stock, $1 par value, authorized
250,000,000 shares; issued 45,137,055 shares |
|
|
45,137 |
|
|
|
|
|
|
|
45,137 |
|
Less: Treasury Stock (at par value) |
|
|
(4,921 |
) |
|
|
|
|
|
|
(4,921 |
) |
|
|
|
|
|
|
|
|
|
|
Common stock outstanding |
|
|
40,216 |
|
|
|
|
|
|
|
40,216 |
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
2,323 |
|
|
|
|
|
|
|
2,323 |
|
Capital reserve |
|
|
80,000 |
|
|
|
|
|
|
|
80,000 |
|
Legal surplus |
|
|
163,106 |
|
|
|
2,603 |
|
|
|
165,709 |
|
Retained earnings |
|
|
270,396 |
|
|
|
(51,035 |
) |
|
|
219,361 |
|
Accumulated other comprehensive income, net of tax |
|
|
22,709 |
|
|
|
(649 |
) |
|
|
22,060 |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,128,850 |
|
|
|
(49,081 |
) |
|
|
1,079,769 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
14,464,820 |
|
|
$ |
24,329 |
|
|
$ |
14,489,149 |
|
|
|
|
|
|
|
|
|
|
|
17
The following tables show the impact of all restatement adjustments on the previously
reported unaudited Consolidated Statements of Income and basic and diluted earnings per share for
the quarter and six month period ended June 30, 2004.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
June 30, |
|
|
|
|
|
|
June 30, |
|
|
|
2004 |
|
|
|
|
|
|
2004 |
|
(In thousands, except per share data) |
|
(As Previously Reported) |
|
|
Adjustments |
|
|
(As Restated) |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
103,074 |
|
|
$ |
3,574 |
|
|
$ |
106,648 |
|
Investment securities |
|
|
57,588 |
|
|
|
(4,180 |
) |
|
|
53,408 |
|
Money market investments |
|
|
546 |
|
|
|
|
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
161,208 |
|
|
|
(606 |
) |
|
|
160,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
26,610 |
|
|
|
89,337 |
|
|
|
115,947 |
|
Federal funds purchased and repurchase agreements |
|
|
32,013 |
|
|
|
(154 |
) |
|
|
31,859 |
|
Advances from FHLB |
|
|
5,817 |
|
|
|
|
|
|
|
5,817 |
|
Notes payable and other borrowings |
|
|
2,490 |
|
|
|
(495 |
) |
|
|
1,995 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
66,930 |
|
|
|
88,688 |
|
|
|
155,618 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
94,278 |
|
|
|
(89,294 |
) |
|
|
4,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
13,200 |
|
|
|
|
|
|
|
13,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan and lease losses |
|
|
81,078 |
|
|
|
(89,294 |
) |
|
|
(8,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges on loans |
|
|
4,218 |
|
|
|
(3,268 |
) |
|
|
950 |
|
Service charges on deposit accounts |
|
|
2,743 |
|
|
|
|
|
|
|
2,743 |
|
Mortgage banking activities |
|
|
217 |
|
|
|
|
|
|
|
217 |
|
Net gain on investments and impairments |
|
|
551 |
|
|
|
|
|
|
|
551 |
|
Rental income |
|
|
702 |
|
|
|
|
|
|
|
702 |
|
Gain on sale of credit card portfolio |
|
|
297 |
|
|
|
|
|
|
|
297 |
|
Other operating income |
|
|
4,922 |
|
|
|
1,764 |
|
|
|
6,686 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
13,650 |
|
|
|
(1,504 |
) |
|
|
12,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Employees compensation and benefits |
|
|
21,513 |
|
|
|
(275 |
) |
|
|
21,238 |
|
Occupancy and equipment |
|
|
9,447 |
|
|
|
(5 |
) |
|
|
9,442 |
|
Business promotion |
|
|
4,588 |
|
|
|
|
|
|
|
4,588 |
|
Professional fees |
|
|
1,206 |
|
|
|
|
|
|
|
1,206 |
|
Taxes, other than income taxes |
|
|
1,951 |
|
|
|
|
|
|
|
1,951 |
|
Insurance and supervisory fees |
|
|
1,010 |
|
|
|
|
|
|
|
1,010 |
|
Other operating expenses |
|
|
5,795 |
|
|
|
355 |
|
|
|
6,150 |
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
|
45,510 |
|
|
|
75 |
|
|
|
45,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
49,218 |
|
|
|
(90,873 |
) |
|
|
(41,655 |
) |
Income tax (provision) benefit |
|
|
(9,283 |
) |
|
|
32,746 |
|
|
|
23,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
39,935 |
|
|
$ |
(58,127 |
) |
|
$ |
(18,192 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
29,866 |
|
|
$ |
(58,127 |
) |
|
$ |
(28,261 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
(0.72 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.36 |
|
|
$ |
(0.71 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
18
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
|
|
|
June 30, |
|
|
|
2004 |
|
|
|
|
|
|
2004 |
|
(In thousands, except per share data) |
|
(As Previously Reported) |
|
|
Adjustments |
|
|
(As Restated) |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
203,122 |
|
|
$ |
7,522 |
|
|
$ |
210,644 |
|
Investment securities |
|
|
103,370 |
|
|
|
(3,858 |
) |
|
|
99,512 |
|
Money market investments |
|
|
1,263 |
|
|
|
|
|
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
307,755 |
|
|
|
3,664 |
|
|
|
311,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
53,657 |
|
|
|
48,910 |
|
|
|
102,567 |
|
Federal funds purchased and repurchase agreements |
|
|
60,346 |
|
|
|
(155 |
) |
|
|
60,191 |
|
Advances from FHLB |
|
|
11,117 |
|
|
|
|
|
|
|
11,117 |
|
Notes payable and other borrowings |
|
|
4,154 |
|
|
|
(380 |
) |
|
|
3,774 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
129,274 |
|
|
|
48,375 |
|
|
|
177,649 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
178,481 |
|
|
|
(44,711 |
) |
|
|
133,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
26,400 |
|
|
|
|
|
|
|
26,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan and lease losses |
|
|
152,081 |
|
|
|
(44,711 |
) |
|
|
107,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges on loans |
|
|
10,163 |
|
|
|
(8,058 |
) |
|
|
2,105 |
|
Service charges on deposit accounts |
|
|
5,526 |
|
|
|
|
|
|
|
5,526 |
|
Mortgage banking activities |
|
|
1,762 |
|
|
|
|
|
|
|
1,762 |
|
Net gain on investments and impairments |
|
|
4,516 |
|
|
|
|
|
|
|
4,516 |
|
Rental income |
|
|
1,319 |
|
|
|
|
|
|
|
1,319 |
|
Gain on sale of credit card portfolio |
|
|
5,533 |
|
|
|
|
|
|
|
5,533 |
|
Other operating income |
|
|
8,829 |
|
|
|
3,520 |
|
|
|
12,349 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
37,648 |
|
|
|
(4,538 |
) |
|
|
33,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Employees compensation and benefits |
|
|
41,499 |
|
|
|
(525 |
) |
|
|
40,974 |
|
Occupancy and equipment |
|
|
18,831 |
|
|
|
(11 |
) |
|
|
18,820 |
|
Business promotion |
|
|
8,057 |
|
|
|
|
|
|
|
8,057 |
|
Professional fees |
|
|
1,940 |
|
|
|
|
|
|
|
1,940 |
|
Taxes, other than income taxes |
|
|
3,899 |
|
|
|
|
|
|
|
3,899 |
|
Insurance and supervisory fees |
|
|
2,086 |
|
|
|
|
|
|
|
2,086 |
|
Other operating expenses |
|
|
12,356 |
|
|
|
183 |
|
|
|
12,539 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
88,668 |
|
|
|
(353 |
) |
|
|
88,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
101,061 |
|
|
|
(48,896 |
) |
|
|
52,165 |
|
Income tax provision |
|
|
(20,922 |
) |
|
|
15,995 |
|
|
|
(4,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
80,139 |
|
|
$ |
(32,901 |
) |
|
$ |
47,238 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
60,001 |
|
|
$ |
(32,901 |
) |
|
$ |
27,100 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.75 |
|
|
$ |
(0.41 |
) |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.73 |
|
|
$ |
(0.40 |
) |
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
19
Restatement of 2004 Consolidated Statement of Cash Flows
During the preparation of the 2006 consolidated financial statements, management became aware
of some incorrect classifications in the Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004. The classification errors related to three main items: 1) the treatment
of discounts and the related accretion activity on certain investment securities (mostly zero
coupon securities) purchased by the Corporation which were incorrectly presented as cash flows
related to investing activities (principal repayments and maturities of securities
held-to-maturity), instead of operating activities (net amortization or accretion of discounts
and premiums on investment securities), 2) the classification of cash flows from the disposition
of repossessed assets which was included as part of operating activities (decrease or increase in
other assets), instead of investing activities (proceeds from sale of repossessed assets), and
3) purchases of zero coupon bonds and agency discount notes amounts presented as part of investing
activities (purchases of securities held-to-maturity) were reported at par amount rather than the
actual cash paid for the securities and the discounts on such securities were being presented as
investing activities (principal repayments and maturities of securities held-to-maturity) rather
than being excluded from the Cash Flow Statements.
The cash flows related to the accretion of discount on certain investment securities have been
properly classified as cash flows from operating activities and the cash flows from the
disposition of repossessed assets have been properly classified as cash flows from investing
activities in the restated Consolidated Statement of Cash Flows for the six month period ended
June 30, 2004. The amounts presented as purchases, principal repayments and maturities of
securities under cash flows from investing activities have also been corrected to reflect actual
cash outflows and inflows related to zero coupon bonds and discounts notes. In addition, the
Corporation has corrected the classification of other items, including items related to the 2004
restatement (see footnotes in table below), and the classification of short-term held-to-maturity
investments (less than 90 days) from investments to cash and cash equivalents.
Also, the Corporation has corrected the classification of cash receipts from sales and
repayments as well as cash disbursements in originations of loans classified as held-for-sale on
the consolidated statements of cash flows. The Corporation previously reported the cash receipts
from sales and repayments as well as cash disbursements in originations of loans classified as
held-for-sale that were originally acquired for investment as cash flows of operating activities in
the consolidated statements of cash flows. Since these loans were originally acquired by the
Corporation for investment purposes, cash receipts from sales and repayments as well as cash
disbursements in originations of these loans should be classified as cash flows of investing
activities in the consolidated statements of cash flows.
20
The following comparative table presents the effects of the aforementioned classification
corrections as well as the impact of all restatement adjustments related with the 2004 restatement
on the Consolidated Statement of Cash Flows for the six month period ended June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
As Previously |
|
|
|
|
|
|
|
Six Month Period Ended June 30, (in thousands) |
|
Reported |
|
|
Adjustments |
|
|
(As Restated) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
80,139 |
|
|
$ |
(32,901 |
) |
|
$ |
47,238 |
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit (1) |
|
|
(5,148 |
) |
|
|
(17,868 |
) |
|
|
(23,016 |
) |
Unrealized derivatives loss (2) |
|
|
58 |
|
|
|
39,042 |
|
|
|
39,100 |
|
Amortization of brokers placement fees (2) |
|
|
|
|
|
|
6,490 |
|
|
|
6,490 |
|
(Accretion) amortization of premiums and
discounts on investment securities (3) |
|
|
|
|
|
|
(2,063 |
) |
|
|
(2,063 |
) |
Decrease (increase) in other assets (3) |
|
|
3,440 |
|
|
|
(16,931 |
) |
|
|
(13,491 |
) |
Other adjustments to cash flows from operating
activities (4) (5) |
|
|
(17,896 |
) |
|
|
35,714 |
|
|
|
17,818 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to reconcile net income to net
cash provided by operating activities |
|
|
(19,546 |
) |
|
|
44,384 |
|
|
|
24,838 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
60,593 |
|
|
|
11,483 |
|
|
|
72,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of repossessed assets (3) |
|
|
|
|
|
|
17,002 |
|
|
|
17,002 |
|
Purchase of securities held to maturity (3) |
|
|
(4,305,050 |
) |
|
|
2,786,389 |
|
|
|
(1,518,661 |
) |
Principal repayments and maturities of securities
held to maturity (3) |
|
|
3,257,559 |
|
|
|
(2,768,184 |
) |
|
|
489,375 |
|
Other adjustments to cash flows from investing
activities (4) (5) |
|
|
(1,087,107 |
) |
|
|
(26,983 |
) |
|
|
(1,114,090 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,134,598 |
) |
|
|
8,224 |
|
|
|
(2,126,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits (2) |
|
|
237,533 |
|
|
|
(8,326 |
) |
|
|
229,207 |
|
Other adjustments to cash flows from financing
activities (5) |
|
|
1,302,479 |
|
|
|
(926 |
) |
|
|
1,301,553 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,540,012 |
|
|
|
(9,252 |
) |
|
|
1,530,760 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(533,993 |
) |
|
|
10,455 |
|
|
|
(523,538 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,060,244 |
|
|
|
(8,136 |
) |
|
|
1,052,108 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period (6) |
|
$ |
526,251 |
|
|
$ |
2,319 |
|
|
$ |
528,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deferred tax effect of items related to the 2004 restatement; refer to explanation
of change in Note 1 Restatement of previously issued financial statements Income
Taxes above. |
|
(2) |
|
Refer to explanation of change in Note 1 Restatement of previously issued
financial statements Accounting for Derivative Instruments and Broker Placement Fees
above. |
|
(3) |
|
Refer to explanation of change in the first paragraph of Restatement of 2004
Consolidated Statements of Cash Flows above. |
|
(4) |
|
Refer to explanation of change in the third paragraph of Restatement of 2004
Consolidated Statements of Cash Flows above. |
|
(5) |
|
Change resulting from certain not significant 2004 restatement adjustments (refer to Note 1
Restatement of previously issued financial statements) and the correction of immaterial
classification errors. |
|
(6) |
|
Correction of classification of short-term held-to-maturity investments (less than 90 days) from investments to cash and cash equivalents. |
21
2 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements (unaudited) have been prepared in conformity with the
accounting policies stated in the Corporations Annual Audited Financial Statements included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005. Certain information
and note disclosure normally included in the financial statements prepared in accordance with GAAP
have been condensed or omitted from these statements pursuant to the rules and regulations of the
SEC and, accordingly, these financial statements should be read in conjunction with the audited
Consolidated Financial Statements of the Corporation for the year ended December 31, 2005, included
in the Corporations 2005 Annual Report on Form 10-K. All adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a fair presentation
of the statement of financial position, results of operations and cash flows for the interim
periods have been reflected. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The results of operations for the quarter and six month period ended on June 30, 2006, are not
necessarily indicative of the results to be expected for the entire year.
On May 24, 2005, the Corporations Board of Directors declared a two-for-one split in the
Corporations common stock. The record date of the stock split was June 15, 2005, and the
distribution date was June 30, 2005. The per share data contained in the Consolidated Financial
Statements prior to the quarter ended June 30, 2005 has been adjusted to reflect the two-for-one
stock split.
Recently issued accounting pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115. This Statement
allows entities to choose to measure certain financial assets and liabilities at fair value with
changes in fair value reflected in earnings. The fair value option may be applied on an
instrument-by-instrument basis. This Statement is effective for periods after November 15, 2007,
however, early adoption is permitted provided that the entity also elects to apply the provisions
of SFAS 157, Fair Value Measurements. The Corporation adopted SFAS 159 effective January 1, 2007.
The Corporation decided to early adopt SFAS 159 for the callable brokered CDs and a portion of the
callable fixed medium-term notes that were economically hedged with interest rate swaps. First
BanCorp had been following the long-haul method of accounting, which was adopted on April 3, 2006,
under SFAS 133 for the portfolio of callable interest rate swaps, callable brokered CDs and
callable notes. One of the main considerations in determining to early adopt SFAS 159 for these
instruments was to eliminate the operational procedures required by the long-haul method of
accounting in terms of documentation, effectiveness assessment, and manual procedures followed by
the Corporation to fulfill the requirements specified by SFAS 133.
Upon adoption of SFAS 159, the Corporation selected the fair value measurement for
approximately 63%, of the brokered CDs portfolio and certain of the medium-term notes portfolio (designated liabilities). Interest rate risk on the
brokered CDs and medium term notes chosen for the fair value measurement option will continue to be
economically hedged through callable interest rate swaps with the same terms and conditions. The
cumulative after-tax effect on the opening balance of retained earnings from adopting these
standards is an approximate increase of $92.2 million. Under SFAS 159, this one-time credit was
not recognized in current earnings. Regulatory capital increased by the positive adjustment to
retained earnings, exceeding by higher margins the capital levels required to be classified as
well-capitalized and strengthened the Corporations regulatory capital ratios.
With the Corporations elimination of the use of the long-haul method in connection with the
adoption of SFAS 159 as of January 1, 2007, the Corporation will no longer amortize the basis
adjustment. The basis adjustment amortization is the reversal of the change in value of the
brokered CDs and medium term notes recognized since the implementation of the long-haul method.
Since the time the Corporation implemented the
22
long-haul method, it has recognized the basis adjustment and the changes in the value of the
brokered CDs and medium term notes based on the expected call date of the instruments. The
adoption of SFAS 159 also requires the recognition, as part of the adoption adjustment to retained
earnings, of all of the unamortized placement fees that were paid to broker counterparties upon the
issuance of the brokered CDs and medium term notes. The Corporation previously amortized those fees
through earnings based on the expected call date of the instruments. The impact of the
de-recognition of the basis adjustment and the unamortized placement fees as of January 1, 2007
results in a cumulative after-tax reduction to retained earnings of approximately $23.8 million.
This negative charge is included in the total cumulative after-tax increase to retained earnings of
$92.2 million that results with the adoption of SFAS 157 and SFAS 159.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). This interpretation expresses the SEC staffs views regarding the process of
quantifying financial statement misstatements that could result in improper amounts of assets or
liabilities. While a misstatement may not be considered material for the period in which it
occurred, it may be considered material in a subsequent year if the corporation were to correct the
misstatement through current period earnings. SAB 108 requires a materiality evaluation based on
all relevant quantitative and qualitative factors and the quantification of the misstatement using
both a balance sheet and income statement approach to determine materiality. SAB 108 is effective
for periods ending after November 15, 2006. The adoption of this Statement did not have a material
effect on the Corporations financial condition and results of operations.
In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R). This Statement requires corporations to recognize the overfunded or underfunded status of
a defined benefit postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement is effective for periods ending after December 15,
2006. This Statement is not applicable to the Corporation and therefore has no impact to the
Corporations financial condition or results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about
fair value measurements. This Statement is effective for periods beginning after November 15, 2007.
Effective January 1, 2007, the Corporation elected to early adopt this Statement. For further
details and for the effect on the Corporations financial condition and results of operations upon
adoption of SFAS 157 and SFAS 159, refer to the discussion on SFAS 159 above.
In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109. This
interpretation provides a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. This interpretation is
effective for periods beginning after December 15, 2006. The Corporation adopted FIN 48 effective
January 1, 2007. The cumulative effect of adoption of FIN 48 resulted in an increase of $2.6
million to tax reserves with offsetting adjustments to retained earnings. Additionally, in
connection with the adoption of FIN 48, the Corporation elected to classify interest and penalties
related to unrecognized tax portions as components of income tax expense.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
an amendment of SFAS No. 140. This Statement requires that servicing assets and servicing
liabilities be initially measured at fair value along with any derivative instruments used to
mitigate inherent risks. This Statement is
23
effective for periods beginning after September 15, 2006. The adoption of this Statement in
2007 did not have a material effect on the Corporations financial condition and results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. This Statement allows fair value
measurement for any hybrid financial instrument that contains an embedded derivative requiring
bifurcation. It also establishes a requirement to evaluate interests in securitized financial
assets to establish whether the interests are freestanding derivatives or hybrid financial
instruments that contain an embedded derivative requiring bifurcation. This Statement is effective
for all financial instruments acquired or issued after September 15, 2006. The adoption of this
Statement did not have a material effect on the Corporations financial condition and results of
operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement changes the
requirements for the accounting for and reporting of a voluntary change in accounting principle.
This Statement requires retrospective application to prior periods financial statements of a
change in accounting principle unless it is impracticable to do so; in which case the earliest
period for which retrospective application is practicable should be applied. If it is impracticable
to calculate the cumulative effect of a change in accounting principle, the Statement requires
prospective application as of the earliest date practicable. This Statement does not change the
guidance in APB Opinion No. 20 with regard to the reporting of the correction of an error, or a
change in accounting estimate. The Statements purpose is to improve the comparability of
financial information among periods. SFAS No. 154 is effective for fiscal years beginning after
December 15, 2005. The adoption of this statement did not have a material effect on the
Corporations financial condition and results of operations.
In December 2004, the Financial Accounting Standard Board (FASB) issued SFAS 123R,
Share-Based Payment. This statement is a revision of SFAS 123, Accounting for Stock- Based
Compensation and it also supersedes APB No. 25, Accounting for Stock Issued to Employees, (APB
25), and its related implementation guidance.
This Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award (with
limited exceptions). The cost will be recognized over the period during which an employee is
required to provide service in exchange for the award-the requisite service period (usually the
vesting period). No compensation cost is recognized for equity instruments for which employees do
not render the requisite service.
SFAS 123R eliminates the alternative to use APB 25s intrinsic value method of accounting that
was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees
generally resulted in recognition of no compensation cost.
The Corporation prospectively applied SFAS123R to its financial statements as of January 1,
2006. Refer to Note 4 to these consolidated financial statements for required disclosures and
further information on the impact of the adoption of this accounting pronouncement.
24
3 EARNINGS PER COMMON SHARE
The calculations of earnings (loss) per common share for the quarters and six month periods
ended on June 30, 2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
(In thousands, except per share data) |
|
Net Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
31,803 |
|
|
$ |
97,406 |
|
|
$ |
(18,192 |
) |
Less: Preferred stock dividend |
|
|
(10,069 |
) |
|
|
(10,069 |
) |
|
|
(10,069 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
21,734 |
|
|
$ |
87,337 |
|
|
$ |
(28,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
83,254 |
|
|
|
80,852 |
|
|
|
80,430 |
|
Average potential common shares |
|
|
158 |
|
|
|
2,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of common shares outstanding |
|
|
83,412 |
|
|
|
82,872 |
|
|
|
80,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.26 |
|
|
$ |
1.08 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.26 |
|
|
$ |
1.05 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
(In thousands, except per share data) |
|
Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
35,666 |
|
|
$ |
122,621 |
|
|
$ |
47,238 |
|
Less: Preferred stock dividend |
|
|
(20,138 |
) |
|
|
(20,138 |
) |
|
|
(20,138 |
) |
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
15,528 |
|
|
$ |
102,483 |
|
|
$ |
27,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
82,410 |
|
|
|
80,818 |
|
|
|
80,280 |
|
Average potential common shares |
|
|
498 |
|
|
|
2,323 |
|
|
|
2,472 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of common shares outstanding |
|
|
82,908 |
|
|
|
83,141 |
|
|
|
82,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
1.27 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.19 |
|
|
$ |
1.23 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
Potential common shares consist of common stock issuable under the assumed exercise of
stock options using the treasury stock method. This method assumes that the potential common
shares are issued and the proceeds from exercise are used to purchase common stock at the exercise
date. The difference between the number of potential shares issued and the shares purchased is
added as incremental shares to the actual number of shares outstanding to compute diluted earnings
per share. Stock options that result in lower potential shares issued than shares purchased under
the treasury stock method are not included in the computation of dilutive earnings per share since
their inclusion would have an antidilutive effect in earnings per share. For the quarter and six
month period ended June 30, 2006, there were 2,172,600 and 2,568,289 weighted-average outstanding
stock options, respectively, that were excluded from the computation of outstanding shares because
they were antidilutive. For the quarter and six month period ended June 30, 2005, there were
1,769,248 and 650,942 weighted-average outstanding stock options, respectively, that were excluded
from the computation of outstanding shares because they were antidilutive. All options outstanding
were exclude from the computation of outstanding shares for the quarter ended June 30, 2004 because
the Corporation reported a net loss for such period. For the six month period ended June 30, 2004
a total of 931,800 stock options were not included in the computation of outstanding shares because
they were antidilutive.
4 STOCK OPTION PLAN
Since 1997 the Corporation has had a stock option plan covering certain employees. This plan
allowed for the granting of up to 8,696,112 purchase options on shares of the Corporations common
stock to officers and other employees. According to the plan, the options granted cannot exceed 20%
of the number of common shares outstanding. Each option provides for the purchase of one share of
common stock at a price not less than the fair market value of the stock on the date the option is
granted. Stock options are fully vested upon issuance. The maximum term to exercise the options is
ten years. The stock option plan provides for a proportionate adjustment in the exercise price and
the number of shares that can be purchased in the event of a stock dividend, stock split,
26
reclassification of stock, merger or reorganization and certain other issuances and distributions
such as stock appreciation rights.
Under the Corporations stock option plan, the Compensation Committee may grant stock
appreciation rights at any time subsequent to the grant of an option. Pursuant to the stock
appreciation rights, the Optionee surrenders the right to exercise an option granted under the plan
in consideration for payment by the Corporation of an amount equal to the excess of the fair market
value of the shares of common stock subject to such option surrendered over the total option price
of such shares. Any option surrendered shall be cancelled by the Corporation and the shares subject
to the option shall not be eligible for further grants under the option plan.
During the second quarter of 2005, the Corporation issued 76,373 (152,746 as adjusted for the
June 2005 stock split) shares of common stock as a result of the exercise of 36,479 stock options
and 39,894 shares granted pursuant to stock appreciation rights before the June 2005 stock split,
both under the Corporations stock-based compensation plan.
Prior to the adoption of SFAS 123R on January 1, 2006, the Corporation accounted for stock
options under the recognition and measurement principles of APB 25 and related Interpretations. No
stock-based employee compensation cost was reflected in net income for the quarters and six month
periods ended June 30, 2005 and 2004, as all options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of the grant. The table below
illustrates the effect on net income and earnings per common share if the Corporation had applied
the fair value recognition provisions of SFAS 123 to stock-based employee compensation granted
during the second quarter and first six months of 2005 and 2004.
27
Pro-forma information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six month period ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2004 |
|
|
|
2005 |
|
|
(As Restated) |
|
|
2005 |
|
|
(As Restated) |
|
|
|
(In thousands, except per share data) |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
97,406 |
|
|
$ |
(18,192 |
) |
|
$ |
122,621 |
|
|
$ |
47,238 |
|
Deduct: Stock-based employee compensation
expense determined under fair value method |
|
|
|
|
|
|
|
|
|
|
6,118 |
|
|
|
4,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
97,406 |
|
|
$ |
(18,192 |
) |
|
$ |
116,503 |
|
|
$ |
42,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share-basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
1.08 |
|
|
$ |
(0.35 |
) |
|
$ |
1.27 |
|
|
$ |
0.34 |
|
Pro forma |
|
$ |
1.08 |
|
|
$ |
(0.35 |
) |
|
$ |
1.19 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share-diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
1.05 |
|
|
$ |
(0.35 |
) |
|
$ |
1.23 |
|
|
$ |
0.33 |
|
Pro forma |
|
$ |
1.05 |
|
|
$ |
(0.35 |
) |
|
$ |
1.16 |
|
|
$ |
0.27 |
|
On January 1, 2006, the Corporation adopted SFAS 123R using the modified prospective
method. Under this method, and since all previously issued stock options were fully vested at the
time of the adoption, the Corporation expenses the fair value of all employee stock options granted
after January 1, 2006 (same as the prospective method). The compensation expense associated with
expensing stock options for the six month period ended June 30, 2006 was approximately $4.9
million. All employee stock options granted during 2006 were fully vested at the time of grant.
The activity of stock options during the first six months of 2006 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Remaining Contractual |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Term (Years) |
|
|
(In thousands) |
|
Beginning of period |
|
|
5,316,410 |
|
|
$ |
13.28 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
1,070,000 |
|
|
|
12.68 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(2,379,000 |
) |
|
|
8.30 |
|
|
|
|
|
|
|
|
|
Options expired unexercised |
|
|
(964,000 |
) |
|
|
21.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period outstanding and exercisable |
|
|
3,043,410 |
|
|
$ |
14.21 |
|
|
|
7.3 |
|
|
$ |
682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted in 2006, 2005 and 2004 that was estimated using the
Black-Scholes option pricing, and the assumptions used follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
Weighted Average Stock Price at grant date and exercise price |
|
$ |
12.68 |
|
|
$ |
23.92 |
|
|
$ |
21.45 |
|
Stock option estimated fair value |
|
|
$4.56 - $4.60 |
|
|
|
$6.40 - $6.41 |
|
|
|
$5.30 - $5.45 |
|
Weighted-average estimated fair value |
|
$ |
4.57 |
|
|
$ |
6.40 |
|
|
$ |
5.33 |
|
Expected stock option term (years) |
|
|
4.22 - 4.31 |
|
|
|
4.25 - 4.27 |
|
|
|
4.08 - 4.33 |
|
Expected volatility |
|
|
46 |
% |
|
|
28 |
% |
|
|
28 |
% |
Expected dividend yield |
|
|
2.2 |
% |
|
|
1.0 |
% |
|
|
1.0 |
% |
Risk-free interest rate |
|
|
4.7% - 5.0 |
% |
|
|
4.2 |
% |
|
|
3.1 |
% |
28
The Corporation uses empirical research data to estimate options exercises and employee
termination within the valuation model; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. For 2006, the expected
volatility is based on the historical implied volatility of the Corporations common stock at each
grant date. For periods prior to 2006, the expected volatility is based on the historical
volatility of the Corporations common stock over a 260 working days period. The dividend yield is
based on the historical 12-month dividend yield observable at each grant date. The risk-free rate
for periods is based on historical zero coupon curves obtained from Bloomberg at the time of grant
based on the option expected term.
No options were exercised during the second quarter of 2006. The total intrinsic value of
options exercised during the second quarter of 2005 and 2004 was approximately $0.5 million, and
$0.1 million, respectively. The total intrinsic value of options exercised during the first half
of 2006, 2005 and 2004 was approximately $10.0 million, $0.8 million and $6.5 million,
respectively. Cash proceeds from options exercised during the second quarter of 2005 and 2004
amounted to approximately $0.4 million and $0.1 million, respectively. Cash proceeds from options
exercised during the first half of 2006, 2005 and 2004 amounted to approximately $19.8 million,
$0.6 million and $2.7 million, respectively.
29
5 INVESTMENT SECURITIES
Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, approximate fair value,
weighted-average yield and contractual maturities of investment securities available for sale at
June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
|
(Dollars in thousands) |
|
Obligations of U.S.
Government Sponsored
Agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,000 |
|
|
|
6.00 |
|
After 5 to 10 years |
|
|
402,215 |
|
|
|
|
|
|
|
24,131 |
|
|
|
378,084 |
|
|
|
4.30 |
|
|
|
392,939 |
|
|
|
|
|
|
|
4,289 |
|
|
|
388,650 |
|
|
|
4.27 |
|
After 10 years |
|
|
12,984 |
|
|
|
|
|
|
|
351 |
|
|
|
12,633 |
|
|
|
6.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government
Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
4,614 |
|
|
|
140 |
|
|
|
|
|
|
|
4,754 |
|
|
|
6.17 |
|
|
|
4,594 |
|
|
|
223 |
|
|
|
|
|
|
|
4,817 |
|
|
|
6.17 |
|
After 5 to 10 years |
|
|
15,400 |
|
|
|
136 |
|
|
|
1,060 |
|
|
|
14,476 |
|
|
|
4.85 |
|
|
|
15,271 |
|
|
|
196 |
|
|
|
678 |
|
|
|
14,789 |
|
|
|
4.84 |
|
After 10 years |
|
|
5,343 |
|
|
|
48 |
|
|
|
228 |
|
|
|
5,163 |
|
|
|
5.88 |
|
|
|
5,311 |
|
|
|
131 |
|
|
|
42 |
|
|
|
5,400 |
|
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and
Puerto Rico Government
Obligations |
|
|
440,556 |
|
|
|
324 |
|
|
|
25,770 |
|
|
|
415,110 |
|
|
|
4.41 |
|
|
|
419,115 |
|
|
|
550 |
|
|
|
5,009 |
|
|
|
414,656 |
|
|
|
4.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
5.70 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
4.26 |
|
After 1 to 5 years |
|
|
2,397 |
|
|
|
48 |
|
|
|
1 |
|
|
|
2,444 |
|
|
|
7.05 |
|
|
|
1,762 |
|
|
|
30 |
|
|
|
|
|
|
|
1,792 |
|
|
|
6.43 |
|
After 5 to 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,336 |
|
|
|
82 |
|
|
|
|
|
|
|
1,418 |
|
|
|
7.98 |
|
After 10 years |
|
|
6,193 |
|
|
|
38 |
|
|
|
258 |
|
|
|
5,973 |
|
|
|
5.59 |
|
|
|
6,839 |
|
|
|
77 |
|
|
|
166 |
|
|
|
6,750 |
|
|
|
5.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,593 |
|
|
|
86 |
|
|
|
259 |
|
|
|
8,420 |
|
|
|
6.00 |
|
|
|
9,939 |
|
|
|
189 |
|
|
|
166 |
|
|
|
9,962 |
|
|
|
6.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
750 |
|
|
|
4 |
|
|
|
1 |
|
|
|
753 |
|
|
|
6.39 |
|
|
|
939 |
|
|
|
14 |
|
|
|
|
|
|
|
953 |
|
|
|
6.39 |
|
After 5 to 10 years |
|
|
1,130 |
|
|
|
6 |
|
|
|
5 |
|
|
|
1,131 |
|
|
|
5.66 |
|
|
|
291 |
|
|
|
10 |
|
|
|
|
|
|
|
301 |
|
|
|
6.64 |
|
After 10 years |
|
|
409,479 |
|
|
|
306 |
|
|
|
17,343 |
|
|
|
392,442 |
|
|
|
5.23 |
|
|
|
438,565 |
|
|
|
1,021 |
|
|
|
1,959 |
|
|
|
437,627 |
|
|
|
5.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411,359 |
|
|
|
316 |
|
|
|
17,349 |
|
|
|
394,326 |
|
|
|
5.24 |
|
|
|
439,795 |
|
|
|
1,045 |
|
|
|
1,959 |
|
|
|
438,881 |
|
|
|
5.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
134 |
|
|
|
1 |
|
|
|
|
|
|
|
135 |
|
|
|
7.47 |
|
|
|
187 |
|
|
|
3 |
|
|
|
|
|
|
|
190 |
|
|
|
7.55 |
|
After 5 to 10 years |
|
|
9,699 |
|
|
|
10 |
|
|
|
343 |
|
|
|
9,366 |
|
|
|
5.00 |
|
|
|
124 |
|
|
|
11 |
|
|
|
|
|
|
|
135 |
|
|
|
11.40 |
|
After 10 years |
|
|
1,148,860 |
|
|
|
407 |
|
|
|
33,503 |
|
|
|
1,115,764 |
|
|
|
5.35 |
|
|
|
1,038,126 |
|
|
|
1,054 |
|
|
|
10,031 |
|
|
|
1,029,149 |
|
|
|
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,158,693 |
|
|
|
418 |
|
|
|
33,846 |
|
|
|
1,125,265 |
|
|
|
5.34 |
|
|
|
1,038,437 |
|
|
|
1,068 |
|
|
|
10,031 |
|
|
|
1,029,474 |
|
|
|
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage pass-through
certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
383 |
|
|
|
3 |
|
|
|
|
|
|
|
386 |
|
|
|
7.29 |
|
|
|
400 |
|
|
|
3 |
|
|
|
|
|
|
|
403 |
|
|
|
7.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
Securities |
|
|
1,579,028 |
|
|
|
823 |
|
|
|
51,454 |
|
|
|
1,528,397 |
|
|
|
5.32 |
|
|
|
1,488,571 |
|
|
|
2,305 |
|
|
|
12,156 |
|
|
|
1,478,720 |
|
|
|
5.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,483 |
|
|
|
84 |
|
|
|
1 |
|
|
|
2,566 |
|
|
|
7.75 |
|
After 5 to 10 years |
|
|
1,311 |
|
|
|
|
|
|
|
283 |
|
|
|
1,028 |
|
|
|
7.46 |
|
|
|
1,912 |
|
|
|
12 |
|
|
|
42 |
|
|
|
1,882 |
|
|
|
8.09 |
|
After 10 years |
|
|
4,495 |
|
|
|
|
|
|
|
1,137 |
|
|
|
3,358 |
|
|
|
7.72 |
|
|
|
21,857 |
|
|
|
909 |
|
|
|
1,833 |
|
|
|
20,933 |
|
|
|
7.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
5,806 |
|
|
|
|
|
|
|
1,420 |
|
|
|
4,386 |
|
|
|
7.66 |
|
|
|
26,252 |
|
|
|
1,005 |
|
|
|
1,876 |
|
|
|
25,381 |
|
|
|
7.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (without
contractual maturity) |
|
|
27,441 |
|
|
|
1,991 |
|
|
|
8,039 |
|
|
|
21,393 |
|
|
|
1.18 |
|
|
|
29,931 |
|
|
|
1,131 |
|
|
|
1,641 |
|
|
|
29,421 |
|
|
|
3.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Available for Sale |
|
$ |
2,052,831 |
|
|
$ |
3,138 |
|
|
$ |
86,683 |
|
|
$ |
1,969,286 |
|
|
|
5.08 |
|
|
$ |
1,963,869 |
|
|
$ |
4,991 |
|
|
$ |
20,682 |
|
|
$ |
1,948,178 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004 |
|
|
|
June 30, 2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
|
(Dollars in thousands) |
|
Obligations of U.S.
Government Sponsored
Agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
$ |
392,625 |
|
|
$ |
4,920 |
|
|
$ |
61 |
|
|
$ |
397,484 |
|
|
|
4.27 |
|
|
$ |
284,333 |
|
|
$ |
2,508 |
|
|
$ |
929 |
|
|
$ |
285,912 |
|
|
|
4.68 |
|
Puerto Rico Government
Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
4,539 |
|
|
|
258 |
|
|
|
|
|
|
|
4,797 |
|
|
|
6.17 |
|
|
|
298 |
|
|
|
33 |
|
|
|
|
|
|
|
331 |
|
|
|
6.62 |
|
After 5 to 10 years |
|
|
12,742 |
|
|
|
187 |
|
|
|
574 |
|
|
|
12,355 |
|
|
|
4.59 |
|
|
|
7,020 |
|
|
|
317 |
|
|
|
75 |
|
|
|
7,262 |
|
|
|
5.79 |
|
After 10 years |
|
|
7,720 |
|
|
|
301 |
|
|
|
20 |
|
|
|
8,001 |
|
|
|
5.94 |
|
|
|
8,186 |
|
|
|
381 |
|
|
|
34 |
|
|
|
8,533 |
|
|
|
5.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and
Puerto Rico Government
Obligations |
|
|
417,626 |
|
|
|
5,666 |
|
|
|
655 |
|
|
|
422,637 |
|
|
|
4.33 |
|
|
|
299,837 |
|
|
|
3,239 |
|
|
|
1,038 |
|
|
|
302,038 |
|
|
|
4.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
5.68 |
|
After 1 to 5 years |
|
|
2,132 |
|
|
|
52 |
|
|
|
|
|
|
|
2,184 |
|
|
|
6.42 |
|
|
|
2,929 |
|
|
|
146 |
|
|
|
|
|
|
|
3,075 |
|
|
|
6.37 |
|
After 5 to 10 years |
|
|
1,724 |
|
|
|
88 |
|
|
|
|
|
|
|
1,812 |
|
|
|
8.08 |
|
|
|
2,775 |
|
|
|
170 |
|
|
|
|
|
|
|
2,945 |
|
|
|
8.14 |
|
After 10 years |
|
|
7,274 |
|
|
|
240 |
|
|
|
|
|
|
|
7,514 |
|
|
|
5.59 |
|
|
|
3,296 |
|
|
|
170 |
|
|
|
|
|
|
|
3,466 |
|
|
|
6.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,130 |
|
|
|
380 |
|
|
|
|
|
|
|
11,510 |
|
|
|
6.14 |
|
|
|
9,001 |
|
|
|
486 |
|
|
|
|
|
|
|
9,487 |
|
|
|
7.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
1,102 |
|
|
|
23 |
|
|
|
|
|
|
|
1,125 |
|
|
|
6.37 |
|
|
|
999 |
|
|
|
47 |
|
|
|
|
|
|
|
1,046 |
|
|
|
5.91 |
|
After 5 to 10 years |
|
|
340 |
|
|
|
13 |
|
|
|
|
|
|
|
353 |
|
|
|
6.64 |
|
|
|
1,082 |
|
|
|
60 |
|
|
|
|
|
|
|
1,142 |
|
|
|
6.90 |
|
After 10 years |
|
|
477,953 |
|
|
|
5,427 |
|
|
|
13 |
|
|
|
483,367 |
|
|
|
5.14 |
|
|
|
124,174 |
|
|
|
1,854 |
|
|
|
2 |
|
|
|
126,026 |
|
|
|
4.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479,395 |
|
|
|
5,463 |
|
|
|
13 |
|
|
|
484,845 |
|
|
|
5.14 |
|
|
|
126,255 |
|
|
|
1,961 |
|
|
|
2 |
|
|
|
128,214 |
|
|
|
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
118 |
|
|
|
3 |
|
|
|
|
|
|
|
121 |
|
|
|
7.53 |
|
|
|
53 |
|
|
|
3 |
|
|
|
|
|
|
|
56 |
|
|
|
8.27 |
|
After 5 to 10 years |
|
|
184 |
|
|
|
10 |
|
|
|
|
|
|
|
194 |
|
|
|
8.98 |
|
|
|
394 |
|
|
|
37 |
|
|
|
|
|
|
|
431 |
|
|
|
8.35 |
|
After 10 years |
|
|
1,160,794 |
|
|
|
12,020 |
|
|
|
110 |
|
|
|
1,172,704 |
|
|
|
5.13 |
|
|
|
974,084 |
|
|
|
6,887 |
|
|
|
185 |
|
|
|
980,786 |
|
|
|
4.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,161,096 |
|
|
|
12,033 |
|
|
|
110 |
|
|
|
1,173,019 |
|
|
|
5.13 |
|
|
|
974,531 |
|
|
|
6,927 |
|
|
|
185 |
|
|
|
981,273 |
|
|
|
4.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage pass-through
certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
428 |
|
|
|
4 |
|
|
|
|
|
|
|
432 |
|
|
|
7.29 |
|
|
|
624 |
|
|
|
6 |
|
|
|
|
|
|
|
630 |
|
|
|
7.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
Securities |
|
|
1,652,049 |
|
|
|
17,880 |
|
|
|
123 |
|
|
|
1,669,806 |
|
|
|
5.14 |
|
|
|
1,110,411 |
|
|
|
9,380 |
|
|
|
187 |
|
|
|
1,119,604 |
|
|
|
4.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
4.44 |
|
|
|
20,000 |
|
|
|
600 |
|
|
|
|
|
|
|
20,600 |
|
|
|
6.37 |
|
After 1 to 5 years |
|
|
3,360 |
|
|
|
2,122 |
|
|
|
|
|
|
|
5,482 |
|
|
|
7.63 |
|
|
|
20,875 |
|
|
|
1,752 |
|
|
|
|
|
|
|
22,627 |
|
|
|
2.74 |
|
After 5 to 10 years |
|
|
3,396 |
|
|
|
986 |
|
|
|
|
|
|
|
4,382 |
|
|
|
7.81 |
|
|
|
375 |
|
|
|
688 |
|
|
|
|
|
|
|
1,063 |
|
|
|
7.74 |
|
After 10 years |
|
|
22,858 |
|
|
|
1,024 |
|
|
|
1,221 |
|
|
|
22,661 |
|
|
|
7.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
49,614 |
|
|
|
4,132 |
|
|
|
1,221 |
|
|
|
52,525 |
|
|
|
6.27 |
|
|
|
41,250 |
|
|
|
3,040 |
|
|
|
|
|
|
|
44,290 |
|
|
|
4.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (without
contractual maturity) |
|
|
60,705 |
|
|
|
14,837 |
|
|
|
3,395 |
|
|
|
72,147 |
|
|
|
1.49 |
|
|
|
44,216 |
|
|
|
11,573 |
|
|
|
2,862 |
|
|
|
52,927 |
|
|
|
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Available for Sale |
|
$ |
2,179,994 |
|
|
$ |
42,515 |
|
|
$ |
5,394 |
|
|
$ |
2,217,115 |
|
|
|
4.91 |
|
|
$ |
1,495,714 |
|
|
$ |
27,232 |
|
|
$ |
4,087 |
|
|
$ |
1,518,859 |
|
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of mortgage-backed securities are based on contractual terms assuming no
prepayments. Expected maturities of investments might differ from contractual maturities because
they may be subject to prepayments and/or call options. The weighted average yield on investment
securities held for sale is based on amortized cost and, therefore, does not give effect to changes
in fair value. The net unrealized gains or losses on available for sale securities are presented
as part of accumulated other comprehensive income.
The following tables show the Corporations available-for-sale investments fair value and
gross unrealized losses, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at June 30, 2006, December 31, 2005,
June 30, 2005 and June 30, 2004:
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
Sponsored Agencies |
|
$ |
390,717 |
|
|
$ |
24,482 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
390,717 |
|
|
$ |
24,482 |
|
Puerto Rico Government
Obligations |
|
|
1,321 |
|
|
|
7 |
|
|
$ |
12,878 |
|
|
$ |
1,281 |
|
|
|
14,199 |
|
|
|
1,288 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
834 |
|
|
|
1 |
|
|
|
4,049 |
|
|
|
258 |
|
|
|
4,883 |
|
|
|
259 |
|
GNMA |
|
|
372,717 |
|
|
|
17,349 |
|
|
|
|
|
|
|
|
|
|
|
372,717 |
|
|
|
17,349 |
|
FNMA |
|
|
855,980 |
|
|
|
31,999 |
|
|
|
43,222 |
|
|
|
1,847 |
|
|
|
899,202 |
|
|
|
33,846 |
|
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
4,386 |
|
|
|
1,420 |
|
|
|
4,386 |
|
|
|
1,420 |
|
Equity Securities |
|
|
14,898 |
|
|
|
8,039 |
|
|
|
|
|
|
|
|
|
|
|
14,898 |
|
|
|
8,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,636,467 |
|
|
$ |
81,877 |
|
|
$ |
64,535 |
|
|
$ |
4,806 |
|
|
$ |
1,701,002 |
|
|
$ |
86,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
Sponsored Agencies |
|
$ |
388,650 |
|
|
$ |
4,289 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
388,650 |
|
|
$ |
4,289 |
|
Puerto Rico Government
Obligations |
|
|
|
|
|
|
|
|
|
|
13,440 |
|
|
|
720 |
|
|
|
13,440 |
|
|
|
720 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
4,440 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
4,440 |
|
|
|
166 |
|
GNMA |
|
|
369,231 |
|
|
|
1,959 |
|
|
|
|
|
|
|
|
|
|
|
369,231 |
|
|
|
1,959 |
|
FNMA |
|
|
939,197 |
|
|
|
10,031 |
|
|
|
|
|
|
|
|
|
|
|
939,197 |
|
|
|
10,031 |
|
Corporate Bonds |
|
|
8,711 |
|
|
|
1,876 |
|
|
|
|
|
|
|
|
|
|
|
8,711 |
|
|
|
1,876 |
|
Equity Securities |
|
|
16,229 |
|
|
|
1,641 |
|
|
|
|
|
|
|
|
|
|
|
16,229 |
|
|
|
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,726,458 |
|
|
$ |
19,962 |
|
|
$ |
13,440 |
|
|
$ |
720 |
|
|
$ |
1,739,898 |
|
|
$ |
20,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
Sponsored Agencies |
|
$ |
100,109 |
|
|
$ |
61 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100,109 |
|
|
$ |
61 |
|
Puerto Rico Government
Obligations |
|
|
8,644 |
|
|
|
515 |
|
|
|
4,921 |
|
|
|
79 |
|
|
|
13,565 |
|
|
|
594 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
|
1,628 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
1,628 |
|
|
|
13 |
|
FNMA |
|
|
55,081 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
55,081 |
|
|
|
110 |
|
Corporate Bonds |
|
|
8,190 |
|
|
|
1,221 |
|
|
|
|
|
|
|
|
|
|
|
8,190 |
|
|
|
1,221 |
|
Equity Securities |
|
|
12,128 |
|
|
|
3,395 |
|
|
|
|
|
|
|
|
|
|
|
12,128 |
|
|
|
3,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
185,780 |
|
|
$ |
5,315 |
|
|
$ |
4,921 |
|
|
$ |
79 |
|
|
$ |
190,701 |
|
|
$ |
5,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2004 |
|
|
|
(As Restated) |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
Sponsored Agencies |
|
$ |
95,304 |
|
|
$ |
929 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
95,304 |
|
|
$ |
929 |
|
Puerto Rico Government
Obligations |
|
|
4,891 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
4,891 |
|
|
|
109 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
|
275 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
275 |
|
|
|
2 |
|
FNMA |
|
|
89,962 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
89,962 |
|
|
|
185 |
|
Equity Securities |
|
|
17,647 |
|
|
|
2,862 |
|
|
|
|
|
|
|
|
|
|
|
17,647 |
|
|
|
2,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
208,079 |
|
|
$ |
4,087 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
208,079 |
|
|
$ |
4,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations investment securities portfolio is comprised principally of (i)
mortgage-backed securities issued or guaranteed by FNMA, GNMA or FHLMC and (ii) U.S. Treasury and
agencies securities. Thus, payment of a substantial portion of these instruments is either
guaranteed or secured by mortgages together with a U.S. government sponsored entity or is backed by
the full faith and credit of the U.S. government. Principal and interest on these securities are
therefore deemed recoverable. The Corporations policy is to review its investment portfolio for possible other-than
temporary impairment, at least quarterly. At June 30, 2006, management has the intent and ability to hold
these investments for a reasonable period of time for a forecasted recovery of fair value up to (or
beyond) the cost of these investments; as a result, the impairments
are considered temporary. The increase in the net unrealized loss position during
2006 was principally due to increases in interest rates and the corresponding decrease in prices.
During the first six months of 2006, 2005 and 2004, the Corporation recorded
other-than-temporary impairments of $2.9 million, $1.5 million and approximately $56,000,
respectively, on certain equity securities held in its investment portfolio. Management concluded that the
declines in value of the securities were other-than-temporary; as such, the cost basis of these
securities was written down to the market value at the date of the analyses.
Total proceeds from the sale of securities available for sale during the six-month period
ended June 30, 2006 amounted to approximately $22.8 million ( 2005 $214.7 million ; 2004-$19.3
million). The Corporation realized gross gains of approximately $2.6 million and approximately
$0.2 million in gross realized losses for the first six
months of 2006 (2005 $9.8 million in gross realized gains ; 2004-$4.6 million in gross realized
gains and approximately $71,000 in gross realized losses).
33
Investment Securities Held to Maturity
The amortized cost, gross unrealized gains and losses, approximate fair value,
weighted-average yield and contractual maturities of investment securities held-to-maturity at June
30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
|
(Dollars in thousands) |
|
U.S. Treasury Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year |
|
$ |
74,673 |
|
|
$ |
27 |
|
|
$ |
|
|
|
$ |
74,700 |
|
|
|
4.86 |
|
|
$ |
149,156 |
|
|
$ |
48 |
|
|
$ |
|
|
|
$ |
149,204 |
|
|
|
3.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of other U.S. Government
Sponsored Agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
2,058,015 |
|
|
|
|
|
|
|
137,000 |
|
|
|
1,921,015 |
|
|
|
5.83 |
|
|
|
2,041,558 |
|
|
|
|
|
|
|
65,799 |
|
|
|
1,975,759 |
|
|
|
5.83 |
|
Puerto Rico Government
Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
5,000 |
|
|
|
|
|
|
|
1 |
|
|
|
4,999 |
|
|
|
5.00 |
|
|
|
5,000 |
|
|
|
20 |
|
|
|
|
|
|
|
5,020 |
|
|
|
5.00 |
|
After 5 to 10 years |
|
|
9,436 |
|
|
|
282 |
|
|
|
275 |
|
|
|
9,443 |
|
|
|
5.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
15,000 |
|
|
|
|
|
|
|
171 |
|
|
|
14,829 |
|
|
|
5.50 |
|
|
|
9,163 |
|
|
|
502 |
|
|
|
143 |
|
|
|
9,522 |
|
|
|
5.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Puerto
Rico Government obligations |
|
|
2,162,124 |
|
|
|
309 |
|
|
|
137,447 |
|
|
|
2,024,986 |
|
|
|
5.79 |
|
|
|
2,204,877 |
|
|
|
570 |
|
|
|
65,942 |
|
|
|
2,139,505 |
|
|
|
5.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
18,089 |
|
|
|
|
|
|
|
931 |
|
|
|
17,158 |
|
|
|
3.67 |
|
|
|
20,211 |
|
|
|
|
|
|
|
778 |
|
|
|
19,433 |
|
|
|
3.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
16,188 |
|
|
|
|
|
|
|
807 |
|
|
|
15,381 |
|
|
|
3.79 |
|
|
|
18,418 |
|
|
|
|
|
|
|
602 |
|
|
|
17,816 |
|
|
|
3.79 |
|
After 10 years |
|
|
1,090,719 |
|
|
|
|
|
|
|
59,971 |
|
|
|
1,030,748 |
|
|
|
4.36 |
|
|
|
1,195,082 |
|
|
|
|
|
|
|
35,277 |
|
|
|
1,159,805 |
|
|
|
4.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
1,124,996 |
|
|
|
|
|
|
|
61,709 |
|
|
|
1,063,287 |
|
|
|
4.34 |
|
|
|
1,233,711 |
|
|
|
|
|
|
|
36,657 |
|
|
|
1,197,054 |
|
|
|
4.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Held to Maturity |
|
$ |
3,287,120 |
|
|
$ |
309 |
|
|
$ |
199,156 |
|
|
$ |
3,088,273 |
|
|
|
5.30 |
|
|
$ |
3,438,588 |
|
|
$ |
570 |
|
|
$ |
102,599 |
|
|
$ |
3,336,559 |
|
|
|
5.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004 |
|
|
|
June 30, 2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
|
(Dollars in thousands) |
|
U.S. Treasury Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
69,987 |
|
|
$ |
|
|
|
$ |
8 |
|
|
$ |
69,979 |
|
|
|
0.98 |
|
|
Obligations of other U.S. Government
Sponsored Agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year |
|
|
14,889 |
|
|
|
|
|
|
|
15 |
|
|
|
14,874 |
|
|
|
3.25 |
|
|
|
14,975 |
|
|
|
|
|
|
|
4 |
|
|
|
14,971 |
|
|
|
1.11 |
|
After 10 years |
|
|
2,362,419 |
|
|
|
2,497 |
|
|
|
7,508 |
|
|
|
2,357,408 |
|
|
|
5.86 |
|
|
|
2,344,592 |
|
|
|
|
|
|
|
89,394 |
|
|
|
2,255,198 |
|
|
|
5.31 |
|
Puerto Rico Government
Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
5,000 |
|
|
|
41 |
|
|
|
|
|
|
|
5,041 |
|
|
|
5.00 |
|
|
|
5,000 |
|
|
|
148 |
|
|
|
|
|
|
|
5,148 |
|
|
|
5.00 |
|
After 10 years |
|
|
8,899 |
|
|
|
512 |
|
|
|
145 |
|
|
|
9,266 |
|
|
|
5.94 |
|
|
|
8,394 |
|
|
|
571 |
|
|
|
124 |
|
|
|
8,841 |
|
|
|
5.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Puerto
Rico Government obligations |
|
|
2,391,207 |
|
|
|
3,050 |
|
|
|
7,668 |
|
|
|
2,386,589 |
|
|
|
5.84 |
|
|
|
2,442,948 |
|
|
|
719 |
|
|
|
89,530 |
|
|
|
2,354,137 |
|
|
|
5.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
22,956 |
|
|
|
|
|
|
|
599 |
|
|
|
22,357 |
|
|
|
3.63 |
|
|
|
30,659 |
|
|
|
|
|
|
|
977 |
|
|
|
29,682 |
|
|
|
3.51 |
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
21,011 |
|
|
|
|
|
|
|
321 |
|
|
|
20,690 |
|
|
|
3.81 |
|
|
|
26,339 |
|
|
|
|
|
|
|
425 |
|
|
|
25,914 |
|
|
|
3.79 |
|
After 10 years |
|
|
1,342,456 |
|
|
|
|
|
|
|
17,562 |
|
|
|
1,324,894 |
|
|
|
4.32 |
|
|
|
1,651,471 |
|
|
|
|
|
|
|
23,837 |
|
|
|
1,627,634 |
|
|
|
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
1,386,423 |
|
|
|
|
|
|
|
18,482 |
|
|
|
1,367,941 |
|
|
|
4.30 |
|
|
|
1,708,469 |
|
|
|
|
|
|
|
25,239 |
|
|
|
1,683,230 |
|
|
|
3.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,983 |
|
|
|
12 |
|
|
|
|
|
|
|
19,995 |
|
|
|
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Held to Maturity |
|
$ |
3,777,630 |
|
|
$ |
3,050 |
|
|
$ |
26,150 |
|
|
$ |
3,754,530 |
|
|
|
5.28 |
|
|
$ |
4,171,400 |
|
|
$ |
731 |
|
|
$ |
114,769 |
|
|
$ |
4,057,362 |
|
|
|
4.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
35
The following tables show the Corporations held-to-maturity investments gross unrealized
losses and fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at June 30, 2006, December 31, 2005,
June 30, 2005 and June 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other U.S. Government Sponsored
Agencies |
|
$ |
610,934 |
|
|
$ |
36,688 |
|
|
$ |
1,310,081 |
|
|
$ |
100,312 |
|
|
$ |
1,921,015 |
|
|
$ |
137,000 |
|
Puerto Rico Government
Obligations |
|
|
19,828 |
|
|
|
172 |
|
|
|
3,715 |
|
|
|
275 |
|
|
|
23,543 |
|
|
|
447 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
2,247 |
|
|
|
114 |
|
|
|
14,911 |
|
|
|
817 |
|
|
|
17,158 |
|
|
|
931 |
|
FNMA |
|
|
|
|
|
|
|
|
|
|
1,046,129 |
|
|
|
60,778 |
|
|
|
1,046,129 |
|
|
|
60,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
633,009 |
|
|
$ |
36,974 |
|
|
$ |
2,374,836 |
|
|
$ |
162,182 |
|
|
$ |
3,007,845 |
|
|
$ |
199,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other U.S. Government Sponsored
Agencies |
|
$ |
1,585,810 |
|
|
$ |
40,379 |
|
|
$ |
389,949 |
|
|
$ |
25,420 |
|
|
$ |
1,975,759 |
|
|
$ |
65,799 |
|
Puerto Rico Government
Obligations |
|
|
3,746 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
3,746 |
|
|
|
143 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
19,433 |
|
|
|
778 |
|
|
|
19,433 |
|
|
|
778 |
|
FNMA |
|
|
11,771 |
|
|
|
339 |
|
|
|
1,165,849 |
|
|
|
35,540 |
|
|
|
1,177,620 |
|
|
|
35,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,601,327 |
|
|
$ |
40,861 |
|
|
$ |
1,575,231 |
|
|
$ |
61,738 |
|
|
$ |
3,176,558 |
|
|
$ |
102,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other U.S. Government Sponsored
Agencies |
|
$ |
944,732 |
|
|
$ |
4,348 |
|
|
$ |
400,586 |
|
|
$ |
3,175 |
|
|
$ |
1,345,318 |
|
|
$ |
7,523 |
|
Puerto Rico Government
Obligations |
|
|
3,645 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
3,645 |
|
|
|
145 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
535 |
|
|
|
16 |
|
|
|
21,822 |
|
|
|
583 |
|
|
|
22,357 |
|
|
|
599 |
|
FNMA |
|
|
788,052 |
|
|
|
9,836 |
|
|
|
557,532 |
|
|
|
8,047 |
|
|
|
1,345,584 |
|
|
|
17,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,736,964 |
|
|
$ |
14,345 |
|
|
$ |
979,940 |
|
|
$ |
11,805 |
|
|
$ |
2,716,904 |
|
|
$ |
26,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2004 |
|
|
|
(As restated) |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Debt Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Securities |
|
$ |
69,979 |
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
69,979 |
|
|
$ |
8 |
|
Other U.S. Government Sponsored
Agencies |
|
|
1,624,447 |
|
|
|
64,969 |
|
|
|
645,722 |
|
|
|
24,429 |
|
|
|
2,270,169 |
|
|
|
89,398 |
|
Puerto Rico Government Obligations |
|
|
3,478 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
3,478 |
|
|
|
124 |
|
Mortgage-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
29,682 |
|
|
|
977 |
|
|
|
|
|
|
|
|
|
|
|
29,682 |
|
|
|
977 |
|
FNMA |
|
|
1,653,548 |
|
|
|
24,262 |
|
|
|
|
|
|
|
|
|
|
|
1,653,548 |
|
|
|
24,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,381,134 |
|
|
$ |
90,340 |
|
|
$ |
645,722 |
|
|
$ |
24,429 |
|
|
$ |
4,026,856 |
|
|
$ |
114,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities in an unrealized loss position at June 30, 2006 are primarily
mortgage-backed securities and U.S. agency securities. The vast majority of them are rated the
equivalent of AAA by the major rating agencies. Management believes that the unrealized losses in
the held-to-maturity portfolio at June 30, 2006 are substantially related to market interest rate
fluctuations and not deterioration in the creditworthiness of the issuers; as a result, the
impairment is considered temporary.
37
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.
At June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004, there were investments
in FHLB stock with book value of $22.0 million, $40.9 million, $73.1 million and $61.1 million
respectively. The estimated market value of such investments is its redemption value determined by
the ultimate recoverability of its par value.
The Corporation has other equity securities that do not have a readily available fair value.
The carrying value of such securities at June 30, 2006, December 31, 2005, June 30, 2005 and June
30, 2004 was $1.7 million, $1.4 million, $1.4 million and $0.4 million, respectively.
7 LOAN PORTFOLIO
The following is a detail of the loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
(Dollars in thousands) |
|
Residential real estate loans, mainly
secured by first mortgages |
|
$ |
2,567,556 |
|
|
$ |
2,245,272 |
|
|
$ |
1,777,044 |
|
|
$ |
1,105,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans |
|
|
1,560,580 |
|
|
|
1,137,118 |
|
|
|
715,971 |
|
|
|
374,845 |
|
Commercial mortgage loans |
|
|
1,152,796 |
|
|
|
1,090,193 |
|
|
|
1,000,752 |
|
|
|
648,690 |
|
Commercial loans |
|
|
2,441,329 |
|
|
|
2,421,219 |
|
|
|
2,295,216 |
|
|
|
1,708,971 |
|
Loans to local financial institutions collateralized by
real estate mortgages and pass-through trust certificates |
|
|
992,586 |
|
|
|
3,676,314 |
|
|
|
4,211,687 |
|
|
|
2,708,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
6,147,291 |
|
|
|
8,324,844 |
|
|
|
8,223,626 |
|
|
|
5,441,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
325,867 |
|
|
|
280,571 |
|
|
|
242,765 |
|
|
|
184,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
1,783,902 |
|
|
|
1,733,569 |
|
|
|
1,580,501 |
|
|
|
1,235,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
10,824,616 |
|
|
|
12,584,256 |
|
|
|
11,823,936 |
|
|
|
7,966,957 |
|
Allowance for loan and lease losses |
|
|
(146,527 |
) |
|
|
(147,999 |
) |
|
|
(146,154 |
) |
|
|
(133,678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net |
|
|
10,678,089 |
|
|
|
12,436,257 |
|
|
|
11,677,782 |
|
|
|
7,833,279 |
|
Loans held for sale |
|
|
80,643 |
|
|
|
101,673 |
|
|
|
49,033 |
|
|
|
19,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
10,758,732 |
|
|
$ |
12,537,930 |
|
|
$ |
11,726,815 |
|
|
$ |
7,852,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations primary lending area is Puerto Rico. The Corporations Bank subsidiary
also lends in the U.S. and British Virgin Islands markets and in the state of Florida (USA). The
Corporation has a significant lending concentration of $546.9 million in one mortgage originator in
Puerto Rico at June 30, 2006. The Corporation has outstanding $445.7 million with another mortgage
originator in Puerto Rico for total loans granted to mortgage originators amounting to $992.6
million at June 30, 2006. These commercial loans were secured by individual residential and
commercial mortgage loans. The mortgage originators have always paid the loans in accordance with
their terms and conditions of the loan agreements.
Of the total net loans portfolio of $10.8 billion as of June 30, 2006, approximately 77% have
credit risk concentration in Puerto Rico, 15% in the state of Florida and 8% in the Virgin Islands.
38
On May 25, 2006, the Corporation entered into a series of credit agreements with Doral
Financial Corporation (Doral) to formally document as secured borrowings the loan transfers
between the parties that previously had been accounted for as sales. The terms of the credit
agreements specified: (1) a floating interest payment based on a spread over 90-day LIBOR subject
to a cap; (2) an amortization schedule tied to the scheduled amortization of the underlying
mortgage loans subject to a maximum maturity of 10 years; (3) mandatory prepayments as a result of
actual prepayments from the underlying mortgages; and (4) an option to Doral to prepay the loan
without penalty at any time.
On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the
balance of approximately $2.9 billion in secured commercial loans to approximately $450 million as
of that date. In connection with the repayment, the Corporation and Doral entered into a sharing
agreement on May 25, 2006 with respect to certain profits or losses that Doral incurs as part of
the sales of the mortgages that collateralized the commercial loans. First BanCorp agreed to
reimburse Doral for 40% of the net losses incurred by Doral as a
result of sales or securitization of the mortgages,
subject to certain conditions and subject to a maximum reimbursement of $9.5 million, which will be
reduced proportionately to the extent that Doral does not sell the mortgages. As a result of the
loss sharing agreement and the partial extinguishment of the commercial loans by Doral, the
Corporation recorded a net loss of $11.6 million during the second quarter of 2006.
8 ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for loan and lease losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
152,596 |
|
|
$ |
144,201 |
|
|
$ |
130,357 |
|
Provision for loan and lease losses |
|
|
9,354 |
|
|
|
11,075 |
|
|
|
13,200 |
|
Charge-offs |
|
|
(16,812 |
) |
|
|
(10,998 |
) |
|
|
(11,281 |
) |
Recoveries |
|
|
1,389 |
|
|
|
1,876 |
|
|
|
1,402 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
146,527 |
|
|
$ |
146,154 |
|
|
$ |
133,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
147,999 |
|
|
$ |
141,036 |
|
|
$ |
126,378 |
|
Provision for loan and lease losses |
|
|
28,730 |
|
|
|
22,029 |
|
|
|
26,400 |
|
Charge-offs |
|
|
(33,261 |
) |
|
|
(21,597 |
) |
|
|
(21,977 |
) |
Recoveries |
|
|
3,059 |
|
|
|
3,323 |
|
|
|
2,877 |
|
Other adjustments (1) |
|
|
|
|
|
|
1,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
146,527 |
|
|
$ |
146,154 |
|
|
$ |
133,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents allowance for loan losses from the acquisition of
Ponce General Corporation. |
The allowance for impaired loans is part of the allowance for loan and lease losses.
These loans represent loans for which management has determined that it is probable that the debtor
will be unable to pay all the amounts due, according to the contractual terms of the loan
agreement, and do not necessarily represent loans for which the Corporation will incur a
substantial loss. At June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004, impaired
loans had a related allowance as follows:
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
As of |
|
As of |
|
June 30, |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
2004 |
|
|
2006 |
|
2005 |
|
2005 |
|
(As Restated) |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Impaired loans |
|
$ |
43,567 |
|
|
$ |
59,801 |
|
|
$ |
51,603 |
|
|
$ |
66,767 |
|
Allowance for impaired loans |
|
$ |
6,329 |
|
|
$ |
9,219 |
|
|
$ |
14,185 |
|
|
$ |
14,982 |
|
Interest income in the amount of approximately $0.8 million, $1.9 million and $0.6
million was recognized on impaired loans for the quarters ended June 30, 2006, 2005 and 2004,
respectively. Interest income in the amount of approximately $2.0 million, $2.6 million and $1.2
million was recognized on impaired loans for the six month period ended June 30, 2006, 2005 and
2004, respectively.
9 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The primary market risk facing the Corporation is interest rate risk, which includes the risk
that changes in interest rates will result in changes in the value of its assets or liabilities and the risk
that net interest income from its loan and investment portfolios will change in response to changes
in interest rates. The overall objective of the Corporations interest rate risk management
activities is to reduce the variability of earnings caused by changes in interest rates.
The Corporation uses various financial instruments, including derivatives, to manage the
interest rate risk related primarily to the values of its brokered CDs and medium-term notes.
Interest rate swap contracts that qualify for hedge accounting
As part of the interest rate risk management, the Corporation has entered into a series of
interest rate swap agreements. Under the interest rate swaps, the Corporation agrees with other
parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount. Net interest
settlements on interest rate swaps that qualify for hedge accounting and unrealized gains and
losses arising from changes in fair value of derivative instruments and hedged items are recorded
as an adjustment to interest income or interest expense depending on whether an asset or liability is being
hedged.
Effective April 3, 2006, the Corporation adopted the long- haul method of effectiveness
testing under SFAS 133, for substantially all of the interest rate swaps that hedge its brokered
CDs and medium-term notes. The long-haul method requires periodic assessment of hedge effectiveness
and measurement of ineffectiveness. The ineffectiveness results to the extent that changes in the
fair value of a derivative do not offset changes in the fair values of the hedged item due to
changes in the hedged risk in the Consolidated Statements of Income.
For interest rate swaps accounted for as a fair value hedges using the long-haul method,
ineffectiveness is the difference between the changes in the fair value of the interest rate swap
and changes in the fair value of the debt attributable to the risk being hedged.
First BanCorps implementation of the long-haul method resulted from its previously
reported determination that it should not have used the short-cut method to account for interest
rate swaps related to brokered CDs and medium- term notes because of technical issues involving the
interpretation of the use of the method (refer to First BanCorp audited Consolidated Financial
Statements, included in the Corporations amended
2004 Annual Report on Form 10-K for additional information). Accordingly, prior to the
implementation of the long-haul method, First BanCorp had reflected changes in the fair value of
those swaps as well as swaps related
40
to certain loans as non-hedging instruments through
operations. Prior to the implementation of fair value hedge, the Corporation recorded unrealized
losses in the valuation of derivative instruments of approximately $68.0 million for 2006. With respect to the
brokered CDs and medium term notes (hedge liabilities) the basis differential between the market
value and the book value of the hedged liabilities at the inception of fair value hedge accounting
in the amount of approximately $200.0 million amortizes or accretes as a yield adjustment over the
expected remaining term of the hedged liabilities as the changes in value since the inception of
the long-haul method are recorded to the hedged liabilities. For the second quarter of 2006, the
Corporation recorded an amortization of $1.3 million as a basis adjustment on the hedged
liabilities.
The Corporation recognized, as a reduction to interest expense, approximately $2.0 million for
the quarter and six-months ended June 30, 2006, representing ineffectiveness on the hedges of its
brokered CDs and medium-term notes that qualified as fair value hedges under SFAS 133.
Interest rate swap contracts not qualifying for hedge accounting
Prior to April 3, 2006, the Corporation used interest rate swaps as economic hedges. These
swaps either did not qualify for hedge accounting treatment or were not qualified by the
Corporation for hedge accounting treatment. Changes in the fair value of these derivatives and the
interest exchanged were recognized in earnings in the interest income or interest expense caption
of the Consolidated Statements of Income depending upon whether an asset or liability was being
economically hedged. At December 31, 2005, June 30, 2005 and June 30, 2004, all derivative
instruments held by the Corporation were considered economic hedges as these did not qualify for
hedge accounting under SFAS 133.
41
The following table summarizes the notional amounts of all derivative instruments as of June
30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed versus receive floating |
|
$ |
89,320 |
|
|
$ |
109,320 |
|
|
$ |
109,320 |
|
|
$ |
113,165 |
|
Received fixed versus pay floating |
|
|
5,457,923 |
|
|
|
5,751,128 |
|
|
|
4,850,107 |
|
|
|
3,579,521 |
|
Embedded written options |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Purchased options |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
125,200 |
|
|
|
150,200 |
|
|
|
48,000 |
|
|
|
25,000 |
|
Purchased interest rate caps |
|
|
348,897 |
|
|
|
386,750 |
|
|
|
475,299 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,048,370 |
|
|
$ |
6,424,428 |
|
|
$ |
5,509,756 |
|
|
$ |
3,769,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the notional amounts of all derivatives by the
Corporations designation as of June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Designated hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed rate certificates of deposit |
|
$ |
4,874,960 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest rate swaps used to hedge
fixed and step rate notes payable |
|
|
165,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges |
|
$ |
5,040,402 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic undesignated hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed rate certificates of deposit and loans |
|
$ |
506,841 |
|
|
$ |
5,860,448 |
|
|
$ |
4,959,427 |
|
|
$ |
3,692,686 |
|
Embedded options on stock index deposits |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Purchased options used to manage exposure
to the stock market on embedded stock
index options |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
125,200 |
|
|
|
150,200 |
|
|
|
48,000 |
|
|
|
25,000 |
|
Purchased interest rate cap agreements |
|
|
348,897 |
|
|
|
386,750 |
|
|
|
475,299 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedge |
|
$ |
1,007,968 |
|
|
$ |
6,424,428 |
|
|
$ |
5,509,756 |
|
|
$ |
3,769,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,048,370 |
|
|
$ |
6,424,428 |
|
|
$ |
5,509,756 |
|
|
$ |
3,769,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006, derivatives qualifying for fair value hedge accounting with a
negative fair value of $254.2 million were recorded as part of Accounts payable and other
liabilities in the Consolidated Statements of Financial Condition. Changes in the fair value of
hedged liabilities since the inception of hedge accounting were recorded to the hedged liabilities.
As of June 30, 2006, derivatives not designated or not qualifying as a hedge with a positive
fair value of $25.4 million (December 31, 2005 $15.8 million; June 30, 2005 $10.5 million; June
30, 2004 $5.4 million) and with a negative fair value of $31.3 million (December 31, 2005
$158.1 million; June 30, 2005 $52.5 million; June 30, 2004 $117.4 million) were recorded as
part of Other Assets and Accounts payable and other liabilities, respectively, in the
Consolidated Statements of Financial Condition.
42
The majority of the Corporations derivative instruments represent interest rate
swaps and mainly convert long-term fixed-rate brokered CDs to a floating rate. A summary of the
types of swaps used at June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
As of |
|
As of |
|
June 30, |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
2004 |
|
|
2006 |
|
2005 |
|
2005 |
|
(As Restated) |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Pay fixed/receive floating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
89,320 |
|
|
$ |
109,320 |
|
|
$ |
109,320 |
|
|
$ |
113,165 |
|
Weighted average receive
rate at period end |
|
|
7.24 |
% |
|
|
6.41 |
% |
|
|
4.98 |
% |
|
|
3.39 |
% |
Weighted average pay rate
at period end |
|
|
6.51 |
% |
|
|
6.60 |
% |
|
|
6.60 |
% |
|
|
6.97 |
% |
Floating rates range from 187 to
251.5 basis points over 3-month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay floating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
5,457,923 |
|
|
$ |
5,751,128 |
|
|
$ |
4,850,107 |
|
|
$ |
3,579,521 |
|
Weighted average receive
rate at period end |
|
|
4.99 |
% |
|
|
4.90 |
% |
|
|
4.98 |
% |
|
|
5.26 |
% |
Weighted average pay rate
at period end |
|
|
5.25 |
% |
|
|
4.37 |
% |
|
|
3.32 |
% |
|
|
1.35 |
% |
Floating rates range from
5 basis points under to 19.5 basis points over3
-month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed options are generally over-the-counter (OTC) contracts that the Corporation
enters into in order to receive the appreciation of a specified Stock Index (i.e., Dow Jones
Industrial Composite Stock Index) over a specified period in exchange for a premium paid at the
contracts inception. The option period is determined by the contractual maturity of the notes
payable tied to the performance of the Stock Index. The credit risk inherent in these options is
the risk that the exchange party may not fulfill its obligation.
Interest rate caps are option-like contracts that require the writer, i.e. the seller, to pay
the purchaser at specified future dates the amount, if any, by which a specified market interest
rate exceeds the fixed cap rate, applied to a notional principal amount.
To satisfy the needs of its customers, the Corporation may enter into non-hedging
transactions. These transactions are structured with the same terms and conditions and the
Corporation participates as a buyer in one of the agreements and as the seller in the other
agreements.
In addition, the Corporation enters into certain contracts with embedded derivatives that do
not require separate accounting as these are clearly and closely related. 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.
10 GOODWILL AND OTHER INTANGIBLES
Goodwill at June 30, 2006 amounted to $28.7 million (December 31, 2005 $28.7 million,
June 30, 2005 $27.3 million and June 30, 2004 $0) and resulted primarily from the acquisition
of Ponce General Corporation in 2005. No goodwill was written down during 2006, 2005 and 2004.
At June 30, 2006, the gross carrying amount and accumulated amortization of core deposit
intangibles was $41.2 million and $13.3 million, respectively, recognized as part of Other Assets
in the Consolidated Statements of Financial Condition (December 31, 2005 $41.2 million and $11.6
million, respectively ; June 30, 2005 $41.2 million and $9.4 million, respectively ; June 30,
2004 $23.9 million and $6.7 million,
43
respectively). During the quarters ended June 30, 2006, 2005
and 2004, the amortization expense of core deposits amounted to $0.8 million, $0.9 million, and
$0.6 million, respectively. For the six month periods ended June 30, 2006, 2005 and 2004, the
amortization expense of core deposits amounted to $1.8 million, $1.5 million, and $1.2 million,
respectively.
11 DEPOSITS
The following table summarizes deposit balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Non-interest bearing checking account deposits |
|
$ |
711,284 |
|
|
$ |
811,006 |
|
|
$ |
791,510 |
|
|
$ |
601,854 |
|
Saving accounts |
|
|
1,035,601 |
|
|
|
1,034,047 |
|
|
|
1,163,166 |
|
|
|
921,507 |
|
Interest-bearing checking accounts |
|
|
389,086 |
|
|
|
375,305 |
|
|
|
399,512 |
|
|
|
316,579 |
|
Certificates of deposit |
|
|
1,676,791 |
|
|
|
1,664,379 |
|
|
|
1,674,902 |
|
|
|
1,225,565 |
|
Brokered certificates of deposit |
|
|
9,700,301 |
|
|
|
8,579,015 |
|
|
|
7,092,370 |
|
|
|
3,941,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,513,063 |
|
|
$ |
12,463,752 |
|
|
$ |
11,121,460 |
|
|
$ |
7,006,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The interest expense on deposits includes the valuation to market of interest rate swaps
that hedge brokered certificates of deposit, the related interest exchanged, the amortization of
broker placement fees and the basis adjustment amortization on the brokered CDs designated under
fair value hedges.
The following are the components of interest expense on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six month period ended |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Interest expense on deposits |
|
$ |
143,801 |
|
|
$ |
67,736 |
|
|
$ |
26,154 |
|
|
$ |
261,053 |
|
|
$ |
114,337 |
|
|
$ |
52,703 |
|
Amortization of broker placement fees |
|
|
4,756 |
|
|
|
2,796 |
|
|
|
1,696 |
|
|
|
8,705 |
|
|
|
6,447 |
|
|
|
6,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on deposits excluding
unrealized loss
(gain) on derivatives (designated and
undesignated hedges) and amortization of basis adjustment on fair value hedges |
|
|
148,557 |
|
|
|
70,532 |
|
|
|
27,850 |
|
|
|
269,758 |
|
|
|
120,784 |
|
|
|
59,193 |
|
Unrealized loss (gain) on derivatives
(designated and undesignated hedges) |
|
|
7,318 |
|
|
|
(72,826 |
) |
|
|
88,097 |
|
|
|
72,955 |
|
|
|
(29,096 |
) |
|
|
43,374 |
|
Amortization of basis adjustment on fair value hedges |
|
|
1,279 |
|
|
|
|
|
|
|
|
|
|
|
1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits |
|
$ |
157,154 |
|
|
$ |
(2,294 |
) |
|
$ |
115,947 |
|
|
$ |
343,992 |
|
|
$ |
91,688 |
|
|
$ |
102,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits includes interest exchanged on interest rate swaps
that hedge designated and undesignated brokered certificates of deposit that for the quarter and
six month period ended June 30, 2006 amounted to net interest incurred of $1.8 million and net
interest realized of $1.7 million, respectively (2005 net interest realized for the quarter and
six month period of $20.5 million and $45.1 million, respectively ; 2004 net interest realized
for the quarter and six month period of $31.7 million and $62.0 million, respectively).
44
12 NOTES PAYABLE
Notes payable consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
Callable fixed rate notes, bearing interest at 6.00%,
maturing on October 1, 2024 |
|
$ |
147,169 |
|
|
$ |
149,456 |
|
|
$ |
149,448 |
|
|
$ |
|
|
|
Callable step-rate notes, bearing step increasing
interest
from 5.00% to 7.00% maturing on October 18, 2019 |
|
|
15,206 |
|
|
|
15,245 |
|
|
|
15,238 |
|
|
|
|
|
|
Dow Jones Industrial Average (DJIA) linked principal
protected notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A maturing on February 28, 2012 |
|
|
6,966 |
|
|
|
6,752 |
|
|
|
6,378 |
|
|
|
6,535 |
|
|
Series B maturing on May 27, 2011 |
|
|
7,510 |
|
|
|
7,240 |
|
|
|
6,862 |
|
|
|
6,821 |
|
|
Callable fixed rate notes, bearing interest at 6.40%,
maturing on June 1, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,883 |
|
|
Callable fixed rate notes, bearing interest at 6.40%,
maturing on July 1, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,500 |
|
|
Callable step-up fixed rate notes, bearing interest
at 4.90%,
maturing on July 1, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
176,851 |
|
|
$ |
178,693 |
|
|
$ |
177,926 |
|
|
$ |
152,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
13 OTHER BORROWINGS
Other borrowings consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
Junior subordinated debentures due in 2034,
interest bearing at a floating rate of 2.75%
over 3-month LIBOR (8.15% at June 30, 2006
7.25% at December 31, 2005, 6.17% at June
30, 2005
and 3.93% at June 30, 2004) |
|
$ |
102,804 |
|
|
$ |
102,756 |
|
|
$ |
102,707 |
|
|
$ |
102,610 |
|
|
Junior subordinated debentures due in 2034,
interest bearing at a floating rate of 2.50%
over 3-month LIBOR (7.91% at June 30, 2006
7.00% at December 31, 2005 and 5.94% at
June 30, 2005) |
|
|
128,866 |
|
|
|
128,866 |
|
|
|
128,866 |
|
|
|
|
|
|
Loan payable to a local financial
institution due in July 2004,
interest bearing at 1.375% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
231,670 |
|
|
$ |
231,622 |
|
|
$ |
231,573 |
|
|
$ |
147,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 SUBORDINATED NOTES
On December 20, 1995, the Corporation issued 7.63% subordinated capital notes in the amount of
$100 million maturing on December 20, 2005. The notes were issued at a discount. At June 30,
2006, there was no outstanding balance as the notes payable were paid at their maturity date of
December 20, 2005 ( carrying value of $82.6 million as of June 30, 2005 and $82.0 million as of
June 30, 2004). Interest on the notes was paid semiannually and at maturity. The notes
represented unsecured obligations of the Corporation ranking subordinate in right of payment to all
existing and future senior debt including the claims of depositors and other general creditors.
The notes could not be redeemed prior to their maturity.
15 INCOME TAXES
Income tax expense include Puerto Rico and Virgin Islands income taxes as well as applicable
federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from
all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for
U.S. income tax purposes and is generally subject to United States income tax only on its income
from sources within the United States or income effectively connected with the conduct of a trade
or business within the United States. Any such tax paid is creditable, within certain conditions
and limitations, against the Corporations Puerto Rico tax liability. The Corporation is also
subject to U.S. Virgin Islands taxes on its income from sources within this jurisdiction. However,
any tax paid, subject to certain conditions and limitations, is creditable against the
Corporations Puerto Rico tax liability.
Under the Puerto Rico Internal Revenue Code of 1994, as amended (PR Code), First BanCorp is
subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006, an additional
transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005,
the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum
statutory tax rate from 39.0% to 41.5% for a two-year period. The additional tax related to the
income earned from January 1 to the date of enactment of the law was fully recorded in the third
quarter of 2005. On May 13, 2006, with an effective date of January 1, 2006, the Governor of
Puerto Rico approved an additional transitory tax rate of 2.0% applicable only to companies covered
by the Puerto Rico Banking Act as amended, such as First Bank
Puerto Rico ( First Bank or the
Bank), which raised the maximum statutory
tax rate to 43.5% for taxable years that commenced during calendar year 2006. For taxable years
beginning after December
46
31, 2006, the maximum statutory tax rate will be 39%. The PR Code also
includes an alternative minimum tax of 22% that applies if the Corporations regular income tax
liability is less than the alternative minimum tax requirements.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate
mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and
Puerto Rico income taxes and doing business through international banking units (IBEs) of the
Corporation and the Bank and by the Banks subsidiary, FirstBank Overseas Corporation. The IBEs
and FirstBank Overseas Corporation were created under the International Banking Entity Act of
Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs
operating in Puerto Rico. Since 2004, IBEs that operate as a unit of a bank pay income taxes at
normal rates to the extent that the IBEs net income exceeds predetermined percentages of the
banks total net taxable income; such limitations were 30% of total net taxable income for a
taxable year commencing between July 1, 2004 and July 1, 2005, and 20% of total net taxable income
for taxable years commencing thereafter.
For the six month period ended June 30, 2006, the Corporations provision for income tax was
$4.3 million compared to $38.3 million and $4.9 million for the same period in 2005 and 2004,
respectively. The decrease in income tax expense for the first half of 2006 as compared to the
first six months of 2005 was mainly due to an increase in deferred tax benefits resulting
principally from higher unrealized losses on derivative instruments. For the first six months of
2006, the Corporation recognized a deferred tax benefit of $26.5 million compared to a deferred tax
provision of $6.8 million for the same period in 2005. The increase in income tax expense for the
first half of 2005 as compared to the same period in 2004 was mainly due to a decrease in deferred
tax benefits resulting principally from unrealized gains on derivative instruments coupled with an
increase in the current tax provision. For the first six months of 2005, the Corporation
recognized a deferred tax provision of $6.8 million compared to a deferred tax benefit of $23.0
million recognized for the same period in 2004.
The Corporation evaluated its ability to realize its deferred tax assets and concluded, based
on the evidence available, that it is more likely than not that some of the deferred tax assets
will not be realized and, thus, established a valuation allowance of $4.7 million as of June 30,
2006. At June 30, 2006, the deferred tax asset, net of the valuation allowance, amounted to
approximately $162.5 million compared to $68.5 million at June 30, 2005 and $91.4 million at June
30, 2004. At June 30, 2005 and 2004, based on the Corporations analysis and available evidence,
the Corporation did not establish a valuation allowance.
16 SEGMENT INFORMATION
Based upon the Corporations organizational structure and the information provided to the
Chief Operating Decision Maker and to a lesser extent to the Board of Directors, the operating
segments are driven primarily by the Corporations legal entities. At June 30, 2006, the
Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking;
Consumer (Retail) Banking; and Treasury and Investments, as well as an Other category reflecting
other legal entities reported separately on an aggregate basis. Management determined the
reportable segments based on the internal reporting used to evaluate performance and to assess
where to allocate resources. Other factors such as the Corporations organizational chart, nature
of the products, distribution channels
and the economic characteristics of the products were also considered in the determination of
the reportable segments.
The Commercial and Corporate Banking segment consists of the Corporations lending and other
services for large customers represented by the public sector and specialized and middle-market
clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial
real estate and construction loans, and other products such as cash management and business
management services. The Mortgage Banking segments operations consist of the origination, sale and
servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires
and sells mortgages in the secondary markets. Certain mortgage loans are purchased
47
from other local
banks or mortgage brokers. The Consumer (Retail) segment consists of the Corporations consumer
lending and deposit-taking activities conducted mainly through its branch network and loan centers.
The Treasury and Investment segment is responsible for the Corporations investment portfolio and
treasury functions executed to manage and enhance liquidity. This segment loans funds to the
Commercial and Corporate Banking; Mortgage Banking; and Consumer segments to finance their lending
activities and borrows from those segments. The Consumer segment also loans funds to other
segments. The interest rates charged or credited by Treasury and Investments and the Consumer
segment are allocated based on market rates. The difference between the allocated interest income or
expense and the Corporations actual net interest income from centralized management of funding
costs is reported in the Treasury and Investments segment. The Other category is mainly composed of
insurance, finance leases and other products.
The accounting policies of the business segments are the same as those described in Note 1 of
the Corporations financial statements for the year ended December 31, 2005 contained in the annual
report of the Corporation on Form 10-K.
The Corporation evaluates the performance of the segments based on net interest income after
the estimated provision for loan and lease losses, non-interest income and direct non-interest
expenses. The segments are also evaluated based on the average volume of their interest-earning
assets less the allowance for loan and lease losses.
48
The following table presents information about the reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
Commercial and |
|
Treasury and |
|
|
|
|
|
|
Banking |
|
Consumer |
|
Corporate |
|
Investments |
|
Other |
|
Total |
For the quarter ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
36,528 |
|
|
$ |
50,539 |
|
|
$ |
132,974 |
|
|
$ |
96,218 |
|
|
$ |
28,184 |
|
|
$ |
344,443 |
|
Net (charge) credit for transfer
of funds |
|
|
(26,269 |
) |
|
|
28,134 |
|
|
|
(87,038 |
) |
|
|
90,114 |
|
|
|
(4,941 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(17,902 |
) |
|
|
|
|
|
|
(194,388 |
) |
|
|
(5,915 |
) |
|
|
(218,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
10,259 |
|
|
|
60,771 |
|
|
|
45,936 |
|
|
|
(8,056 |
) |
|
|
17,328 |
|
|
|
126,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) recovery for loan and lease losses |
|
|
(3,261 |
) |
|
|
368 |
|
|
|
865 |
|
|
|
|
|
|
|
(7,326 |
) |
|
|
(9,354 |
) |
Other income (loss) |
|
|
450 |
|
|
|
5,909 |
|
|
|
(9,513 |
) |
|
|
64 |
|
|
|
4,873 |
|
|
|
1,783 |
|
Direct operating expenses |
|
|
(3,790 |
) |
|
|
(21,259 |
) |
|
|
(3,323 |
) |
|
|
(1,425 |
) |
|
|
(11,170 |
) |
|
|
(40,967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
3,658 |
|
|
$ |
45,789 |
|
|
$ |
33,965 |
|
|
$ |
(9,417 |
) |
|
$ |
3,705 |
|
|
$ |
77,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,270,072 |
|
|
$ |
1,934,608 |
|
|
$ |
6,922,171 |
|
|
$ |
7,563,499 |
|
|
$ |
1,127,120 |
|
|
$ |
19,817,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
25,932 |
|
|
$ |
42,765 |
|
|
$ |
83,128 |
|
|
$ |
74,744 |
|
|
$ |
22,588 |
|
|
$ |
249,157 |
|
Net (charge) credit for transfer
of funds |
|
|
(15,875 |
) |
|
|
18,501 |
|
|
|
(57,594 |
) |
|
|
58,815 |
|
|
|
(3,847 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(12,614 |
) |
|
|
|
|
|
|
(39,992 |
) |
|
|
(3,480 |
) |
|
|
(56,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
10,057 |
|
|
|
48,652 |
|
|
|
25,534 |
|
|
|
93,567 |
|
|
|
15,261 |
|
|
|
193,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) recovery for loan and lease losses |
|
|
(1,033 |
) |
|
|
(8,703 |
) |
|
|
1,788 |
|
|
|
|
|
|
|
(3,127 |
) |
|
|
(11,075 |
) |
Other income (loss) |
|
|
3,076 |
|
|
|
5,504 |
|
|
|
1,430 |
|
|
|
(1,012 |
) |
|
|
4,421 |
|
|
|
13,419 |
|
Direct operating expenses |
|
|
(3,818 |
) |
|
|
(18,590 |
) |
|
|
(1,923 |
) |
|
|
(1,144 |
) |
|
|
(8,495 |
) |
|
|
(33,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
$ |
8,282 |
|
|
$ |
26,863 |
|
|
$ |
26,829 |
|
|
$ |
91,411 |
|
|
$ |
8,060 |
|
|
$ |
161,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
1,545,849 |
|
|
$ |
1,658,446 |
|
|
$ |
7,266,154 |
|
|
$ |
6,095,977 |
|
|
$ |
874,534 |
|
|
$ |
17,440,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2004 (As
Restated): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
18,188 |
|
|
$ |
33,508 |
|
|
$ |
43,580 |
|
|
$ |
53,954 |
|
|
$ |
11,372 |
|
|
$ |
160,602 |
|
Net (charge) credit for transfer of funds |
|
|
(11,750 |
) |
|
|
14,008 |
|
|
|
(18,184 |
) |
|
|
17,901 |
|
|
|
(1,975 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(9,926 |
) |
|
|
|
|
|
|
(145,692 |
) |
|
|
|
|
|
|
(155,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
6,438 |
|
|
|
37,590 |
|
|
|
25,396 |
|
|
|
(73,837 |
) |
|
|
9,397 |
|
|
|
4,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) recovery for loan and lease losses |
|
|
(175 |
) |
|
|
(9,939 |
) |
|
|
413 |
|
|
|
|
|
|
|
(3,499 |
) |
|
|
(13,200 |
) |
Other income |
|
|
223 |
|
|
|
5,312 |
|
|
|
2,600 |
|
|
|
731 |
|
|
|
3,280 |
|
|
|
12,146 |
|
Direct operating expenses |
|
|
(2,456 |
) |
|
|
(16,076 |
) |
|
|
(1,742 |
) |
|
|
(800 |
) |
|
|
(4,406 |
) |
|
|
(25,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
4,030 |
|
|
$ |
16,887 |
|
|
$ |
26,667 |
|
|
$ |
(73,906 |
) |
|
$ |
4,772 |
|
|
$ |
(21,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
1,049,551 |
|
|
$ |
1,290,103 |
|
|
$ |
4,871,389 |
|
|
$ |
5,504,959 |
|
|
$ |
279,383 |
|
|
$ |
12,995,385 |
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
Commercial and |
|
Treasury and |
|
|
|
|
|
|
Banking |
|
Consumer |
|
Corporate |
|
Investments |
|
Other |
|
Total |
For the six-month period ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
71,852 |
|
|
$ |
100,512 |
|
|
$ |
267,422 |
|
|
$ |
177,174 |
|
|
$ |
55,188 |
|
|
$ |
672,148 |
|
Net (charge) credit for transfer
of funds |
|
|
(49,806 |
) |
|
|
53,205 |
|
|
|
(176,169 |
) |
|
|
182,140 |
|
|
|
(9,370 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(33,933 |
) |
|
|
|
|
|
|
(427,905 |
) |
|
|
(11,253 |
) |
|
|
(473,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
22,046 |
|
|
|
119,784 |
|
|
|
91,253 |
|
|
|
(68,591 |
) |
|
|
34,565 |
|
|
|
199,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) recovery for loan and lease losses |
|
|
(3,587 |
) |
|
|
(12,917 |
) |
|
|
33 |
|
|
|
|
|
|
|
(12,259 |
) |
|
|
(28,730 |
) |
Other (loss) income |
|
|
(104 |
) |
|
|
11,745 |
|
|
|
(8,595 |
) |
|
|
(846 |
) |
|
|
10,171 |
|
|
|
12,371 |
|
Direct operating expenses |
|
|
(7,375 |
) |
|
|
(42,672 |
) |
|
|
(8,562 |
) |
|
|
(3,281 |
) |
|
|
(21,651 |
) |
|
|
(83,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
10,980 |
|
|
$ |
75,940 |
|
|
$ |
74,129 |
|
|
$ |
(72,718 |
) |
|
$ |
10,826 |
|
|
$ |
99,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,203,199 |
|
|
$ |
1,935,327 |
|
|
$ |
7,290,553 |
|
|
$ |
6,980,564 |
|
|
$ |
1,102,771 |
|
|
$ |
19,512,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-month period ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
48,660 |
|
|
$ |
81,703 |
|
|
$ |
162,644 |
|
|
$ |
133,396 |
|
|
$ |
35,131 |
|
|
$ |
461,534 |
|
Net (charge) credit for transfer
of funds |
|
|
(30,070 |
) |
|
|
35,357 |
|
|
|
(103,868 |
) |
|
|
105,020 |
|
|
|
(6,439 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(23,618 |
) |
|
|
|
|
|
|
(176,089 |
) |
|
|
(3,480 |
) |
|
|
(203,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,590 |
|
|
|
93,442 |
|
|
|
58,776 |
|
|
|
62,327 |
|
|
|
25,212 |
|
|
|
258,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(1,494 |
) |
|
|
(12,519 |
) |
|
|
(3,807 |
) |
|
|
|
|
|
|
(4,209 |
) |
|
|
(22,029 |
) |
Other income |
|
|
3,588 |
|
|
|
10,262 |
|
|
|
2,713 |
|
|
|
8,590 |
|
|
|
8,517 |
|
|
|
33,670 |
|
Direct operating expenses |
|
|
(7,340 |
) |
|
|
(36,203 |
) |
|
|
(5,036 |
) |
|
|
(2,375 |
) |
|
|
(13,882 |
) |
|
|
(64,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
$ |
13,344 |
|
|
$ |
54,982 |
|
|
$ |
52,646 |
|
|
$ |
68,542 |
|
|
$ |
15,638 |
|
|
$ |
205,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
1,444,535 |
|
|
$ |
1,600,327 |
|
|
$ |
6,974,788 |
|
|
$ |
5,493,371 |
|
|
$ |
605,390 |
|
|
$ |
16,118,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-month period ended June 30, 2004
(As Restated): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
36,678 |
|
|
$ |
66,519 |
|
|
$ |
84,976 |
|
|
$ |
100,776 |
|
|
$ |
22,470 |
|
|
$ |
311,419 |
|
Net (charge) credit for transfer
of funds |
|
|
(23,368 |
) |
|
|
25,312 |
|
|
|
(32,357 |
) |
|
|
34,174 |
|
|
|
(3,761 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(19,893 |
) |
|
|
|
|
|
|
(157,756 |
) |
|
|
|
|
|
|
(177,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
13,310 |
|
|
|
71,938 |
|
|
|
52,619 |
|
|
|
(22,806 |
) |
|
|
18,709 |
|
|
|
133,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(440 |
) |
|
|
(15,229 |
) |
|
|
(6,159 |
) |
|
|
|
|
|
|
(4,572 |
) |
|
|
(26,400 |
) |
Other income |
|
|
1,799 |
|
|
|
15,361 |
|
|
|
3,929 |
|
|
|
5,945 |
|
|
|
6,076 |
|
|
|
33,110 |
|
Direct operating expenses |
|
|
(4,807 |
) |
|
|
(31,167 |
) |
|
|
(3,810 |
) |
|
|
(1,450 |
) |
|
|
(8,658 |
) |
|
|
(49,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
9,862 |
|
|
$ |
40,903 |
|
|
$ |
46,579 |
|
|
$ |
(18,311 |
) |
|
$ |
11,555 |
|
|
$ |
90,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
1,033,092 |
|
|
$ |
1,265,410 |
|
|
$ |
4,699,943 |
|
|
$ |
5,088,707 |
|
|
$ |
273,786 |
|
|
$ |
12,360,938 |
|
50
The following table presents a reconciliation of the reportable segment financial
information to the consolidated totals (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
Total income
(loss) for segments and other |
|
$ |
77,700 |
|
|
$ |
161,445 |
|
|
$ |
(21,550 |
) |
Other operating expenses |
|
|
(30,073 |
) |
|
|
(22,103 |
) |
|
|
(20,105 |
) |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
|
47,627 |
|
|
|
139,342 |
|
|
|
(41,655 |
) |
Income tax
(expense) benefit |
|
|
(15,824 |
) |
|
|
(41,936 |
) |
|
|
23,463 |
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated net income (loss) |
|
$ |
31,803 |
|
|
$ |
97,406 |
|
|
$ |
(18,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning assets for segments |
|
$ |
19,817,470 |
|
|
$ |
17,440,960 |
|
|
$ |
12,995,385 |
|
Average non- earning assets |
|
|
744,490 |
|
|
|
594,079 |
|
|
|
450,978 |
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average assets |
|
$ |
20,561,960 |
|
|
$ |
18,035,039 |
|
|
$ |
13,446,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Period Ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
Total income for segments and other |
|
$ |
99,157 |
|
|
$ |
205,152 |
|
|
$ |
90,588 |
|
Other operating expenses |
|
|
(59,237 |
) |
|
|
(44,244 |
) |
|
|
(38,423 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
39,920 |
|
|
|
160,908 |
|
|
|
52,165 |
|
Income taxes |
|
|
(4,254 |
) |
|
|
(38,287 |
) |
|
|
(4,927 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated net income |
|
$ |
35,666 |
|
|
$ |
122,621 |
|
|
$ |
47,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning assets for segments |
|
$ |
19,512,354 |
|
|
$ |
16,118,411 |
|
|
$ |
12,360,938 |
|
Average non- earning assets |
|
|
707,886 |
|
|
|
524,210 |
|
|
|
407,239 |
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average assets |
|
$ |
20,220,240 |
|
|
$ |
16,642,621 |
|
|
$ |
12,768,177 |
|
|
|
|
|
|
|
|
|
|
|
17. COMMITMENTS AND CONTINGENCIES
The Corporation enters into financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments may
include commitments to extend credit and commitments to sell and purchase mortgage loans at fair
value. As of June 30, 2006, commitments to extend credit amounted to approximately $1.9 billion
and stand by letters of credit amounted to approximately $105.2 million. Commitments to extend
credit are agreements to lend to a customer as long as the conditions established in the contract
are met. Commitments generally have fixed expiration dates or other termination clauses.
Generally, the Corporations mortgage banking activities do not enter into interest rate lock
agreements with its prospective borrowers.
As of June 30, 2006, First BanCorp and its subsidiaries were defendants in various legal
proceedings arising in the ordinary course of business. Management believes, based on the opinion
of legal counsel, that the final
disposition of these matters will not have a material adverse effect on the Corporations financial
position or results of operations, except as described below.
51
On August 1, 2005, the Audit Committee of the Corporation determined that it should review the
background and accounting for certain mortgage-related transactions that the Corporation had
entered into with Doral Financial Corporation (Doral) and R&G Financial Corporation (R&G)
between 1999 and 2005 that did not qualify as true sales for accounting purposes. The Committee
retained the law firms of Clifford Chance U.S. LLP and Martínez Odell & Calabria and forensic
accountants FTI Consulting Inc. to assist the Audit Committee in its review. On August 25, 2005,
the Corporation announced the receipt of a letter from the SEC in which the SEC indicated that it
was conducting an informal inquiry into the Corporation. On October 21, 2005, the Corporation
announced that the SEC had issued a formal order of investigation into the accounting for the
mortgagerelated transactions with Doral and R&G. The Corporation announced on December 13, 2005
that management, with the concurrence of the Board of Directors, determined to restate its
previously reported financial statements to correct its accounting for the mortgage-related
transactions. The Corporation has fully cooperated with the SECs investigation. In August 2006,
the Audit Committee completed its review and the Corporation filed the Amended 2004 Form 10-K with
the SEC on September 26, 2006, the 2005 Form 10-K on February 9, 2007 and the 2006 Form 10-K on
July 9, 2007.
On August 7, 2007, First BanCorp announced that the SEC approved a final settlement with the
Corporation, which resolves the previously disclosed SEC investigation of the Corporation. Under
the settlement, the Corporation agreed, without admitting or denying any wrongdoing, to be enjoined
from future violations of certain provisions of the securities laws. The Corporation also agreed
to pay an $8.5 million civil penalty and the disgorgement of $1 to the SEC. The SEC may request
that the civil penalty be subject to distribution pursuant to the Fair Fund provisions of Section
308(a) of the Sarbanes-Oxley Act of 2002. The monetary payment will have no impact on the
Corporations earnings or capital in 2007. As reflected in First BanCorps previously filed audited
Consolidated Financial Statements for 2005, the Corporation accrued $8.5 million in 2005 for the
potential settlement with the SEC. In connection with the settlement, the Corporation consented to
the entry of a final judgment to implement the terms of the
agreement. The United States District
Court for the Southern District of New York must consent to the entry
of the final judgment in
order to consummate the settlement.
Following the announcement of the Audit Committees review, the Corporation and certain of its
current and former officers and directors were named as defendants in five separate securities
class actions filed between October 31, 2005 and December 5, 2005, alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934. At present, all securities class actions
have been consolidated into one case named In Re: First BanCorp Securities Litigations.
Subsequently, in 2007, the Corporation reached an agreement in principle and signed a memorandum of
understanding with the lead plaintiff. The agreement specified a payment of $74.25 million by the
Corporation subject to the approval by the United States District Court for the District of Puerto
Rico.
On
August 1, 2007, the United States District Court for the District of Puerto Rico issued a
Preliminary Order approving the stipulation of settlement filed in connection with the proposed
settlement of the class action lawsuit brought on behalf of First BanCorps shareholders against
the Corporation in the amount of $74.25 million.
The effectiveness of a final order to be issued by the Court is subject to:
|
|
|
The payment of $61 million to be deposited by First BanCorp in a settlement fund within
fifteen calendar days of the date of issuance of the Preliminary Order; and |
|
|
|
|
The mailing of a notice to shareholders that describes the general terms of the
settlement. |
52
The court hearing for the final order of approval of the settlement has been set for October
15, 2007. First BanCorp intends to comply with the $61 million payment requirement within the
timeframe set forth in the terms of the settlement. The remaining amount of $13,250,000 will be
paid before December 31, 2007. The monetary payment will have no impact on the Corporations
earnings or capital in 2007. As reflected in First BanCorps audited Consolidated Financial
Statements, included in the Corporations 2005 Annual Report on Form 10-K, the Corporation accrued
$74.25 million in 2005 for a possible settlement of the class action.
The Corporation expects to seek recovery of a total of approximately $14.75 million from its
insurance companies and from former executives of the Corporation. Since agreements with the
insurance carriers have not been executed, the Corporation cannot provide assurances that the
monies from the insurance carriers will be received and consequently,
the Coporation has not made accruals for any potential payment from
its insurance carriers.
Between November 8, 2005 and March 7, 2006, several shareholders of the Corporation commenced
five separate derivative actions against certain current and former executive officers and
directors of the Corporation. In these actions, the Corporation was included as a nominal
defendant. These actions were filed pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and
alleged, among other things, a breach of fiduciary duty on behalf of the defendants. All
shareholder derivative actions were consolidated into one case named In Re: First BanCorp
Derivative Litigation which was dismissed on November 30, 2006 before the U.S. District Court for
the District of Puerto Rico.
53
18 FIRST BANCORP (Holding Company Only) Financial Information
The following condensed financial information presents the financial position of the Holding
Company only at June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004 and the results
of its operations for the quarter and six-month period ended on June 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
16,748 |
|
|
$ |
2,772 |
|
|
$ |
16,058 |
|
|
$ |
29,102 |
|
Money market instruments |
|
|
300 |
|
|
|
300 |
|
|
|
69,100 |
|
|
|
51,569 |
|
Investment securities available for sale, at market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
|
21,394 |
|
|
|
29,421 |
|
|
|
68,420 |
|
|
|
50,836 |
|
Other equity securities |
|
|
1,425 |
|
|
|
1,425 |
|
|
|
1,375 |
|
|
|
375 |
|
Loans receivable, net |
|
|
68,845 |
|
|
|
74,914 |
|
|
|
84,429 |
|
|
|
102,024 |
|
Investment in FirstBank Puerto Rico, at equity |
|
|
1,285,404 |
|
|
|
1,316,380 |
|
|
|
1,236,075 |
|
|
|
1,036,318 |
|
Investment in FirstBank Insurance Agency, at equit |
|
|
2,588 |
|
|
|
5,953 |
|
|
|
4,141 |
|
|
|
1,784 |
|
Investment in Ponce General Corporation, at equity |
|
|
100,359 |
|
|
|
105,907 |
|
|
|
103,667 |
|
|
|
|
|
Investment in PR Finance, at equity |
|
|
2,550 |
|
|
|
3,005 |
|
|
|
2,519 |
|
|
|
|
|
Accrued interest receivable |
|
|
387 |
|
|
|
363 |
|
|
|
429 |
|
|
|
358 |
|
Investment in FBP Statutory Trust I |
|
|
3,093 |
|
|
|
3,093 |
|
|
|
3,093 |
|
|
|
|
|
Investment in FBP Statutory Trust II |
|
|
3,866 |
|
|
|
3,866 |
|
|
|
3,866 |
|
|
|
|
|
Other assets |
|
|
32,689 |
|
|
|
29,758 |
|
|
|
821 |
|
|
|
5,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,539,648 |
|
|
$ |
1,577,157 |
|
|
$ |
1,593,993 |
|
|
$ |
1,278,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings |
|
$ |
231,670 |
|
|
$ |
295,446 |
|
|
$ |
303,499 |
|
|
$ |
197,377 |
|
Accounts payable and other liabilities |
|
|
148,555 |
|
|
|
83,870 |
|
|
|
1,512 |
|
|
|
882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
380,225 |
|
|
|
379,316 |
|
|
|
305,011 |
|
|
|
198,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,159,423 |
|
|
|
1,197,841 |
|
|
|
1,288,982 |
|
|
|
1,079,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,539,648 |
|
|
$ |
1,577,157 |
|
|
$ |
1,593,993 |
|
|
$ |
1,278,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
(Dollars in thousands) |
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on investment
securities |
|
$ |
|
|
|
$ |
262 |
|
|
$ |
90 |
|
Interest income on other investments |
|
|
164 |
|
|
|
603 |
|
|
|
169 |
|
Interest income on loans |
|
|
1,032 |
|
|
|
1,048 |
|
|
|
381 |
|
Dividend from FirstBank Puerto Rico |
|
|
1,961 |
|
|
|
16,886 |
|
|
|
15,410 |
|
Dividend from other subsidiaries |
|
|
9,500 |
|
|
|
240 |
|
|
|
2,770 |
|
Other income |
|
|
134 |
|
|
|
271 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,791 |
|
|
|
19,310 |
|
|
|
19,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
repurchase agreements |
|
|
|
|
|
|
|
|
|
|
2 |
|
Notes payable and other borrowings |
|
|
4,522 |
|
|
|
3,980 |
|
|
|
870 |
|
Interest on funding to subsidiaries |
|
|
1,227 |
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
1,288 |
|
|
|
390 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,037 |
|
|
|
4,370 |
|
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on sale of investments, net |
|
|
(817 |
) |
|
|
(1,181 |
) |
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision and equity
in undistributed earnings (loss) of
subsidiaries |
|
|
4,937 |
|
|
|
13,759 |
|
|
|
18,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(1,925 |
) |
|
|
(26 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings (loss) of
subsidiaries |
|
|
28,791 |
|
|
|
83,673 |
|
|
|
(36,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
31,803 |
|
|
$ |
97,406 |
|
|
$ |
(18,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Period Ended |
|
|
Six-month Period Ended |
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
|
(Dollars in thousands) |
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on investment securities |
|
$ |
178 |
|
|
$ |
342 |
|
|
$ |
241 |
|
Interest income on other investments |
|
|
167 |
|
|
|
1,722 |
|
|
|
291 |
|
Interest income on loans |
|
|
2,085 |
|
|
|
2,032 |
|
|
|
446 |
|
Dividend from FirstBank Puerto Rico |
|
|
19,088 |
|
|
|
33,631 |
|
|
|
30,320 |
|
Dividend from other subsidiaries |
|
|
13,500 |
|
|
|
240 |
|
|
|
2,770 |
|
Other income |
|
|
258 |
|
|
|
474 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,276 |
|
|
|
38,441 |
|
|
|
34,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
repurchase agreements |
|
|
|
|
|
|
|
|
|
|
2 |
|
Notes payable and other borrowings |
|
|
8,668 |
|
|
|
7,516 |
|
|
|
871 |
|
Interest on funding to subsidiaries |
|
|
1,969 |
|
|
|
|
|
|
|
|
|
(Recovery) provision for loan losses |
|
|
(71 |
) |
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
2,544 |
|
|
|
648 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,110 |
|
|
|
8,164 |
|
|
|
1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on sale of investments, net |
|
|
(1,850 |
) |
|
|
1,780 |
|
|
|
3,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision and equity
in undistributed earnings of subsidiaries |
|
|
20,316 |
|
|
|
32,057 |
|
|
|
36,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(837 |
) |
|
|
(34 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of
subsidiaries |
|
|
16,187 |
|
|
|
90,598 |
|
|
|
10,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
35,666 |
|
|
$ |
122,621 |
|
|
$ |
47,238 |
|
|
|
|
|
|
|
|
|
|
|
55
19. SUBSEQUENT EVENTS
Following the close of the second quarter of 2006, a number of events have occurred including:
|
|
|
Effective January 1, 2007, the Corporation elected to early adopt SFAS 159 for
the callable brokered CDs and a portion of the callable medium-term notes that were
previously recognized under the long-haul method as hedged against certain interest
rate swaps under SFAS 133. Refer to Note 2 for additional information on the
adoption of SFAS 159. |
|
|
|
|
In February 2007, the Corporation entered into various agreements with R&G
relating to prior transactions originally treated as purchases of mortgages and
pass-through trust certificates from R&G subsidiaries. First, through a mortgage
payment agreement, R&G paid the Corporation approximately $50 million to reduce the
commercial loan that R&G Premier has outstanding with the Corporation. In addition,
the remaining balance of approximately $271 million was re-documented as a secured
loan from the Corporation to R&G. Second, R&G and the Corporation amended various
agreements involving approximately $218 million of securities collateralized by
loans that were originally sold through five grantor trusts. The modifications to
the original agreements allow the Corporation to treat these transactions as true
sales for accounting and legal purposes. The agreements enable First BanCorp to
fulfill the remaining requirement of the Consent Order signed with banking
regulators relating to the mortgage-related transactions with R&G that First BanCorp
recharacterized for accounting and legal purposes as commercial loans secured by the
mortgage loans and pass-through trust certificates. |
|
|
|
|
During the first quarter of 2007, the Corporation announced that it had entered
into a definitive agreement to issue approximately 9.250 million shares of its
common stock to The Bank of Nova Scotia (Scotiabank), through a private placement
offering, valuing the stock at $10.25 per share for a total purchase price of
approximately $94.8 million. The valuation reflects a premium of approximately 5%
over the volume weighted- average closing share price over the 30 trading-day period
ending January 30, 2007. After the investment, Scotiabank will hold approximately 10% of First BanCorps currently
outstanding common shares. The original agreement provided that the agreement may be
terminated at any time prior to the closing by either the Corporation or Scotiabank
if the closing did not occur by July 31, 2007 (the Termination Date). The
agreement was subsequently amended to change the Termination Date to August 31,
2007. On August 9, 2007, First BanCorp announced the approval by the Federal Reserve
Board of the private placement offering with Scotiabank. |
|
|
|
|
On August 1, 2007, the United States District Court for the District of
Puerto Rico issued a Preliminary Order approving the
stipulation of settlement filed in connection with the proposed settlement of the class action lawsuit brought
on behalf of First BanCorps shareholders against the Corporation in the amount of
$74.25 million. |
|
|
|
|
The effectiveness of a final order to be issued by the Court is subject to: |
|
|
|
|
- The payment of $61 million to be deposited by First BanCorp in a settlement
fund within fifteen calendar days of the date of issuance of the Preliminary Order;
and |
|
|
|
|
- The mailing of a notice to shareholders that describes the general terms of the
settlement.
|
|
|
|
|
The court hearing for the final order of approval of the settlement has been set for
October 15, 2007. First BanCorp intends to comply with the $61 million payment
requirement within the timeframe |
56
|
|
|
set forth in the terms of the settlement. The remaining amount of $13,250,000 will be
paid before December 31, 2007. The monetary payment will have no impact on the
Corporations earnings or capital in 2007. As reflected in First BanCorps audited
Consolidated Financial Statements, included in the Corporations 2005 Annual Report on
Form 10-K, the Corporation accrued $74.25 million in 2005 for a possible settlement of
the class action. |
|
|
|
|
On August 7, 2007, First BanCorp announced that the SEC approved a final
settlement with the Corporation, which resolves the previously disclosed SEC
investigation of the Corporation. Under the settlement, the Corporation agreed,
without admitting or denying any wrongdoing, to be enjoined from future violations
of certain provisions of the securities laws. The Corporation also
agreed to pay an
$8.5 million civil penalty and the disgorgement of $1 to the SEC. The SEC may
request that the civil penalty be subject to distribution pursuant to the Fair Fund
provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The monetary
payment will have no impact on the Corporations earnings or capital in 2007. As
reflected in First BanCorps previously filed audited Consolidated Financial
Statements for 2005, the Corporation accrued $8.5 million in 2005 for the potential
settlement with the SEC. In connection with the settlement, the Corporation
consented to the entry of a final judgment to implement the terms of the agreement.
The United States District Court for the Southern District of New York must consent
to the entry of the final judgment in order to consummate the settlement. |
57
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(MD&A)
Restatement of Previously Issued Financial Statements
On September 26, 2006, First BanCorp filed with the SEC its amended 2004 Annual Report on Form
10-K/A, which included a restatement of the Corporations audited financial statements for the
years ended December 31, 2004, 2003 and 2002 and unaudited selected quarterly financial information
for each of the four quarters of 2004, 2003 and 2002 (the 2004 restatement). This Quarterly
Report on Form 10-Q includes financial information for the quarter ended June 30, 2004, as
restated. The restatement reflects adjustments necessary to correct accounting errors relating to
the following:
|
|
|
Accounting for derivative instruments and broker placement fees; |
|
|
|
|
Recharacterization of purchases of mortgage loans and pass-through trust certificates as
commercial loans secured by mortgage loans; |
|
|
|
|
Accounting for investment securities; |
|
|
|
|
Accounting for deferral and recognition of origination fees and costs on loans; and |
|
|
|
|
Other accounting adjustments and reclassifications, including adjustments to the gain on
sale of credit card portfolios, accrual for rental expense on lease contracts, valuation of
financial instruments and income from a loan origination subsidiary. |
In addition, with the filing of its 2006 Annual Report on Form 10-K, First BanCorp restated
its 2005 and 2004 Statements of Cash Flows due to some incorrect classifications. The
classification errors related to three main items: 1) the treatment of discounts and the related
accretion activity on certain investment securities, 2) the classification of cash flows from the
disposition of repossessed assets, and 3) purchases of zero coupon bonds and agency discount notes
amounts presented as part of investing activities.
The filing of this Quarterly Report on Form 10-Q was delayed because of the time required to
complete the 2004 restatement. For more information on the Corporations 2004 restatement, refer
to Item 8, Financial Statements and Supplementary Data, Note 1 Restatement of Previously Issued
Financial Statements in the Corporations amended 2004 Annual Report on Form 10-K. For more
information on the Corporations 2006 restatement, refer to Item 8, Financial Statements and
Supplementary Data, Note 1 Restatement of 2005 and 2004 Consolidated Statements of Cash Flows
to First BanCorp audited Consolidated Financial Statements, included in the Corporations 2006
Annual Report on Form 10-K. For more information on the impact of the 2004 and 2006 restatements
on the Corporations financial statements for the quarter and six month period ended June 30, 2004,
refer to Note 1 to the accompanying unaudited interim consolidated financial statements contained
in this Quarterly Report on Form 10-Q.
58
SELECTED FINANCIAL DATA
(In thousands except for per share and financial ratios results)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six Month Period Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
(As Restated) |
Condensed Income Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
344,443 |
|
|
$ |
249,157 |
|
|
$ |
160,602 |
|
|
$ |
672,148 |
|
|
$ |
461,534 |
|
|
$ |
311,419 |
|
Total interest expense |
|
|
218,205 |
|
|
|
56,086 |
|
|
|
155,618 |
|
|
|
473,091 |
|
|
|
203,187 |
|
|
|
177,649 |
|
Net interest income |
|
|
126,238 |
|
|
|
193,071 |
|
|
|
4,984 |
|
|
|
199,057 |
|
|
|
258,347 |
|
|
|
133,770 |
|
Provision for loan and lease losses |
|
|
9,354 |
|
|
|
11,075 |
|
|
|
13,200 |
|
|
|
28,730 |
|
|
|
22,029 |
|
|
|
26,400 |
|
Non-interest income |
|
|
1,783 |
|
|
|
13,419 |
|
|
|
12,146 |
|
|
|
12,371 |
|
|
|
33,670 |
|
|
|
33,110 |
|
Non-interest expenses |
|
|
71,040 |
|
|
|
56,073 |
|
|
|
45,585 |
|
|
|
142,778 |
|
|
|
109,080 |
|
|
|
88,315 |
|
Income (Loss) before income taxes |
|
|
47,627 |
|
|
|
139,342 |
|
|
|
(41,655 |
) |
|
|
39,920 |
|
|
|
160,908 |
|
|
|
52,165 |
|
Income tax (expense) benefit |
|
|
(15,824 |
) |
|
|
(41,936 |
) |
|
|
23,463 |
|
|
|
(4,254 |
) |
|
|
(38,287 |
) |
|
|
(4,927 |
) |
Net income (loss) |
|
|
31,803 |
|
|
|
97,406 |
|
|
|
(18,192 |
) |
|
|
35,666 |
|
|
|
122,621 |
|
|
|
47,238 |
|
Net income (loss) attributable to
common stockholders |
|
|
21,734 |
|
|
|
87,337 |
|
|
|
(28,261 |
) |
|
|
15,528 |
|
|
|
102,483 |
|
|
|
27,100 |
|
Per Common Share Results (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic |
|
$ |
0.26 |
|
|
$ |
1.08 |
|
|
$ |
(0.35 |
) |
|
$ |
0.19 |
|
|
$ |
1.27 |
|
|
$ |
0.34 |
|
Net income (loss) per share diluted |
|
$ |
0.26 |
|
|
$ |
1.05 |
|
|
$ |
(0.35 |
) |
|
$ |
0.19 |
|
|
$ |
1.23 |
|
|
$ |
0.33 |
|
Cash dividends declared |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
Average shares outstanding |
|
|
83,254 |
|
|
|
80,852 |
|
|
|
80,430 |
|
|
|
82,410 |
|
|
|
80,818 |
|
|
|
80,280 |
|
Average shares outstanding diluted |
|
|
83,412 |
|
|
|
82,872 |
|
|
|
80,430 |
|
|
|
82,908 |
|
|
|
83,141 |
|
|
|
82,752 |
|
Book value per share |
|
|
7.32 |
|
|
|
9.14 |
|
|
|
6.59 |
|
|
|
7.32 |
|
|
|
9.14 |
|
|
|
6.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Ratios (In Percent): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets |
|
|
0.62 |
|
|
|
2.17 |
|
|
|
(0.54 |
) |
|
|
0.36 |
|
|
|
1.49 |
|
|
|
0.74 |
|
Interest Rate Spread |
|
|
2.28 |
|
|
|
3.03 |
|
|
|
2.91 |
|
|
|
2.46 |
|
|
|
2.99 |
|
|
|
2.93 |
|
Net Interest Margin |
|
|
2.73 |
|
|
|
3.37 |
|
|
|
3.20 |
|
|
|
2.91 |
|
|
|
3.34 |
|
|
|
3.24 |
|
Return on Average Total Equity |
|
|
10.91 |
|
|
|
31.66 |
|
|
|
(6.64 |
) |
|
|
6.05 |
|
|
|
20.34 |
|
|
|
8.61 |
|
Return on Average Common Equity |
|
|
14.08 |
|
|
|
51.22 |
|
|
|
(20.63 |
) |
|
|
4.90 |
|
|
|
31.04 |
|
|
|
9.88 |
|
Average Total Equity to Average
Total Assets |
|
|
5.69 |
|
|
|
6.84 |
|
|
|
8.18 |
|
|
|
5.88 |
|
|
|
7.31 |
|
|
|
8.62 |
|
Dividend payout ratio |
|
|
26.81 |
|
|
|
6.48 |
|
|
|
(17.08 |
) |
|
|
74.93 |
|
|
|
11.04 |
|
|
|
35.58 |
|
Efficiency ratio (2) |
|
|
55.49 |
|
|
|
27.16 |
|
|
|
266.10 |
|
|
|
67.53 |
|
|
|
37.35 |
|
|
|
52.92 |
|
Asset Quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
to loans receivable |
|
|
1.35 |
|
|
|
1.24 |
|
|
|
1.68 |
|
|
|
1.35 |
|
|
|
1.24 |
|
|
|
1.68 |
|
Net charge-offs (annualized) to
average loans |
|
|
0.50 |
|
|
|
0.32 |
|
|
|
0.52 |
|
|
|
0.48 |
|
|
|
0.34 |
|
|
|
0.52 |
|
Provision for loan and lease losses
to net charge-offs |
|
|
0.61 |
|
|
|
1.21 |
|
|
|
1.34 |
|
|
|
0.95 |
|
|
|
1.21 |
|
|
|
1.38 |
|
Other Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price: End of period (1) |
|
$ |
9.30 |
|
|
$ |
20.08 |
|
|
$ |
20.38 |
|
|
$ |
9.30 |
|
|
$ |
20.08 |
|
|
$ |
20.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
As of |
|
As of |
|
June 30, |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
2004 |
|
|
2006 |
|
2005 |
|
2005 |
|
(As Restated) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale |
|
$ |
10,905,259 |
|
|
$ |
12,685,929 |
|
|
$ |
11,872,969 |
|
|
$ |
7,986,010 |
|
Allowance for loan and lease losses |
|
|
146,527 |
|
|
|
147,999 |
|
|
|
146,154 |
|
|
|
133,678 |
|
Money market and investment securities |
|
|
8,641,981 |
|
|
|
6,653,925 |
|
|
|
6,493,229 |
|
|
|
6,197,032 |
|
Total assets |
|
|
20,180,878 |
|
|
|
19,917,651 |
|
|
|
18,814,278 |
|
|
|
14,489,149 |
|
Deposits |
|
|
13,513,063 |
|
|
|
12,463,752 |
|
|
|
11,121,460 |
|
|
|
7,006,612 |
|
Borrowings |
|
|
4,625,207 |
|
|
|
5,750,197 |
|
|
|
6,147,149 |
|
|
|
5,963,429 |
|
Total common equity |
|
|
609,323 |
|
|
|
647,741 |
|
|
|
738,882 |
|
|
|
529,669 |
|
Total equity |
|
|
1,159,423 |
|
|
|
1,197,841 |
|
|
|
1,288,982 |
|
|
|
1,079,769 |
|
|
|
|
1- |
|
Adjusted to reflect two-for-one stock split effective June 30, 2005. |
|
2- |
|
Non-interest expense to the sum of net interest income and non-interest income. The denominator
includes non-recurring items and changes in the fair value of derivative instruments. |
59
OVERVIEW OF RESULTS OF OPERATIONS
This discussion and analysis relates to the accompanying consolidated interim unaudited
financial statements of First BanCorp (the Corporation or First BanCorp) and should be read in
conjunction with the interim unaudited financial statements and the notes thereto.
First BanCorps results of operations depend primarily upon its net interest income, which is
the difference between the interest income earned on its interest-earning assets, including
investment securities and loans, and the interest expense on its interest-bearing liabilities,
including deposits and borrowings. Net interest income is affected by various factors including
the interest rate scenario, the volumes, mix and composition of interest-earning assets and
interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities.
The Corporations results of operations also depend on the provision for loan and lease losses,
non-interest expenses (such as personnel, occupancy and other costs), non-interest income (mainly
insurance income and service charges and fees on loans and deposits), the result of its hedging
activities, gains (losses) on investments, gains (losses) on sale of loans, and income taxes.
As previously reported, on March 31, 2005, the Corporation completed the acquisition of 100%
of the outstanding common shares of Ponce General Corporation, the holding company of FirstBank
Florida (formerly known as Unibank) a thrift subsidiary, and Ponce Realty. This acquisition will
allow First BanCorp to build a larger platform in Florida from which to initiate further expansion
into the United States. As of March 31, 2005, excluding the effects of purchase accounting
entries, Ponce General had approximately $546.2 million in assets and $439.1 million in deposits.
Ponce General assets were mainly comprised of $476.0 million in loans ($425.8 million commercial
and residential mortgage loans; $28.2 million commercial and construction loans; and $22.1
million consumer loans). In connection with the purchase, the Corporation paid a cash premium of
approximately $36 million that was mainly allocated to core deposit intangibles and goodwill.
For the quarter ended June 30, 2006, the Corporations net income amounted to $31.8 million,
compared to a net income of $97.4 million and a net loss of $18.2 million for the quarters ended
June 30, 2005 and 2004, respectively. For the quarter ended June 30, 2006, diluted earnings per
common share amounted to $0.26, compared to diluted earnings per common share of $1.05 and losses
per common share of $0.35, for the comparable period in 2005 and 2004, respectively. Return on
average assets and return on average common equity were 0.62% and 14.08% respectively, for the
quarter ended June 30, 2006 as compared to 2.17% and 51.22% and (0.54)% and (20.63)%, respectively,
for the same quarter of 2005 and 2004, respectively. The Corporations financial performance for
the second quarter of 2006, as compared to the second quarter of 2005, was principally impacted by:
(1) positive variances in the valuation of derivative instruments, (2) a loss of $11.6 million on
the partial extinguishment of certain secured commercial loan to a local financial institution, and
(3) higher non-interest expenses, primarily professional fees associated with the Audit Committees
review and the restatement process.
The highlights and key drivers of the Corporations financial results for the quarter ended
June 30, 2006 included the following:
|
|
|
For the quarter ended June 30, 2006, the Corporations operations resulted in a net
income of $31.8 million, compared to net income of $97.4 million and a net loss of $18.2
million for the quarters ended June 30, 2005 and 2004, respectively. After payment of
preferred stock dividends, the Corporations net income available to common stockholders
amounted to $21.7 million for the second quarter of 2006, $87.3 million for the second
quarter of 2005, and a net loss attributable to common stockholders of $28.3 million for
the second quarter of 2004. |
60
|
|
|
Diluted earnings per common share for the quarter ended June 30, 2006 was $0.26,
compared to diluted earnings per common share of $1.05 and losses per common share of $0.35
for the quarters ended June 30, 2005 and 2004, respectively. |
|
|
|
|
Net interest income for the quarters ended June 30, 2006, 2005, and 2004 was $126.2
million, $193.1 million, and $5.0 million, respectively. Net interest income fluctuated
significantly due to changes in the valuation of derivative instruments. For the quarter
ended June 30, 2006, the Corporation recorded net unrealized losses of $2.1 million in the
valuation of derivative instruments, compared to net unrealized gains of $63.4 million and
unrealized losses of $84.9 million for the same period in 2005 and 2004, respectively.
Refer to the Net Interest Income discussion below for further details. |
|
|
|
|
On a tax equivalent basis, excluding the changes in the fair values of derivative
instruments, the ineffective portion resulting from fair value hedge accounting as well as
the basis adjustment amortization or accretion (for definition and reconciliation of this
non-GAAP measure, refer to the Net Interest Income discussion below), net interest income
for the quarters ended June 30, 2006, 2005, and 2004 was $136.2 million, $147.4 million, and
$104.2 million, respectively. The decrease in tax equivalent net interest income, when
excluding the changes in the fair values of derivative instruments, the ineffective portion
resulting from fair value hedge accounting as well as the basis adjustment amortization or
accretion, was principally due to margin compressions due to the flattening of the yield
curve and fluctuations in net interest incurred on interest rate swaps. The interest margin
on a tax equivalent basis was 2.73% for the quarter ended June 30, 2006, compared to 3.37%
and 3.20% for the same periods in 2005 and 2004, respectively. The decrease in the
Corporations net interest margin on a tax equivalent basis has been particularly significant
with respect to the Corporations portfolio of investment securities. The interest rate
spread on the Corporations portfolio of investment securities, (allocating a funding cost
equal to the weighted-average cost of the Corporations other borrowed funds) was
approximately 0.65% for the quarter ended June 30, 2006 compared to 2.18% for the quarter
ended June 30, 2005. Increases in short-term rates resulted in a change in net interest
settlements on interest rate swaps included as part of interest expense. For the quarter
ended June 30, 2006, the net interest settlement on such interest rate swaps resulted in
additional charges of $1.8 million to interest expense, compared to benefits of $20.5 million
recognized as a reduction to interest expense for the same period in 2005, as the rates paid
by the Corporation under the variable portion of the swaps exceeded the rates received by the
Corporation under the fixed portion of the swap. |
|
|
|
|
The increase in tax equivalent net interest income for 2005, compared to 2004, was mainly
driven by higher average balance of loans receivable, particularly residential real estate
loans, coupled with an increase in the Corporations net margin, offset in part by a decrease
in net interest realized on interest rate swaps. |
|
|
|
|
For the quarter ended June 30, 2006, the Corporation provided $9.4 million for loan and
lease losses, compared to $11.1 million and $13.2 million for quarters ended June 30, 2005
and 2004, respectively. The decrease for the second quarter of 2006 principally reflects a
reduction in the Corporations commercial loans due to the payment of $2.4 billion received
from a local financial institution substantially reducing the amount of secured commercial
loans outstanding, offset in part by increasing trends in non-performing loans experienced
during 2006. The decrease in the provision for loan and lease losses during 2005 was due
in part to the stability experienced in non-performing loans coupled with the seasoning of
the corporate commercial loans portfolio and a decrease in net charge-offs. |
|
|
|
|
Non-interest income for the second quarter of 2006 was $1.8 million, compared to $13.4
million and $12.1 million for the same periods in 2005 and 2004, respectively. The
decrease in non-interest income for the second quarter of 2006, compared to 2005, was
mainly attributable to a loss of $11.6 million recorded on the partial extinguishment of a
secured commercial loan to a local financial institution offset in part by higher net gains
on investments. The increase during 2005 compared to 2004 was principally due to |
61
|
|
|
increases in mortgage banking activities income associated with a higher volume of sales, and
higher insurance income partially offset by a decrease in other commissions and fees income. |
|
|
|
|
Non-interest expenses for the second quarter of 2006 amounted to $71.0 million, compared
to $56.1 million and $45.6 million, for the same period in 2005 and 2004, respectively.
The increase in non-interest expenses for 2006 compared to 2005 was mainly due to increases
in professional fees associated with the internal review conducted by the Corporations
Audit Committee, the restatement process and other related legal and regulatory matters as
well as increases in employees compensation and benefits and occupancy and equipment
expenses. The increase in non-interest expenses for the second quarter of 2005 compared to
2004 mainly reflects increases in employees compensation and benefits, occupancy and
equipment, professional fees, and servicing and processing fees. |
|
|
|
|
For the quarter ended June 30, 2006, the Corporation reported an income tax expense of
$15.8 million, compared to an income tax expense of $41.9 million and an income tax benefit
of $23.5 million for the quarters ended June 30, 2005 and 2004, respectively. The decrease
in provision for income taxes for the second quarter of 2006, as compared to the second
quarter of 2005, was mainly due to an increase in deferred tax benefits mainly as a result
of variances in the valuation of derivative instruments. The income tax expense for 2005
compared to a tax benefit recorded in 2004 was mainly due to increases in deferred tax
expenses associated with unrealized gains on derivative instruments. |
|
|
|
|
Total assets at June 30, 2006 amounted to $20.2 billion, an increase of $0.3 billion,
$1.4 billion and $5.7 billion as compared to total assets as of December 31, 2005, June 30,
2005 and 2004, respectively. The increase at June 30 2006 compared to balances at December
31, 2005 and June 30, 2005 was mainly the result of increases in money market instruments
partially offset by decreases in the Corporations loans and investments portfolio. The
decrease in the Corporations loans portfolio was due to the payment received on a secured
commercial loan extended to a local financial institution. A portion of such proceeds was
used to fund temporarily the increase in short-term investment, mainly money market
instruments. The decrease in investment securities was due to the Corporations decision
to deleverage its balance sheet by not reinvesting maturities and prepayments received from
the Corporations investment portfolio, mainly mortgage-backed securities. The deleverage
of the investment portfolio was influenced, among other things, by the flat-to-inverted
yield curve. Also, the Corporation decided to use proceeds from the payment received on
secured commercial loans to repay, during the second half of 2006, higher rate maturing
liabilities, in particular brokered CDs, rather than investing the proceeds at an interest
yield lower than the Corporations cost of funds. The increase
at June 30, 2005, compared
to balances at June 30, 2004, was mainly due to increases in the Corporations loan
portfolio, in particular residential real estate, commercial, construction and consumer
loans. |
|
|
|
|
Total liabilities at June 30, 2006 were $19.0 billion, an increase of $0.3 billion, $1.5
billion, and $5.6 billion as compared to balances as of December 31, 2005, June 30, 2005,
and 2004, respectively. The increase in total liabilities was mainly due to increases in
interest bearing deposits, mainly brokered CDs, partially offset by decreases in FHLB
advances and federal funds purchased and securities sold under agreements to repurchase.
During 2005, the Corporation experienced a significant increase in brokered CDs as
short-term brokered CDs were issued to fund the Corporations growth and to replace
advances from the Federal Home Loan Bank. |
|
|
|
|
Total loan production for the quarter ended June 30, 2006 was $1.3 billion, compared to
$1.7 billion and $1.1 billion, for the second quarter of 2005 and 2004, respectively. The
decrease in loan production for 2006 compared to 2005 was mainly due to decreases in
residential real estate, commercial, construction, and consumer loan originations, mainly
due to higher prevailing interest rates, deteriorating economic conditions and stricter
underwriting standards. |
62
Critical Accounting Policies and Practices
The accounting principles of the Corporation and the methods of applying these principles
conform with generally accepted accounting principles in the United States and to general practices
within the banking industry. The Corporations critical accounting policies relate to the 1)
allowance for loan and lease losses; 2) other-than-temporary impairments; 3) income taxes; 4)
classification and related values of investment securities; 5) valuation of financial instruments;
and 6) derivative financial instruments. These critical accounting policies involve judgments,
estimates and assumptions made by management that affect the recorded assets and liabilities and
contingent assets and liabilities disclosed at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from estimates, if different assumptions or conditions prevail. Certain determinations inherently
have greater reliance on the use of estimates, assumptions, and judgments and, as such, have a
greater possibility of producing results that could be materially different than originally
reported.
The Corporations critical accounting policies are described in the Management Discussion and
Analysis of Financial Condition and Results of Operations section of First BanCorps 2005 Annual
Report on Form 10-K.
Recently Adopted Accounting Pronouncement
Effective April 3, 2006, the Corporation adopted the long-haul method of effectiveness testing
under SFAS No. 133, for substantially all of the interest rate swaps that hedge its brokered CDs
and medium-term notes (collectively, the hedged liabilities). The long-haul method requires
periodic assessment of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness
results to the extent that changes in the fair value of derivatives do not offset changes in the
fair values of the debt due to changes in the hedged risk.
For interest rate swaps accounted for as fair value hedges using the long-haul method,
ineffectiveness is the difference between the changes in the fair value of the interest rate swap
and changes in the fair value of the debt attributable to the risk being hedged (the ineffective
portion). Changes in the value of the Corporations brokered CDs and medium-term notes should
substantially offset the changes in the value of the interest rate swaps. After adoption of hedge
accounting, the ineffective portion is recorded as part of interest expense.
First BanCorps implementation of the long-haul method resulted from its previously reported
determination that it should not have used the short-cut method to account for interest rate swaps
related to brokered CDs and medium-term notes because of technical issues involving the
interpretation of the use of the method (refer to First Bancorp audited Consolidated Financial
Statements, included in the Corporations 2004 Annual Report on Form 10-K/A for additional
information). Accordingly, First BanCorp has reflected changes in the fair value of those swaps
as well as swaps related to certain loans as non-hedging instruments through operations as part of
net interest income.
With the implementation of the long-haul method with respect to the brokered CDs and
medium-term notes on April 3, 2006, the basis differential between the market value of the interest
rate swap and the book value of the hedged liabilities at the inception of fair value hedge
accounting, of approximately $200.0 million, amortizes or accretes as a yield adjustment over the
remaining term of the hedged liabilities.
Effective January 1, 2007, the Corporation elected to early adopt SFAS 157, Fair Value
Measurements and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities.
Following the initial fair value measurement date, ongoing realized gains and losses on items for
which fair value reporting has been elected are reported in earnings at each subsequent financial
reporting date.
63
The Corporation decided to early adopt SFAS 159 for the callable brokered CDs and a portion of
the callable fixed medium-term notes that were hedged with interest rate swaps. First BanCorp had
been following the long-haul method of accounting, which was adopted on April 3, 2006, under SFAS
133 for the portfolio of callable interest rate swaps, callable brokered CDs and callable notes.
One of the main considerations in determining to early adopt SFAS 159 for these instruments was to
eliminate the operational procedures required by the long-haul method of accounting in terms of
documentation, effectiveness assessment, and manual procedures followed by the Corporation to
fulfill the requirements specified by SFAS 133.
With the Corporations elimination of the use of the long-haul method in connection with the
adoption of SFAS 159 as of January 1, 2007, the Corporation will no longer amortize or accrete the
basis adjustment. The basis adjustment amortization or accretion is the reversal of the change in
value of the brokered CDs and medium term notes recognized since the implementation of the
long-haul method. Since the time the Corporation implemented the long-haul method, it has
recognized the basis adjustment and the changes in the value of the brokered CDs and medium term
notes based on the expected call date of the instruments. The adoption of SFAS 159 also requires
the recognition, as part of the adoption adjustment, of all of the unamortized placement fees that
were paid to broker counterparties upon the issuance of the brokered CDs and medium term notes. The
Corporation previously amortized those fees through earnings based on the expected call date of the
instruments.
For additional information and further details on the adoption of SFAS 157 and SFAS 159 as
well as other recently adopted accounting pronouncements, refer to Note 2 of the accompanying
unaudited interim consolidated financial statements.
Net Interest Income
Net interest income is the excess of interest earned by First BanCorp on its interest-earning
assets over the interest incurred on its interest-bearing liabilities. First BanCorps net
interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the
Corporations assets and liabilities. Net interest income for the quarter and six-month period
ended June 30, 2006 was $126.2 million and $199.1 million, respectively, compared to $193.1 million
and $258.3 million, respectively, for the comparable periods in 2005 and $5.0 million and $133.8
million, respectively, for the comparable periods in 2004. On a tax equivalent basis, excluding
the changes in the fair values of derivative instruments, the ineffective portion resulting from
fair value hedge accounting as well as the basis adjustment amortization or accretion, net interest
income for the quarters ended June 30, 2006, 2005, and 2004 was $136.2 million, $147.4 million, and
$104.2 million, respectively. On a tax equivalent basis, excluding the changes in the fair values
of derivative instruments, the ineffective portion resulting from fair value hedge accounting as
well as the basis adjustment amortization or accretion, net interest income for the six-month
periods ended June 30, 2006, 2005, and 2004 was $284.6 million, $269.2 million, and $200.6 million,
respectively.
Part I of the following table presents average volumes and rates on a tax equivalent basis and
Part II describes the respective extent to which changes in interest rates and changes in volume of
interest-related assets and liabilities have affected the Corporations interest income and
interest expense during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to (i) changes in
volume (changes in volume multiplied by prior period rates), (ii) changes in rate (changes in rate
multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by the
changes in volume) have been allocated to the changes in volume and changes in rate based upon
their respective percentage of the combined totals.
For periods after the adoption of fair value hedge accounting, the net interest income is
computed on a tax equivalent basis by excluding: (1) the change in the value of derivatives for
undesignated hedges, (2) the ineffective portion of designated hedges and (3) the basis adjustment
amortization or accretion. For periods prior to the
64
adoption of hedge accounting, the net interest income is computed on a tax equivalent basis by
excluding the impact of the change in the fair value of derivatives (refer to explanation below
regarding changes in the fair value of derivative instruments).
65
Part I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest Income (1) / expense |
|
|
Average rate (1) |
|
Quarter ended June 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
(Dollars in thousands) |
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
investments |
|
$ |
2,081,151 |
|
|
$ |
313,687 |
|
|
$ |
230,994 |
|
|
$ |
24,904 |
|
|
$ |
2,150 |
|
|
$ |
546 |
|
|
|
4.80 |
% |
|
|
2.75 |
% |
|
|
0.95 |
% |
Government
obligations (2) |
|
|
2,944,943 |
|
|
|
2,779,164 |
|
|
|
2,360,074 |
|
|
|
44,347 |
|
|
|
46,755 |
|
|
|
38,299 |
|
|
|
6.04 |
% |
|
|
6.75 |
% |
|
|
6.53 |
% |
Mortgage-backed
securities |
|
|
2,559,381 |
|
|
|
2,824,817 |
|
|
|
2,721,296 |
|
|
|
31,805 |
|
|
|
39,704 |
|
|
|
26,993 |
|
|
|
4.98 |
% |
|
|
5.64 |
% |
|
|
3.99 |
% |
Corporate bonds |
|
|
26,140 |
|
|
|
66,299 |
|
|
|
63,696 |
|
|
|
424 |
|
|
|
921 |
|
|
|
(77 |
) |
|
|
6.50 |
% |
|
|
5.57 |
% |
|
|
-0.49 |
% |
FHLB stock |
|
|
24,160 |
|
|
|
73,187 |
|
|
|
58,419 |
|
|
|
479 |
|
|
|
882 |
|
|
|
174 |
|
|
|
7.95 |
% |
|
|
4.83 |
% |
|
|
1.20 |
% |
Equity securities |
|
|
29,526 |
|
|
|
50,810 |
|
|
|
41,691 |
|
|
|
|
|
|
|
262 |
|
|
|
89 |
|
|
|
0.00 |
% |
|
|
2.07 |
% |
|
|
0.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments (3) |
|
|
7,665,301 |
|
|
|
6,107,964 |
|
|
|
5,476,170 |
|
|
|
101,959 |
|
|
|
90,674 |
|
|
|
66,024 |
|
|
|
5.34 |
% |
|
|
5.95 |
% |
|
|
4.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real
estate loans |
|
|
2,583,195 |
|
|
|
1,749,152 |
|
|
|
1,055,414 |
|
|
|
41,836 |
|
|
|
29,838 |
|
|
|
18,556 |
|
|
|
6.50 |
% |
|
|
6.84 |
% |
|
|
7.07 |
% |
Construction loans |
|
|
1,495,293 |
|
|
|
554,909 |
|
|
|
377,861 |
|
|
|
32,094 |
|
|
|
9,693 |
|
|
|
4,550 |
|
|
|
8.61 |
% |
|
|
7.01 |
% |
|
|
4.84 |
% |
Commercial loans |
|
|
6,194,798 |
|
|
|
7,386,546 |
|
|
|
4,809,051 |
|
|
|
109,287 |
|
|
|
96,937 |
|
|
|
40,521 |
|
|
|
7.08 |
% |
|
|
5.26 |
% |
|
|
3.39 |
% |
Finance leases |
|
|
314,023 |
|
|
|
235,843 |
|
|
|
178,542 |
|
|
|
7,010 |
|
|
|
5,500 |
|
|
|
4,282 |
|
|
|
8.92 |
% |
|
|
9.35 |
% |
|
|
9.65 |
% |
Consumer loans |
|
|
1,783,936 |
|
|
|
1,523,145 |
|
|
|
1,209,237 |
|
|
|
53,353 |
|
|
|
46,557 |
|
|
|
38,564 |
|
|
|
12.00 |
% |
|
|
12.26 |
% |
|
|
12.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4)(5) |
|
|
12,371,245 |
|
|
|
11,449,595 |
|
|
|
7,630,105 |
|
|
|
243,580 |
|
|
|
188,525 |
|
|
|
106,473 |
|
|
|
7.90 |
% |
|
|
6.60 |
% |
|
|
5.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning
assets |
|
$ |
20,036,546 |
|
|
$ |
17,557,559 |
|
|
$ |
13,106,275 |
|
|
$ |
345,539 |
|
|
$ |
279,199 |
|
|
$ |
172,497 |
|
|
|
6.92 |
% |
|
|
6.38 |
% |
|
|
5.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits |
|
$ |
13,054,199 |
|
|
$ |
9,446,007 |
|
|
$ |
6,256,126 |
|
|
$ |
148,557 |
|
|
$ |
70,532 |
|
|
$ |
27,850 |
|
|
|
4.55 |
% |
|
|
2.99 |
% |
|
|
1.79 |
% |
Other borrowed funds |
|
|
4,761,624 |
|
|
|
5,123,546 |
|
|
|
4,299,408 |
|
|
|
57,946 |
|
|
|
50,355 |
|
|
|
34,639 |
|
|
|
4.88 |
% |
|
|
3.94 |
% |
|
|
3.24 |
% |
FHLB advances |
|
|
230,426 |
|
|
|
1,211,922 |
|
|
|
974,599 |
|
|
|
2,867 |
|
|
|
10,865 |
|
|
|
5,817 |
|
|
|
4.99 |
% |
|
|
3.60 |
% |
|
|
2.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
18,046,249 |
|
|
$ |
15,781,475 |
|
|
$ |
11,530,133 |
|
|
$ |
209,370 |
|
|
$ |
131,752 |
|
|
$ |
68,306 |
|
|
|
4.64 |
% |
|
|
3.35 |
% |
|
|
2.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
136,169 |
|
|
$ |
147,447 |
|
|
$ |
104,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.28 |
% |
|
|
3.03 |
% |
|
|
2.91 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.73 |
% |
|
|
3.37 |
% |
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest Income (1) / expense |
|
|
Average rate (1) |
|
Six months period ended June 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
1,523,506 |
|
|
$ |
314,273 |
|
|
$ |
277,421 |
|
|
$ |
34,879 |
|
|
$ |
4,017 |
|
|
$ |
1,263 |
|
|
|
4.62 |
% |
|
|
2.58 |
% |
|
|
0.92 |
% |
Government obligations (2) |
|
|
2,849,157 |
|
|
|
2,370,505 |
|
|
|
1,771,247 |
|
|
|
87,016 |
|
|
|
80,708 |
|
|
|
53,101 |
|
|
|
6.16 |
% |
|
|
6.87 |
% |
|
|
6.03 |
% |
Mortgage-backed securities |
|
|
2,603,591 |
|
|
|
2,626,960 |
|
|
|
2,836,295 |
|
|
|
68,237 |
|
|
|
75,071 |
|
|
|
69,583 |
|
|
|
5.28 |
% |
|
|
5.76 |
% |
|
|
4.93 |
% |
Corporate bonds |
|
|
26,278 |
|
|
|
53,844 |
|
|
|
70,476 |
|
|
|
858 |
|
|
|
1,172 |
|
|
|
(82 |
) |
|
|
6.58 |
% |
|
|
4.39 |
% |
|
|
-0.23 |
% |
FHLB stock |
|
|
29,537 |
|
|
|
73,902 |
|
|
|
50,982 |
|
|
|
1,261 |
|
|
|
1,367 |
|
|
|
330 |
|
|
|
8.61 |
% |
|
|
3.73 |
% |
|
|
1.30 |
% |
Equity securities |
|
|
30,424 |
|
|
|
42,544 |
|
|
|
44,829 |
|
|
|
213 |
|
|
|
477 |
|
|
|
240 |
|
|
|
1.41 |
% |
|
|
2.26 |
% |
|
|
1.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (3) |
|
|
7,062,493 |
|
|
|
5,482,028 |
|
|
|
5,051,250 |
|
|
|
192,464 |
|
|
|
162,812 |
|
|
|
124,435 |
|
|
|
5.50 |
% |
|
|
5.99 |
% |
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
2,504,730 |
|
|
|
1,553,226 |
|
|
|
1,038,539 |
|
|
|
82,137 |
|
|
|
52,961 |
|
|
|
37,387 |
|
|
|
6.61 |
% |
|
|
6.88 |
% |
|
|
7.24 |
% |
Construction loans |
|
|
1,397,757 |
|
|
|
489,865 |
|
|
|
360,544 |
|
|
|
58,903 |
|
|
|
16,177 |
|
|
|
8,621 |
|
|
|
8.50 |
% |
|
|
6.66 |
% |
|
|
4.81 |
% |
Commercial loans |
|
|
6,664,728 |
|
|
|
7,013,498 |
|
|
|
4,644,162 |
|
|
|
225,673 |
|
|
|
171,732 |
|
|
|
80,204 |
|
|
|
6.83 |
% |
|
|
4.94 |
% |
|
|
3.47 |
% |
Finance leases |
|
|
303,217 |
|
|
|
228,392 |
|
|
|
172,410 |
|
|
|
13,722 |
|
|
|
10,352 |
|
|
|
8,372 |
|
|
|
9.13 |
% |
|
|
9.14 |
% |
|
|
9.76 |
% |
Consumer loans |
|
|
1,774,802 |
|
|
|
1,464,959 |
|
|
|
1,192,505 |
|
|
|
106,202 |
|
|
|
89,268 |
|
|
|
76,684 |
|
|
|
12.07 |
% |
|
|
12.29 |
% |
|
|
12.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4)(5) |
|
|
12,645,234 |
|
|
|
10,749,940 |
|
|
|
7,408,160 |
|
|
|
486,637 |
|
|
|
340,490 |
|
|
|
211,268 |
|
|
|
7.76 |
% |
|
|
6.39 |
% |
|
|
5.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
$ |
19,707,727 |
|
|
$ |
16,231,968 |
|
|
$ |
12,459,410 |
|
|
$ |
679,101 |
|
|
$ |
503,302 |
|
|
$ |
335,703 |
|
|
|
6.95 |
% |
|
|
6.25 |
% |
|
|
5.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
12,422,245 |
|
|
$ |
8,480,679 |
|
|
$ |
6,166,119 |
|
|
$ |
269,758 |
|
|
$ |
120,784 |
|
|
$ |
59,193 |
|
|
|
4.38 |
% |
|
|
2.87 |
% |
|
|
1.93 |
% |
Other borrowed funds |
|
|
4,997,313 |
|
|
|
4,650,712 |
|
|
|
3,858,316 |
|
|
|
117,733 |
|
|
|
91,026 |
|
|
|
64,750 |
|
|
|
4.75 |
% |
|
|
3.95 |
% |
|
|
3.37 |
% |
FHLB advances |
|
|
301,427 |
|
|
|
1,339,674 |
|
|
|
886,242 |
|
|
|
7,045 |
|
|
|
22,290 |
|
|
|
11,117 |
|
|
|
4.71 |
% |
|
|
3.36 |
% |
|
|
2.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities |
|
$ |
17,720,985 |
|
|
$ |
14,471,065 |
|
|
$ |
10,910,677 |
|
|
$ |
394,536 |
|
|
$ |
234,100 |
|
|
$ |
135,060 |
|
|
|
4.49 |
% |
|
|
3.26 |
% |
|
|
2.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
284,565 |
|
|
$ |
269,202 |
|
|
$ |
200,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.46 |
% |
|
|
2.99 |
% |
|
|
2.93 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.91 |
% |
|
|
3.34 |
% |
|
|
3.24 |
% |
|
|
|
(1) |
|
On a tax equivalent basis. The tax equivalent yield was estimated by dividing the interest
rate spread on exempt assets by (1- PR statutory tax rate (43.5% for the Corporations PR
banking subsidiary in 2006, 41.5% for all other subsidiaries in 2006, and 39% for all
subsidiaries in 2005 and 2004)) and adding to it the cost of interest-bearing liabilities.
When adjusted to a tax equivalent basis, yields on taxable and exempt assets are comparable.
Changes in the fair value of derivative instruments (including the ineffective portion of the
instruments after the adoption of hedge accounting in the second quarter of 2006) and basis
adjustment amortization or accretion are excluded from interest income and interest expense
for average rate calculation purposes because the changes in valuation do not affect interest
paid or received. |
|
(2) |
|
Government obligations include debt issued by government sponsored agencies. |
|
(3) |
|
Unrealized holding gains or losses in investments available for sale are excluded from
average volumes. |
|
(4) |
|
Average loan balances include the average of non-accruing loans, of which interest income is
recognized when collected. |
|
(5) |
|
Interest income on loans includes $3.4 million, $2.5 million, and $2.1 million for the second
quarter of 2006, 2005, and 2004, respectively, and $7.0 million,
$5.0 million, and $5.9
million for the six month period ended June 30, 2006, 2005 and 2004, respectively, of income
from prepayment penalties and late fees related to the Corporations loans portfolio. |
66
PART II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended on June 30, |
|
|
|
2006 compared to 2005 (As Restated) |
|
|
2005 compared to 2004 (As Restated) |
|
|
|
Increase (decrease) |
|
|
Increase (decrease) |
|
|
|
Due to: |
|
|
Due to: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(In thousands) |
|
Interest income on earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
20,094 |
|
|
$ |
2,660 |
|
|
$ |
22,754 |
|
|
$ |
256 |
|
|
$ |
1,348 |
|
|
$ |
1,604 |
|
Government obligations |
|
|
2,654 |
|
|
|
(5,062 |
) |
|
|
(2,408 |
) |
|
|
7,102 |
|
|
|
1,354 |
|
|
|
8,456 |
|
Mortgage-backed securities |
|
|
(3,537 |
) |
|
|
(4,362 |
) |
|
|
(7,899 |
) |
|
|
1,071 |
|
|
|
11,640 |
|
|
|
12,711 |
|
Corporate bonds |
|
|
(606 |
) |
|
|
109 |
|
|
|
(497 |
) |
|
|
16 |
|
|
|
982 |
|
|
|
998 |
|
FHLB stock |
|
|
(784 |
) |
|
|
381 |
|
|
|
(403 |
) |
|
|
54 |
|
|
|
654 |
|
|
|
708 |
|
Equity Securities |
|
|
(77 |
) |
|
|
(185 |
) |
|
|
(262 |
) |
|
|
24 |
|
|
|
149 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
17,744 |
|
|
|
(6,459 |
) |
|
|
11,285 |
|
|
|
8,523 |
|
|
|
16,127 |
|
|
|
24,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
13,890 |
|
|
|
(1,892 |
) |
|
|
11,998 |
|
|
|
12,076 |
|
|
|
(794 |
) |
|
|
11,282 |
|
Construction loans |
|
|
19,737 |
|
|
|
2,664 |
|
|
|
22,401 |
|
|
|
2,632 |
|
|
|
2,511 |
|
|
|
5,143 |
|
Commercial loans |
|
|
(18,400 |
) |
|
|
30,750 |
|
|
|
12,350 |
|
|
|
27,761 |
|
|
|
28,655 |
|
|
|
56,416 |
|
Finance leases |
|
|
1,787 |
|
|
|
(277 |
) |
|
|
1,510 |
|
|
|
1,365 |
|
|
|
(147 |
) |
|
|
1,218 |
|
Consumer loans |
|
|
7,898 |
|
|
|
(1,102 |
) |
|
|
6,796 |
|
|
|
9,885 |
|
|
|
(1,892 |
) |
|
|
7,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
24,912 |
|
|
|
30,143 |
|
|
|
55,055 |
|
|
|
53,719 |
|
|
|
28,333 |
|
|
|
82,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
42,656 |
|
|
|
23,684 |
|
|
|
66,340 |
|
|
|
62,242 |
|
|
|
44,460 |
|
|
|
106,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
32,895 |
|
|
|
45,130 |
|
|
|
78,025 |
|
|
|
18,403 |
|
|
|
24,279 |
|
|
|
42,682 |
|
Other borrowed funds |
|
|
(4,002 |
) |
|
|
11,593 |
|
|
|
7,591 |
|
|
|
7,380 |
|
|
|
8,336 |
|
|
|
15,716 |
|
FHLB advances |
|
|
(10,524 |
) |
|
|
2,526 |
|
|
|
(7,998 |
) |
|
|
1,657 |
|
|
|
3,391 |
|
|
|
5,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
18,369 |
|
|
|
59,249 |
|
|
|
77,618 |
|
|
|
27,440 |
|
|
|
36,006 |
|
|
|
63,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
24,287 |
|
|
$ |
(35,565 |
) |
|
$ |
(11,278 |
) |
|
$ |
34,802 |
|
|
$ |
8,454 |
|
|
$ |
43,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six month Period Ended on June 30, |
|
|
|
2006 compared to 2005 |
|
|
2005 compared to 2004 (As Restated) |
|
|
|
Increase (decrease) |
|
|
Increase (decrease) |
|
|
|
Due to: |
|
|
Due to: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(In thousands) |
|
Interest income on earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
25,599 |
|
|
$ |
5,263 |
|
|
$ |
30,862 |
|
|
$ |
188 |
|
|
$ |
2,566 |
|
|
$ |
2,754 |
|
Government obligations |
|
|
15,583 |
|
|
|
(9,275 |
) |
|
|
6,308 |
|
|
|
19,574 |
|
|
|
8,033 |
|
|
|
27,607 |
|
Mortgage-backed securities |
|
|
(662 |
) |
|
|
(6,172 |
) |
|
|
(6,834 |
) |
|
|
(5,718 |
) |
|
|
11,206 |
|
|
|
5,488 |
|
Corporate bonds |
|
|
(754 |
) |
|
|
440 |
|
|
|
(314 |
) |
|
|
14 |
|
|
|
1,240 |
|
|
|
1,254 |
|
FHLB stock |
|
|
(1,368 |
) |
|
|
1,262 |
|
|
|
(106 |
) |
|
|
201 |
|
|
|
836 |
|
|
|
1,037 |
|
Equity Securities |
|
|
(114 |
) |
|
|
(150 |
) |
|
|
(264 |
) |
|
|
(20 |
) |
|
|
257 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
38,284 |
|
|
|
(8,632 |
) |
|
|
29,652 |
|
|
|
14,239 |
|
|
|
24,138 |
|
|
|
38,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
31,966 |
|
|
|
(2,790 |
) |
|
|
29,176 |
|
|
|
18,046 |
|
|
|
(2,472 |
) |
|
|
15,574 |
|
Construction loans |
|
|
37,187 |
|
|
|
5,539 |
|
|
|
42,726 |
|
|
|
3,644 |
|
|
|
3,912 |
|
|
|
7,556 |
|
Commercial loans |
|
|
(10,481 |
) |
|
|
64,422 |
|
|
|
53,941 |
|
|
|
50,104 |
|
|
|
41,424 |
|
|
|
91,528 |
|
Finance leases |
|
|
3,404 |
|
|
|
(34 |
) |
|
|
3,370 |
|
|
|
2,625 |
|
|
|
(645 |
) |
|
|
1,980 |
|
Consumer loans |
|
|
18,796 |
|
|
|
(1,862 |
) |
|
|
16,934 |
|
|
|
17,019 |
|
|
|
(4,435 |
) |
|
|
12,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
80,872 |
|
|
|
65,275 |
|
|
|
146,147 |
|
|
|
91,438 |
|
|
|
37,784 |
|
|
|
129,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
119,156 |
|
|
|
56,643 |
|
|
|
175,799 |
|
|
|
105,677 |
|
|
|
61,922 |
|
|
|
167,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
69,973 |
|
|
|
79,001 |
|
|
|
148,974 |
|
|
|
26,786 |
|
|
|
34,805 |
|
|
|
61,591 |
|
Other borrowed funds |
|
|
7,154 |
|
|
|
19,553 |
|
|
|
26,707 |
|
|
|
14,395 |
|
|
|
11,881 |
|
|
|
26,276 |
|
FHLB advances |
|
|
(20,879 |
) |
|
|
5,634 |
|
|
|
(15,245 |
) |
|
|
6,791 |
|
|
|
4,382 |
|
|
|
11,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
56,248 |
|
|
|
104,188 |
|
|
|
160,436 |
|
|
|
47,972 |
|
|
|
51,068 |
|
|
|
99,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
62,908 |
|
|
$ |
(47,545 |
) |
|
$ |
15,363 |
|
|
$ |
57,705 |
|
|
$ |
10,854 |
|
|
$ |
68,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
A portion of the Corporations interest-earning assets, mostly investments in
obligations of some U.S. Government agencies and sponsored entities, generate interest which is
exempt from income tax, principally in Puerto Rico. Also, interest and gains on sale of
investments held by the Corporations international banking entities are tax-exempt under Puerto
Rico tax law. To facilitate the comparison of all interest data related to these assets, the
interest income has been converted to a taxable equivalent basis. The tax equivalent yield was
estimated by dividing the interest rate spread on exempt assets by (1 less the Puerto Rico
statutory tax rate (43.5% for the Corporations Puerto Rico banking subsidiary in 2006, 41.5% for
all other subsidiaries in 2006, and 39% for all subsidiaries in 2005 and 2004)) 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 exclusion of changes in the fair value on derivative instruments, including the
ineffective portion for designated hedges after adoption of hedge accounting, and the basis
adjustment amortization or accretion from the detailed analysis of net interest income provides
additional information about the Corporations net interest income and facilitates comparability
and analysis. The changes in the fair value of the financial instruments have no effect on
interest due or interest earned on interest-bearing liabilities or interest-earning assets,
respectively, or on interest payments exchanged with swap counterparties.
The following table reconciles interest income on a tax equivalent basis set forth in Part I
above to interest income set forth in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six month period ended June 30, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
(As Restated) |
|
Interest income on interest-earning assets on a tax equivalent basis |
|
$ |
345,539 |
|
|
$ |
279,199 |
|
|
$ |
172,497 |
|
|
$ |
679,101 |
|
|
$ |
503,302 |
|
|
$ |
335,703 |
|
Less: tax equivalent adjustments |
|
|
(6,554 |
) |
|
|
(17,821 |
) |
|
|
(14,351 |
) |
|
|
(17,394 |
) |
|
|
(32,063 |
) |
|
|
(26,573 |
) |
Plus: net unrealized gains (losses) on derivatives |
|
|
5,458 |
|
|
|
(12,221 |
) |
|
|
2,456 |
|
|
|
10,441 |
|
|
|
(9,705 |
) |
|
|
2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
344,443 |
|
|
$ |
249,157 |
|
|
$ |
160,602 |
|
|
$ |
672,148 |
|
|
$ |
461,534 |
|
|
$ |
311,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the changes in fair values of interest
rate swaps and interest rate caps agreements, which are included in interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six month period ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Unrealized gains (losses) on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
$ |
4,299 |
|
|
$ |
(10,147 |
) |
|
$ |
|
|
|
$ |
7,619 |
|
|
$ |
(8,612 |
) |
|
$ |
|
|
Interest rate swaps on corporate bonds |
|
|
1 |
|
|
|
125 |
|
|
|
1,740 |
|
|
|
31 |
|
|
|
593 |
|
|
|
1,867 |
|
Interest rate swaps on loans |
|
|
1,158 |
|
|
|
(2,199 |
) |
|
|
716 |
|
|
|
2,791 |
|
|
|
(1,686 |
) |
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on derivatives |
|
$ |
5,458 |
|
|
$ |
(12,221 |
) |
|
$ |
2,456 |
|
|
$ |
10,441 |
|
|
$ |
(9,705 |
) |
|
$ |
2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
The following table summarizes the components of interest expense for the quarters and
six-month periods ended June 30, 2006, 2005 and 2004. As previously stated, the net interest
margin analysis excludes the changes in the fair value of interest rate swaps, the ineffective
portion of instruments designated as hedges, and the basis adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six month period ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Interest expense on interest-bearing liabilities |
|
$ |
202,808 |
|
|
$ |
149,456 |
|
|
$ |
98,333 |
|
|
$ |
387,524 |
|
|
$ |
272,785 |
|
|
$ |
190,599 |
|
Net interest incurred (realized) on interest rate swaps |
|
|
1,799 |
|
|
|
(20,506 |
) |
|
|
(31,724 |
) |
|
|
(1,707 |
) |
|
|
(45,144 |
) |
|
|
(62,029 |
) |
Amortization of placement fees on brokered CDs |
|
|
4,756 |
|
|
|
2,796 |
|
|
|
1,696 |
|
|
|
8,705 |
|
|
|
6,447 |
|
|
|
6,490 |
|
Amortization of placement fees on medium-term notes |
|
|
7 |
|
|
|
6 |
|
|
|
|
|
|
|
14 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense excluding unrealized losses (gains)
on derivatives
(designated and economic undesignated hedges)
and amortization of basis adjustments on fair value hedges |
|
|
209,370 |
|
|
|
131,752 |
|
|
|
68,306 |
|
|
|
394,536 |
|
|
|
234,100 |
|
|
|
135,060 |
|
Net unrealized losses (gains) on derivatives (designated and
economic undesignated hedges) |
|
|
7,531 |
|
|
|
(75,666 |
) |
|
|
87,312 |
|
|
|
77,251 |
|
|
|
(30,913 |
) |
|
|
42,589 |
|
Amortization of basis adjustment on fair value hedges |
|
|
1,304 |
|
|
|
|
|
|
|
|
|
|
|
1,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
218,205 |
|
|
$ |
56,086 |
|
|
$ |
155,618 |
|
|
$ |
473,091 |
|
|
$ |
203,187 |
|
|
$ |
177,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the unrealized loss (gain) on
derivatives (designated and economic undesignated hedges), which is included in interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six month period ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Unrealized gains on derivatives (designated hedges ineffective portion): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
$ |
(2,187 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,187 |
) |
|
$ |
|
|
|
$ |
|
|
Interest rate swaps on medium-term notes |
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on derivatives (designated hedges ineffective portion) |
|
|
(1,974 |
) |
|
|
|
|
|
|
|
|
|
|
(1,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses (gains) on derivatives (economic undesignated hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
|
9,505 |
|
|
|
(72,826 |
) |
|
|
88,097 |
|
|
|
75,142 |
|
|
|
(29,096 |
) |
|
|
43,374 |
|
Interest rate swaps on medium-term notes |
|
|
|
|
|
|
(2,840 |
) |
|
|
(785 |
) |
|
|
4,083 |
|
|
|
(1,817 |
) |
|
|
(785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses (gains) on derivatives |
|
|
9,505 |
|
|
|
(75,666 |
) |
|
|
87,312 |
|
|
|
79,225 |
|
|
|
(30,913 |
) |
|
|
42,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses (gains) on derivatives (designated and economic
undesignated hedges) |
|
$ |
7,531 |
|
|
$ |
(75,666 |
) |
|
$ |
87,312 |
|
|
$ |
77,251 |
|
|
$ |
(30,913 |
) |
|
$ |
42,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the amortization of basis adjustment,
which is included in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six month period ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Amortization of basis adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
$ |
1,279 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,279 |
|
|
$ |
|
|
|
$ |
|
|
Interest rate swaps on medium-term notes |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of basis adjustment |
|
$ |
1,304 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,304 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on interest-earning assets primarily represents interest earned on loan
receivables and investment securities.
Interest
expense on interest-bearing liabilities primarily represents interest
paid on
brokered CDs, branch-based deposits, repurchase agreements and notes payable.
Net interest incurred or realized on interest rate swaps primarily represents net interest
exchanged on swaps that hedge brokered CDs and medium-term notes.
The amortization of broker placement fees represents the amortization of fees paid to brokers
upon issuance of related financial instruments (i.e., brokered CDs).
69
Unrealized gains or losses on derivatives represent: (1) for economic or undesignated hedges
- changes in the fair value of interest rate swaps that economically hedge liabilities (i.e.,
brokered CDs and medium-term notes) or assets (i.e., loans and corporate bonds), and (2) for
designated hedges the ineffectiveness represented by the difference between the changes in the
fair value of the derivative instrument (i.e., interest rate swap) and changes in fair value of the
hedged item (i.e., brokered CDs and medium-term notes).
The basis adjustment on fair value hedges represents the amortization or accretion of the
basis differential between the market value and the book value of the hedged liabilities
recognized at the inception of fair value hedge accounting that amortizes or accretes to interest
expense based on the expected maturity of the hedged liabilities as changes in value since the
inception of the long-haul method are recorded to these hedged items.
As shown on the tables above, the results of operations for the second quarter and first
halves of 2006, 2005 and 2004 were significantly impacted by changes in the valuation of interest
rate swaps that hedge economically or under fair value designation the Corporations brokered CDs
and medium-term notes. The change in the valuation of interest rate swaps and the ineffective
portion on designated hedges recorded as part of interest expense resulted in an unrealized loss
of $7.5 million and $77.3 million for the second quarter and first half of 2006, respectively
(2005- unrealized gains of $75.7 million and $30.9 million for the second quarter and first half,
respectively; 2004- unrealized losses of $87.3 million and $42.6 million for the second quarter
and first half, respectively). Effective April 3, 2006, the Corporation implemented fair value
hedge accounting for the majority of its interest rate swaps (98% of the interest rate swap
portfolio outstanding) that economically hedge brokered CDs and certain medium-term notes payable
which substantially eliminated the impact of fluctuation in the valuation of the interest rate
swaps after April 3, 2006. As part of the implementation, the Corporation formally documented the
relationship between the interest rate swaps and hedged liabilities under the long-haul method of
effectiveness testing.
Derivative instruments, such as interest rate swaps, are subject to market risk. While the
Corporation does have certain trading derivatives to facilitate customer transactions, the
Corporation does not utilize derivative instruments for speculative purposes. The Corporations
derivatives are mainly composed of interest rate swaps that are used to convert the fixed interest
payments on its brokered CDs and medium-term notes to variable payments (received fixed/pay
floating). Refer to the Risk Management Derivatives section below for further detail
concerning the notional amounts of derivative instruments and additional information. As is the
case with investment securities, the market value of derivative instruments is largely a function
of the financial markets expectations regarding the future direction of interest rates.
Accordingly, current market values are not necessarily indicative of the future impact of the
values of derivative instruments on net interest income. This will depend, for the most part, on
the shape of the yield curve as well as the level of interest rates.
2006 compared to 2005. First BanCorps net interest income decreased by $66.8 million and $59.3
million for quarter and six month period ended June 30, 2006, compared to the same periods in
2005. The decrease in net interest income for the second quarter and first half of 2006 was mainly
driven by fluctuations in the valuation of derivative instruments and the adoption of fair value
hedge accounting, coupled with a reduction in the net interest margin due to the flattening of the
yield curve. For the second quarter and first half of 2006, the change in the valuation of
interest rate swaps including the ineffective portion on designated hedges recorded as part of
interest expense resulted on unrealized losses of $7.5 million and $77.3 million, respectively,
compared to unrealized gains of $75.7 million and $30.9 million, respectively, for the same
periods in 2005. The negative fluctuation in the valuation of derivative instruments reflects
increasing long-term interest rates during the second quarter and first half of 2006 coupled with
a significant reduction in the volume of undesignated derivatives due to the fair value hedge
accounting implementation in 2006.
70
On a tax equivalent basis, net interest income excluding the changes in the fair values of
derivative instruments, the ineffective portion for designated hedges, and basis adjustment
amortization or accretion on fair value hedges, decreased by $11.3 million, or 8%, and increased
by $15.4 million, or 6%, for the second quarter and first half of 2006, respectively, as compared
to the same periods in 2005. The decrease in tax equivalent net interest income was principally
due to margin compressions due to the flattening of the yield curve and fluctuations in net
interest settlements on interest rate swaps. First BanCorps net interest spread and margin for
the quarter and six month period ended June 30, 2006 were 2.28% and 2.73% and 2.46% and 2.91%,
respectively, compared to 3.03% and 3.37% and 2.99% and 3.34%, respectively, for the same periods
in 2005. The decrease in the net interest rate spread and margin during 2006 was due primarily to
the upward trend of short-term interest rates, the flattening of the yield curve, and the
re-pricing mismatch of the Corporations assets and liabilities. On average, the Corporations
liabilities re-price and/or mature earlier than its assets. Thus, increases in short-term
interest rates reduce net interest income, which is a significant component of the Corporations
earnings. The decrease in the Corporations net interest margin has been particularly significant
with respect to the Corporations portfolio of investment securities. The interest rate spread on
the Corporations portfolio of investment securities (allocating a funding cost equal to the
weighted-average cost of the Corporations other borrowed funds) was approximately 0.65% and 0.99%
for the quarter and six-month period ended June 30, 2006 compared to 2.18% and 2.25% for the same
period in 2005. The tax equivalent yield on interest-earning assets increased by 54 and 70 basis
points during the second quarter and first half of 2006, compared to the same periods in 2005,
mainly due to the re-pricing of variable rate commercial and construction loans and new commercial
and construction loans originated in a rising interest rate environment. A substantial portion of
the Corporations commercial and construction loans are variable rate loans tied to
short-term-rates indexes, mainly LIBOR and Prime rate. The average rate paid by the Corporation on
its interest-bearing liabilities increased by 129 basis points and 123 basis points during the
second quarter and first half of 2006 when compared to the same periods in 2005, mainly due to the
re-pricing of the Corporations interest-bearing deposits, principally time deposits, FHLB
advances, and other borrowed funds.
The Corporation used to enter into interest rate swaps that had the effect of converting its
fixed-rate brokered CDs as well as its fixed-rate and step rate notes payable to LIBOR-based
variable-rate liabilities. For the first half of 2006, the net settlement payments on such
interest rate swaps resulted in a benefit of $1.7 million recognized as a reduction to interest
expense, compared to a benefit of $45.1 million for the first half of 2005, as the rates paid
under the variable leg of the swaps significantly increased during.
2005 compared to 2004. First BanCorps net interest income increased by $188.1 million and $124.6
million for quarter and six month period ended June 30, 2005, compared to the same period in 2004.
The increase in net interest income for the second quarter and first half of 2005 was mainly
driven by fluctuations in the valuation of derivative instruments. For the second quarter and
first half of 2005, the change in the valuation of interest rate swaps recorded as part of
interest expense resulted on unrealized gains of $75.7 million and $30.9 million, respectively,
compared to unrealized losses of $87.3 million and $42.6 million, respectively, for the same
periods in 2004. The positive fluctuation in the valuation of derivative instruments reflects
decreasing long-term interest rates during the second quarter and first half of 2005.
On a tax equivalent basis, the Corporations net interest income, excluding the changes in
the fair values of derivative instruments, increased by $43.3 million or 42% and $68.6 million or
34% for the second quarter and first half of 2005, respectively, as compared to the same periods
in 2004. The increase in tax equivalent net interest income for the second quarter and first half
of 2005 was mainly due to an increase in the Corporations average earning assets, principally
increases in the Corporations commercial, construction and residential mortgage loans portfolio
as well as its investment portfolio partially offset by a decrease in net interest margin and net
interest realized on interest rate swaps. First BanCorps net interest spread and margin for the
quarter and six month period ended June 30, 2005 were 3.03% and 3.37% and 2.99% and 3.34%,
respectively, compared to 2.91% and 3.20% and 2.93% and 3.24%, respectively, for the same periods
in 2004. The increase in the net interest rate spread and margin during 2005 was due primarily to
the re-pricing of
71
variable rate commercial and construction loans and new commercial and
construction loans originated in a rising interest rate environment. The tax equivalent yield on
interest earning assets increased by 109 and 83 basis points during the second quarter and first
half 2005, compared to the same periods in 2004. The average rate paid by the Corporation on its
interest-bearing liabilities increased by 97 basis points and 77 basis points during first quarter
and first half of 2005 when compared to the same periods in 2004, mainly due to the re-pricing of
the Corporations interest-bearing deposits including net interest settlements on swaps,
principally time deposits, FHLB advances, and other borrowed funds.
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings to maintain the allowance for
loan and lease losses at a level that the Corporation considers adequate to absorb probable losses
inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based
upon a number of additional factors including historical loan loss experience, current economic
conditions, the fair value of the underlying collateral, and the financial condition of the
borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation.
Although the Corporation believes that the allowance for loan and lease losses is adequate,
factors beyond the Corporations control, including factors affecting the Puerto Rico, Florida
(USA), US Virgin Islands and British Virgin Islands economies may contribute to delinquencies and
defaults, thus necessitating additional reserves.
For the quarter and six-month period ended on June 30, 2006, the Corporation provided $9.4
million and $28.7 million, respectively, for loan and lease losses, as compared to $11.1 million
and $22.0 million, respectively, for the same periods in 2005, and $13.2 million and $26.4 million,
respectively, for the same periods in 2004.
Refer to the discussions under Credit Risk Management below for analysis of the allowance
for loan and lease losses and non-performing assets and related ratios.
2006 compared to 2005. First BanCorps provision for loan and lease losses for the quarter ended
June 30, 2006 decreased by $1.7 million, or 16%, compared to the same period in 2005. The decrease
for the second quarter of 2006 principally reflects a reduction in the provision associated with
the Corporations commercial loans, offset in part by increasing trends in non-performing loans
experienced during 2006. The reduction in the Corporations loan portfolio was primarily due to a
partial repayment of $2.4 billion received in connection with a secured commercial loan extended to
a local financial institution.
For the six-month period ended June 30, 2006, the Corporations provision for loan and lease
losses increased by $6.7 million or 30%, compared to the same period in 2005. The increase in the
provision for the first half of 2006 as compared to the first half of 2005 principally reflects
growth in the Corporations consumer, construction and commercial loan portfolio (excluding secured
commercial loans to local financial institutions) coupled with increasing trends in non-performing
loans and charge-offs experienced during 2006 as compared to 2005 as well as changes to the
Corporations estimate of probable losses for residential real estate loans. The Corporations net
charge offs were affected by the fiscal and economic situation of Puerto Rico. According to the
Puerto Rico Planning Board, Puerto Rico is in a midst of a recession. The slowdown in activity is
the result of, among other things, higher utilities prices, higher taxes, government
budgetary imbalances, the upward trend in short-term interest rates and the flattening of the yield
curve, and higher levels of oil prices.
Net charge-offs for the second quarter and first half of 2006 were $15.4 million and $30.2
million, respectively (0.50% and 0.48%, respectively, of average loans on an annualized basis),
compared to $9.1 million and $18.3 million (0.32% and 0.34%, respectively, of average loans) for
the same periods in 2005. The increase in net charge-offs for 2006, compared to 2005, was mainly
associated with the auto loans portfolio, given higher delinquencies during 2006. Recoveries made
from previously written-off accounts were $1.4 million and $3.1
72
million for the second quarter and
first half of 2006, respectively, compared to $1.9 million and $3.3 million for the same periods in
2005, respectively.
2005 compared to 2004. For the second quarter and first half of 2005, the Corporations provision
for loan and lease losses decreased by $2.1 million or 16% and $4.4 million, or 17%, respectively,
compared to the same periods in 2004. The decrease in the provision during 2005 was mainly due to
a decrease in net charge-offs. The decrease in the provision during 2005 periods was also
associated with the seasoning of the corporate commercial loan portfolio. The Corporation has not
incurred significant losses as a percentage of its commercial loans receivable since it started
emphasizing the corporate commercial lending activities in the late 1990s, therefore, the provision
for inherent losses in this portfolio decreased.
Net charge-offs for the second quarter and first half of 2005 were $9.1 million and $18.3
million, respectively (0.32% and 0.34%, respectively, of average loans on an annualized basis),
compared to $9.9 million and $19.1 million (0.52% and 0.52%, respectively, of average loans) for
the same periods in 2004. Recoveries made from previously written-off accounts were $1.9 million
and $3.3 million in the second quarter of 2005 and first half of 2005, respectively, compared to
$1.4 million and $2.9 million for the same periods in 2004, respectively.
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six Month Period Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Other service charges on loans |
|
$ |
1,467 |
|
|
$ |
1,538 |
|
|
$ |
950 |
|
|
$ |
2,953 |
|
|
$ |
2,659 |
|
|
$ |
2,105 |
|
Service charges on deposit accounts |
|
|
3,278 |
|
|
|
3,022 |
|
|
|
2,743 |
|
|
|
6,555 |
|
|
|
5,712 |
|
|
|
5,526 |
|
Mortgage banking activities gain (loss) |
|
|
427 |
|
|
|
3,060 |
|
|
|
217 |
|
|
|
(148 |
) |
|
|
3,570 |
|
|
|
1,762 |
|
Rental income |
|
|
838 |
|
|
|
843 |
|
|
|
702 |
|
|
|
1,611 |
|
|
|
1,709 |
|
|
|
1,319 |
|
Insurance income |
|
|
2,812 |
|
|
|
2,115 |
|
|
|
1,490 |
|
|
|
5,869 |
|
|
|
4,194 |
|
|
|
2,976 |
|
Other commissions and fees |
|
|
1,256 |
|
|
|
147 |
|
|
|
1,020 |
|
|
|
1,336 |
|
|
|
289 |
|
|
|
1,312 |
|
Other operating income |
|
|
3,211 |
|
|
|
3,875 |
|
|
|
4,176 |
|
|
|
6,410 |
|
|
|
7,205 |
|
|
|
8,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income before net gain (loss)
on investments, loss on partial extinguishment
of secured commercial loans to local financial institution
and gain on sale of credit card portfolio |
|
|
13,289 |
|
|
|
14,600 |
|
|
|
11,298 |
|
|
|
24,586 |
|
|
|
25,338 |
|
|
|
23,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of investments |
|
|
951 |
|
|
|
318 |
|
|
|
607 |
|
|
|
2,375 |
|
|
|
9,831 |
|
|
|
4,572 |
|
Impairment on investments |
|
|
(817 |
) |
|
|
(1,499 |
) |
|
|
(56 |
) |
|
|
(2,950 |
) |
|
|
(1,499 |
) |
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments |
|
|
134 |
|
|
|
(1,181 |
) |
|
|
551 |
|
|
|
(575 |
) |
|
|
8,332 |
|
|
|
4,516 |
|
Loss on partial extinguishment of secured
commercial loans to local financial institutions |
|
|
(11,640 |
) |
|
|
|
|
|
|
|
|
|
|
(11,640 |
) |
|
|
|
|
|
|
|
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
5,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,783 |
|
|
$ |
13,419 |
|
|
$ |
12,146 |
|
|
$ |
12,371 |
|
|
$ |
33,670 |
|
|
$ |
33,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income primarily consists of other service charges on loans; service charges
on deposit accounts; commissions derived from various banking, securities and insurance activities;
gains on mortgage banking activities; net gains and losses on investments and impairments; and
gains or losses on derivatives that are designated non-economic hedges (non-economic
derivatives).
Other service charges on loans consist mainly of service charges on credit card-related
activities.
Service charges on deposit accounts include monthly fees and other fees on deposit accounts.
Income from mortgage banking activities includes gains on the sales of loans and revenues
earned for administering residential mortgage loans originated by the Corporation and subsequently
sold with servicing
73
retained. In addition, lower-of-cost-or-market valuation adjustments to the
Corporations residential mortgage loans held for sale portfolio are recorded as part of mortgage
banking activities.
Rental income represents income generated by the Corporations subsidiary, First Leasing and
Rental Corporation, on the rental of various types of motor vehicles.
Other commissions and fees income is the result of an agreement with a major investment
banking firm to participate in bond issues by the Government Development Bank for Puerto Rico, and
an agreement with an international brokerage firm doing business in Puerto Rico to offer brokerage
services in selected branches of the Corporation.
Insurance income consists of insurance commissions earned by the Corporations subsidiary
FirstBank Insurance Agency, Inc., and the Banks subsidiary in the US Virgin Islands, FirstBank
Insurance V.I., Inc. These subsidiaries offer a wide variety of insurance business.
The other operating income category is composed of miscellaneous fees such as debit and credit
card interchange fees and check fees. Other operating income also includes unrealized gains and
losses on certain non-economic derivatives.
The net gain (loss) on investment securities reflects gains or losses as a result of sales
that are consistent with the Corporations investment policies as well as other-than-temporary
impairment charges on the Corporations investment portfolio.
2006 compared to 2005. First BanCorps non-interest income for the second quarter and first half
of 2006 amounted to $1.8 million and $12.4 million, respectively, compared to $13.4 million and
$33.7 million for the same periods in 2005. The decrease in non-interest income during the second
quarter and first half of 2006 was mainly attributable to a net loss of $11.6 million on the
partial extinguishment of a secured commercial loan extended to a local financial institution,
coupled with lower earnings from the Corporations mortgage banking activities partially offset by
increases in insurance income, service charges on deposit accounts, and other commissions and fees.
During the second quarter of 2006, the Corporation recorded a net loss of $11.6 million on the
partial extinguishment of a secured commercial loan extended to a local financial institution as a
result of a series of agreements reached with Doral Financial Corporation (Doral). On May 25,
2006, the Corporation entered into a series of credit agreements with Doral to formally document as
secured borrowings the loan transfers between the parties that previously had been accounted for as
sales. The terms of the credit agreements specified: (1) a floating interest payment based on a
spread over 90-day LIBOR subject to a cap; (2) an amortization schedule tied to the scheduled
amortization of the underlying mortgage loans subject to a maximum maturity of 10 years; (3)
mandatory prepayments as a result of actual prepayments from the underlying mortgages; and (4) an
option to Doral to prepay the loan without penalty at any time.
On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the
balance of approximately $2.9 billion in its secured commercial loan to approximately $450 million
as of that date. In connection with the repayment, the Corporation and Doral entered into a
sharing agreement on May 25, 2006 with respect to certain profits or losses that Doral incurs as
part of the sales of the mortgages that collateralized the commercial loans. First BanCorp agreed
to reimburse Doral for 40% of the net losses incurred by Doral as a
result of sales or securitization of the
mortgages, subject to certain conditions and subject to a maximum reimbursement of $9.5 million,
which will be reduced proportionately to the extent that Doral does not sell the mortgages. As a
result of the loss sharing agreement and the reduction of the secured commercial loan by Doral, the
Corporation recorded a net loss of $11.6 million, composed of losses realized as part of the loss
sharing agreement and the difference between the carrying value of the loans and the net payment
received from Doral.
74
In connection with the repayment, Doral and First BanCorp also agreed to share the profits, if
any, received from any subsequent sales or securitization of the mortgage loans, in the same
proportion that the Corporation shared in the losses, subject to a maximum of $9.5 million.
However, given the uncertainties of such future possible gains, the Corporation has not recorded
any value in this period.
Mortgage banking activities for the second quarter and first half of 2006 resulted in income
of $0.4 million and a loss of $0.1 million, respectively, as compared to income of $3.1 million and
$3.6 million, respectively, for the comparable periods in 2005. The decrease in 2006 was
principally due to a lower volume of mortgage loan sales coupled with a $1.0 million
lower-of-cost-or-market negative valuation adjustment to the Corporations loans held for sale
portfolio as a result of increases in long-term interest rates. During 2005, the Corporation
entered into an arrangement with an unrelated financial institution (the Counterparty) in which,
in substance, the parties agreed to sell and purchase similar mortgage loan portfolios. Pursuant to
this arrangement, the Corporation purchased mortgage loans with an aggregate unpaid principal
balance of $87.2 million for $88.9 million in March 2005. In April and May of 2005, the Corporation
sold to the Counterparty mortgage loans with aggregate unpaid principal balances of $60.0 million
and $29.7 million, for $61.1 million and $30.3 million, respectively, resulting in gains on the
sales of $1.3 million and $0.6 million, respectively. Since the Corporation retained the servicing
on the mortgage loans sold to the Counterparty, it also recognized a servicing asset of $1.2
million during the second quarter of 2005. The Corporation entered into these transactions
because, among other reasons, they were consistent with its business objectives of developing a
mortgage-banking business that would provide liquidity as well as developing new sources for the
acquisition of mortgage loans. Notwithstanding that the transactions were in substance the purchase
and sale of similar mortgage loan portfolios, generally accepted accounting principles require that
the transactions be treated as a separate purchase and a separate sale.
Insurance income for the second quarter and first half of 2006 increased by $0.7 million or
33% and $1.7 million or 40%, respectively, compared to the corresponding periods in 2005. The
increase for 2006 was due to an increase in volume of business through cross-selling strategies,
marketing efforts and the strategic locations of the Corporations insurance offices.
Service charges on deposit accounts for the second quarter and first half of 2006 increased by
$0.3 million or 8% and $0.8 million or 15% compared to the same periods in 2005. The increase for
2006 primarily reflects a larger volume of accounts and transactions as compared to 2005.
Other commissions and fees for the second quarter and first half of 2006 increased by $1.1
million and $1.0 million, respectively, compared to the same periods in 2005. The increase in
other commissions and fees was due to consulting services provided by the Corporation to the
Government Development Bank for Puerto Rico for the issuance of certain financial instruments
during the second quarter of 2006.
For the second quarter of 2006, net gain on investment securities amounted to $0.1 million,
compared to a net loss of $1.2 million for the same period in 2005. The improved result in 2006
was principally due to higher volume of sales coupled with lower other-than-temporary impairment
charges in the Corporations available-for-sale portfolio.
Net loss on sale of investments for the first half of 2006 amounted to $0.6 million compared
to a net gain of $8.3 million for the same period in 2005. The decrease during 2006 was
principally due to a lower volume of sales coupled with a $2.9 million other-than-temporary
impairment on certain equity securities held in the Corporations available-for-sale investment
portfolio.
2005 compared to 2004. First BanCorps non-interest income for the second quarter and first half
of 2005 increased by $1.3 million, or 10%, and $0.6 million, or 2%, respectively, compared to the
same periods in 2004. The increase in non-
interest income during 2005 was principally due to higher income derived from its mortgage banking
and insurance activities partially offset by a decrease in other commissions and fees income.
75
Income from mortgage banking activities during the second quarter and first half of 2005
increased by $2.8 million and $1.8 million, respectively, compared to the same periods in 2004.
The increase in income from mortgage banking activities for 2005 primarily reflects higher volume
of mortgage loan sales. As discussed above, during 2005, the Corporation entered into an
arrangement with another unrelated financial institution in which, in substance, the parties agreed
to sell and purchase similar mortgage loan portfolios. As a result of transactions derived from
this agreement the Corporation recognized a gain on sales of mortgage loans of approximately $1.9
million during the second quarter of 2005. Since the Corporation retained the servicing on the
mortgage loans sold in these transactions, it also recognized a servicing asset of $1.2 million.
Insurance income for the second quarter and first half of 2005 increased by $0.6 million or
42% and $1.2 million or 41%, respectively, compared to the same periods in 2004. The increase for
2005 was due to an increase in volume of business through cross-selling strategies, marketing
efforts and the strategic locations of the Corporations insurance offices.
Other commissions and fees for the second quarter and first half of 2005 decreased by $0.9
million and $1.0 million, respectively, compared to the same periods in 2004. The decrease during
2005 principally reflects lower fees as a result of a reduced volume of consulting services.
During 2004, the Corporation provided consulting services to the Government Development Bank for
Puerto Rico for the issuance of certain financial instruments.
The gain on sales of credit card portfolios during the second quarter and first half of 2004
resulted from portfolios sold pursuant to a strategic alliance agreement reached with a U.S.
financial institution in 2003.
The Corporation recorded a net loss on investments of $1.2 million for the second quarter of
2005 compared to a net gain of $0.6 million for the same period in 2004. The net loss on
investments for the second quarter of 2005 was principally associated with other-than-temporary
impairment charges of $1.5 million on certain equity securities. However, an increased volume of
sales of investments resulted in the recognition in the six month period ended June 30, 2005 of a
net gain on investments of $8.3 million compared to a net gain of $4.5 million for the same period
in 2004.
Non-Interest Expenses
The following table presents the detail of non-interest expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six Month Period Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Employees compensation and benefits |
|
$ |
29,870 |
|
|
$ |
26,273 |
|
|
$ |
21,238 |
|
|
$ |
63,995 |
|
|
$ |
49,588 |
|
|
$ |
40,974 |
|
Occupancy and equipment |
|
|
13,624 |
|
|
|
11,766 |
|
|
|
9,442 |
|
|
|
26,330 |
|
|
|
22,405 |
|
|
|
18,820 |
|
Deposit insurance premium |
|
|
390 |
|
|
|
284 |
|
|
|
252 |
|
|
|
789 |
|
|
|
553 |
|
|
|
493 |
|
Other taxes, insurance and supervisory fees |
|
|
4,078 |
|
|
|
3,129 |
|
|
|
2,709 |
|
|
|
7,935 |
|
|
|
6,192 |
|
|
|
5,492 |
|
Professional fees |
|
|
10,143 |
|
|
|
1,512 |
|
|
|
1,206 |
|
|
|
17,536 |
|
|
|
3,408 |
|
|
|
1,940 |
|
Servicing and processing fees |
|
|
1,771 |
|
|
|
1,658 |
|
|
|
207 |
|
|
|
3,952 |
|
|
|
3,045 |
|
|
|
1,221 |
|
Business promotion |
|
|
4,324 |
|
|
|
5,085 |
|
|
|
4,588 |
|
|
|
8,098 |
|
|
|
9,633 |
|
|
|
8,057 |
|
Communications |
|
|
2,012 |
|
|
|
2,097 |
|
|
|
1,777 |
|
|
|
4,468 |
|
|
|
4,074 |
|
|
|
3,555 |
|
Other |
|
|
4,828 |
|
|
|
4,269 |
|
|
|
4,166 |
|
|
|
9,675 |
|
|
|
10,182 |
|
|
|
7,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,040 |
|
|
$ |
56,073 |
|
|
$ |
45,585 |
|
|
$ |
142,778 |
|
|
$ |
109,080 |
|
|
$ |
88,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2006, non-interest expenses amounted to $71.0 million,
compared to $56.1 million
and $45.6 million for the same periods in 2005 and 2004, respectively. For the first half of 2006,
non-interest expenses amounted to $142.8 million, compared to $109.1 million and $88.3 million for
the same periods in 2005 and 2004, respectively.
2006 compared to 2005. The Corporations non-interest expenses for the second quarter and first
half of 2006
76
increased by $15.0 million, or 27% and $33.7 million, or 31%, respectively, compared
to the same periods in 2005. The increase in non-interest expenses for 2006 was mainly due to
increases in professional fees, employees compensation and benefits, and occupancy and equipment
expenses partially offset by a decrease in business promotion expenses. The increase in
non-interest expenses for the first half of 2006 also includes an increase of $6.9 million
associated with the operations of Ponce General Corporation acquired in March 2005.
Employees compensation and benefits expenses for the second quarter and first half of 2006
increased by $3.6 million, or 14%, and $14.4 million or 29%, respectively, compared to the same
periods in 2005. A significant portion of the increase for the first half of 2006 was associated
with the expensing of the fair value of stock options granted to certain employees following the
provisions of SFAS 123R. The Corporation recorded $4.9 million during the first quarter of 2006 in
stock-based compensation expense. The increase in compensation and benefits expenses also was
attributable to increases in the average compensation and related fringe benefits paid to employees
and an increase in the headcount during 2006. The increase in the headcount was mostly
attributable to increases associated with the Corporations loan origination and deposit gathering
efforts, in particular in FirstBank Puerto Rico, FirstBank Florida, FirstMortgage Inc. (First
Mortgage), and the Corporations small loan company, First Federal Finance, as well as increases
in support areas, in particular audit and compliance, credit risk management, finance and
accounting, information technology and banking operations. For the first half of 2006,
compensation and benefits expenses associated with the operations in Florida increased by $2.2
million, compared to the same period in 2005. The results for Ponce General Corporation in 2006
reflect two quarters of activity compared to one quarter for 2005.
Occupancy and equipment expenses for the second quarter and first half of 2006 increased by
$1.9 million, or 16%, and $3.9 million or 18%, respectively, compared to the same periods in 2005.
The increase in occupancy and equipment expenses in 2006 as compared to 2005 is mainly attributable
to increases in costs associated with the expansion of the Corporations branch network and loan
origination offices. The increase also reflects higher electricity costs, security costs and costs
associated with the operations of Ponce General Corporation.
Professional fees increased during the second quarter and first half of 2006 by $8.6 million
and $14.1 million, respectively, compared to the same periods in 2005. The increase for 2006 was
primarily due to legal, accounting, and consulting fees associated with the internal review
conducted by the Corporations Audit Committee, the restatement process and other related legal and
regulatory proceedings which increased professional fees by $5.5 million and $10.4 million for the
second quarter and first half of 2006, respectively, compared to the same periods in 2005.
Business promotion expenses decreased during the second quarter and first half of 2006 by $0.8
million or 15% and $1.5 million or 16%, respectively, compared to the same periods in 2005. The
decrease was due to the Corporations decision to reduce its marketing expenditures.
2005 compared to 2004. The Corporations non-interest expenses for the second quarter and first
half of 2005 increased by $10.5 million and $20.8 million, respectively, compared to the same
periods in 2004. The increase in non-interest expenses for 2005 mainly reflects increases in
employees compensation and benefits, occupancy and equipment, professional fees, and servicing and
processing fees.
Employees compensation and benefits expenses increased during the second quarter and first
half of 2005 by $5.0 million, or 24% and $8.6 million, or 21%, respectively, compared to the same
periods in 2004. The increase in compensation and benefits expenses was primarily attributable to
increases in average compensation and related fringe benefits paid to employees and an increase in
the headcount for 2005. The increase in the headcount was mainly to support the growth in
operations, specifically to support new products and services, in First Mortgage and FirstBank
Florida operations.
Occupancy and equipment expenses increased during the second quarter and first half of 2005 by
$2.3 million, or 25%, and $3.6 million or 19%, compared to the same periods in 2004. The increase
is mainly
77
attributable to increases in costs associated with the expansion of the Corporations
branch network and loan origination offices.
Professional fees increased during the second quarter of 2005 and first half of 2005 by $0.3
million and $1.5 million, respectively, compared to the same periods in 2004. The increase was
mainly due to higher expenses related with Sarbanes-Oxley Act compliance.
Servicing and processing fees expenses increased during the second quarter and first half of
2005 by $1.5 million and $1.8 million, respectively, compared to the same periods in 2004. Lower
non-interest expenses during the first half of 2004 were due primarily to the strategic alliance
agreement and sale of the Corporations credit card portfolio to a U.S. financial institution in
2003. As part of the agreement, the Corporation entered into a service level agreement to
temporarily service the credit card portfolio that the US financial institution acquired. During
the first half of 2004, the Corporation was reimbursed $2.1 million in expenses for services
provided under the service level agreement.
78
Provision for Income Tax
Income tax expense include Puerto Rico and Virgin Islands income taxes as well as applicable
federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from
all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for
U.S. income tax purposes and is generally subject to United States income tax only on its income
from sources within the United States or income effectively connected with the conduct of a trade
or business within the United States. Any such tax paid is creditable, within certain conditions
and limitations, against the Corporations Puerto Rico tax liability. The Corporation is also
subject to US Virgin Islands (VI) taxes on its income from sources within the VI jurisdiction.
Any such tax paid, is creditable against the Corporations Puerto Rico tax liability, subject to
certain conditions and limitations.
Under the Puerto Rico Internal Revenue Code of 1994, as amended (PR Code), First BanCorp is
subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006 an additional
transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005,
the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum
statutory tax rate from 39.0% to 41.5% for a two-year period. The additional tax related to the
income earned from January 1 to the date of enactment of the law was recorded in the third quarter
of 2005. On May 13, 2006, with an effective date of January 1, 2006, the Governor of Puerto Rico
approved an additional transitory tax rate of 2.0% applicable only to companies covered by the
Puerto Rico Banking Act, as amended, such as FirstBank, which raised the maximum statutory tax rate
to 43.5% for taxable years commenced during calendar year 2006. The PR Code also includes an
alternative minimum tax of 22% that applies if the Corporations regular income tax liability is
less than the alternative minimum tax requirements.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate
mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and
Puerto Rico income taxes and doing business through international banking units (IBEs) of the
Corporation and the Bank and by the Banks subsidiary FirstBank Overseas Corporation. The IBEs and
FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto
Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in
Puerto Rico. Since 2004, IBEs that operate as a unit of a bank pay income taxes at normal rates to
the extent that the IBEs net income exceeds predetermined percentages of the banks total net
taxable income; such limitations were 30% of total net taxable income for a taxable year commencing
between July 1, 2004 and July 1, 2005, and 20% of total net taxable income for taxable years
commencing thereafter.
2006 compared to 2005. For the second quarter and first half of 2006, the Corporations provision
for income taxes decreased by $26.1 million and $34.0 million, respectively, compared to the same
periods in 2005. The decrease in income tax expense for 2006 as compared to 2005 was mainly due to
an increase in deferred tax benefits, that itself was, mainly the result of unrealized losses on
derivative instruments recognized during 2006 compared to unrealized gains recognized during 2005.
For the first half of 2006, the Corporation recognized a deferred tax benefit of $26.5 million
compared to a deferred tax expense of $6.8 million for the same period in 2005.
As of June 30, 2006, the Corporation evaluated its ability to realize the deferred tax asset
and concluded, based on the evidence available, that it is more likely than not that some of the
deferred tax assets will not be realized and thus, established a valuation allowance of $4.7
million. At June 30, 2006, the deferred tax asset, net of the valuation allowance of $4.7 million,
amounted to approximately $162.5 million compared to $68.5 million at June 30, 2005. At June 30,
2005, based on the Corporations analysis and available evidence, the Corporation did not establish
a valuation allowance.
79
2005 compared to 2004. For the quarter ended June 30, 2005, the Corporation recognized a provision
for income tax of $41.9 million compared to an income tax benefit of $23.5 million for the same
period in 2004. The income tax expense for the second quarter of 2005 as compared to the income
tax benefit recorded for the second quarter of 2004 was mainly due to a deferred tax expense of
$24.5 million recognized during the second quarter of 2005 as a result of unrealized gains on
derivative instruments. In comparison, for the second quarter of 2004, the Corporation recognized
a deferred tax benefit of $36.0 million mainly as a result of unrealized losses on derivative
instruments due to increases in interest rates.
For the first half of 2005, the Corporations provision for income tax amounted to $38.3
million (representing an effective tax rate of 24%), compared to $4.9 million (representing an
effective tax rate of 9%). The increase in the provision for income taxes for the first half of
2005, when compared to the first half of 2004, is attributable to increases in deferred tax expense
due to unrealized gains on derivative instruments recognized during 2005 compared to unrealized
losses recognized in 2004. Also, the provision for income tax for the first half of 2005 increased
due to changes in the proportion of exempt and taxable income as a result of increases in the
Corporations taxable income generated from the Corporations loan portfolios and decreases in tax
exempt income mainly from the Corporations investment portfolios.
FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Loan Production
First BanCorp relies primarily on its retail network of branches to originate residential and
consumer loans. The Corporation supplements its residential mortgage loan originations with
wholesale servicing released mortgage loan purchases from small mortgage bankers. The Corporation
manages its construction and commercial loan originations through a centralized unit and most of
its originations come from existing customers as well as through referrals and direct
solicitations. For commercial loan originations, the Corporation also has regional offices to
provide services to designated territories. For purposes of the following table, the Corporation
separately presented commercial loans to local financial institutions because it believes this
approach provides a better representation of the Corporations commercial loan production capacity.
Total loan production for the quarter and six-month period ended June 30, 2006 were $1.3
billion and $2.7 billion, respectively, compared to $1.7 billion and $3.5 billion, respectively,
for the comparable periods in 2005, and $1.1 billion and $2.2 billion, respectively, for the
comparable periods in 2004. The decrease in loan production during 2006, compared to 2005, was
mainly due to decreases in residential real estate, commercial loan, and consumer loan originations
mainly due to prevailing higher interest rates, worsening economic conditions in Puerto Rico, and
stricter underwriting guidelines.
The following table sets the First BanCorps loan production for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six month period ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
239,462 |
|
|
$ |
284,822 |
|
|
$ |
201,930 |
|
|
$ |
517,405 |
|
|
$ |
588,598 |
|
|
$ |
353,042 |
|
Commercial and Construction |
|
|
802,179 |
|
|
|
1,097,384 |
|
|
|
283,290 |
|
|
|
1,650,032 |
|
|
|
1,691,200 |
|
|
|
605,151 |
|
Finance Leases |
|
|
42,651 |
|
|
|
34,507 |
|
|
|
28,460 |
|
|
|
89,860 |
|
|
|
68,184 |
|
|
|
55,327 |
|
Consumer |
|
|
180,603 |
|
|
|
266,114 |
|
|
|
186,732 |
|
|
|
402,681 |
|
|
|
490,636 |
|
|
|
345,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,264,895 |
|
|
|
1,682,827 |
|
|
|
700,412 |
|
|
|
2,659,978 |
|
|
|
2,838,618 |
|
|
|
1,359,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans to local financial institutions |
|
|
|
|
|
|
|
|
|
|
427,646 |
|
|
|
|
|
|
|
681,407 |
|
|
|
862,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan Production |
|
$ |
1,264,895 |
|
|
$ |
1,682,827 |
|
|
$ |
1,128,058 |
|
|
$ |
2,659,978 |
|
|
$ |
3,520,025 |
|
|
$ |
2,221,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Residential Real Estate Loans
Residential mortgage loan production for the second quarter and first half of 2006 decreased
by $45.4 million, or 16%, and $71.2 million, or 12%, respectively, compared to the same periods in
2005, and increased by $37.5 million, or 19%,and $164.4 million, or 47%, respectively, compared to
the same periods in 2004. The decrease in mortgage loan production for 2006, compared to 2005, was
mainly attributable to higher prevailing interest rates, deteriorating economic conditions in
Puerto Rico and stricter underwriting standards. The Corporation decided to make certain
adjustments to its underwriting standards designed to enhance the credit quality of its mortgage
loan portfolio, in light of the worsening economic conditions in Puerto Rico. The implementation of
these standards contributed to the reduction in the Corporations mortgage loan originations.
Residential real estate loans represent 19% of total loans originated and purchased for the
first half of 2006. The Corporations strategy is to penetrate markets by providing customers with
a variety of high quality mortgage products. The Corporations originations of residential
mortgage loans continued to be driven by FirstMortgage, its mortgage loan origination subsidiary.
The Corporation continues to commit substantial resources to this operation with the goal of
becoming a leading institution in the highly competitive residential mortgage loans market. The
Corporation established FirstMortgage as a stand-alone subsidiary in 2003. FirstMortgage
supplements its internal direct originations through its retail network with an indirect business
strategy. The Corporations Partners in Business, a division of FirstMortgage, partners with
mortgage brokers and small mortgage bankers in Puerto Rico to purchase ongoing mortgage loan
production. FirstMortgage Realty Group, launched in 2005, focuses on building relationships with
realtors by providing resources, office amenities and personnel to them, and to assist real estate
brokers in building their individual businesses and closing transactions. FirstMortgage
multi-channel strategy has proven to be effective in capturing business.
Commercial and Construction Loans
Commercial and construction loan production for the second quarter and first half of 2006
decreased by $295.2 million, or 27%, and $41.2 million, or 2%, respectively, compared to the same
periods in 2005, and increased by $518.9 million and $1.0 billion, respectively, compared to the
same periods in 2004. The decrease in commercial and construction loan production for 2006
compared to 2005 was mainly due to adverse economic conditions in Puerto Rico. However, the loan
production of the Corporations subsidiary bank loan agency in Coral Gables, Florida increased
during 2006 and 2005. Loans originated by the agency for the first half of 2006 and 2005 amounted
to $504.6 million and $278.8 million, respectively.
Commercial loan originations come from existing customers as well as through referrals and
direct solicitations. The Corporation follows a strategy aimed to cater to customer needs in the
commercial loans middle market segment by building strong relationships and offering financial
solutions that meet customers unique needs. Starting in 2005, the Corporation expanded its
distribution network and participation in the commercial loans middle market segment by focusing on
customers with financing needs up to $5 million. The Corporation established 4 regional offices
that provide coverage throughout Puerto Rico. The offices are staffed with sales, marketing and
credit officers able to provide a high level of personalized service and prompt decision-making.
Consumer Loans
Consumer loan originations are principally driven through the Corporations retail network.
For the second quarter and first half of 2006, consumer loan originations decreased by $85.5
million or 32% and $88.0 million, or 18%, respectively, and decreased by $6.1 million, or 3% and
increased by $57.1 million, or 17%, respectively, compared to the same periods in 2005 and 2004,
respectively. The decrease in consumer loan originations for 2006 compared to 2005 was mainly due
to adverse economic conditions in Puerto Rico. The increase when compared to
2004 was primarily due to increases in auto loan originations. Auto loan originations come
primarily through referrals from the Corporations network of auto dealers.
81
Finance Leases
During the second quarter and first half of 2006, finance lease originations, which are mostly
composed of loans to individuals to finance the acquisition of a motor vehicle, increased by $8.1
million and $21.7 million, respectively, compared to the same periods in 2005, and increased by
$14.2 million and $34.5 million, respectively, when compared to the same periods in 2004.
Assets
Total assets as of June 30, 2006 amounted to $20.2 billion, an increase of $0.3 billion, $1.4
billion and $5.7 billion as compared to total assets as of December 31, 2005, June 30, 2005 and
June 30, 2004, respectively. The increase at June 30, 2006, compared to balances at December 31,
2005 and June 30, 2005, was mainly the result of increases in money market instruments partially
offset by decreases in the Corporations loan and investment portfolio. The decrease in the
Corporations loans portfolio was due to the payment of $2.4 billion from a local financial
institution to reduce its secured commercial loan with the Corporation. The Corporation
temporarily used a portion of the proceeds in short-term investment. The Corporation decided to
use proceeds from the payment received on the secured commercial loan to repay, during the second
half of 2006, higher rate maturing liabilities, in particular brokered CDs, rather than investing
the proceeds at an interest yield lower than the Corporations cost of funds.
The decrease in the investment portfolio resulted mainly from prepayments and maturities
received from the Corporations investment portfolio, mainly mortgage-backed securities and the
Corporations decision to deleverage its investment portfolio. The deleverage of the investment
portfolio was influenced, among other things, by the flat to inverted yield curve. As a result,
the Corporation decided to repay higher rate maturing liabilities, in particular brokered CDs,
rather than investing the proceeds at an effective interest rate lower than the Corporations cost
of funds.
Loan Portfolio
The composition of the Corporations total loan portfolio for the periods indicated is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
(In Thousands) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
Residential real estate loans |
|
$ |
2,648,199 |
|
|
$ |
2,346,945 |
|
|
$ |
1,826,077 |
|
|
$ |
1,124,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans |
|
|
1,152,796 |
|
|
|
1,090,193 |
|
|
|
1,000,752 |
|
|
|
648,690 |
|
Construction loans |
|
|
1,560,580 |
|
|
|
1,137,118 |
|
|
|
715,971 |
|
|
|
374,845 |
|
Commercial loans |
|
|
2,441,329 |
|
|
|
2,421,219 |
|
|
|
2,295,216 |
|
|
|
1,708,971 |
|
Loans to local financial institutions
collateralized by real estate mortgages
and pass-through trust certificates |
|
|
992,586 |
|
|
|
3,676,314 |
|
|
|
4,211,687 |
|
|
|
2,708,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
6,147,291 |
|
|
|
8,324,844 |
|
|
|
8,223,626 |
|
|
|
5,441,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
325,867 |
|
|
|
280,571 |
|
|
|
242,765 |
|
|
|
184,866 |
|
Consumer and other loans |
|
|
1,783,902 |
|
|
|
1,733,569 |
|
|
|
1,580,501 |
|
|
|
1,235,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,905,259 |
|
|
$ |
12,685,929 |
|
|
$ |
11,872,969 |
|
|
$ |
7,986,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, the Corporations total loans decreased by $1.8 billion and $1.0
billion, when compared with balances as of December 31, 2005 and June 30, 2005, respectively, and
increased by $2.9 billion when
82
compared to the
balance as of June 30, 2004. The decrease in the Corporations total loans receivable
primarily relates to the partial extinguishment of a secured commercial loan extended to a local
financial institution partially offset by a growth in the Corporations other portfolios through
new originations, net of repayments. Refer to the Loan Production section of this discussion
above for further details on the Corporations originations by product.
Residential Real Estate Loans
As of June 30, 2006, the Corporations residential real estate loan portfolio increased by
$301.3 million, $822.1 million and $1.5 billion as compared to balances as of December 31, 2005,
June 30, 2005, and June 30, 2004, respectively. The Corporation has diversified its loan
receivable portfolio by increasing the concentration of residential real estate loans. The
residential real estate loans as a percentage of total loans has increased over time from 14% at
June 30, 2004 to 24% at June 30, 2006.
Commercial and Construction Loans
As of June 30, 2006, the Corporations commercial and construction loan portfolio decreased by
$2.2 billion and $2.1 billion as compared to balances as of December 31, 2005 and June 30, 2005,
respectively, and increased by $705.9 million compared to the balance at June 30, 2004. The
decrease was due to the repayment of $2.4 billion that substantially reduced the Corporations
secured commercial loan extended to a local financial institutions. The Corporations strategy
focuses on growing its commercial loans portfolio principally through commercial real estate and
construction loans. A substantial portion of this portfolio is collateralized by real estate. The
Corporations commercial loans are primarily variable- and adjustable-rate loans.
The Corporation had a lending concentration of $445.7 million in one mortgage originator in
Puerto Rico, Doral, at June 30, 2006. The Corporation had outstanding $546.9 million with another
mortgage originator in Puerto Rico, R&G Financial Corporation (R&G), for total loans to mortgage
originators amounting to $992.6 million at June 30, 2006. These commercial loans are secured by
individual mortgage loans on residential and commercial real estate. The mortgage originators have
always paid the loans in accordance with their terms and conditions. In December 2005, the
Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the
Commonwealth of Puerto Rico (Office of the Commissioner) with respect to the statutory limit for
individual borrowers (loans-to-one borrower limit). In May 2006, the Corporation received a cash
payment from Doral of approximately $2.4 billion, substantially reducing the balance of the secured
commercial loan to that institution. As part of the Cease and Desist Order imposed on the
Corporation by its regulators, the Corporation has continued working on the reduction of its
exposure to Doral.
During the fourth quarter of 2005, First BanCorp received a partial payment from R&G of $137
million for its secured commercial loans. In addition, in February 2007, the Corporation entered
into various agreements with R&G relating to prior transactions originally treated as purchases of
mortgages and pass-through trust certificates from R&G subsidiaries. First, through a mortgage
payment agreement, R&G paid the Corporation approximately $50 million to reduce the commercial loan
that R&G Premier Bank, R&Gs banking subsidiary, had outstanding with the Corporation. In addition,
the remaining balance of approximately $271 million was re-documented as a secured loan from the
Corporation to R&G. Second, R&G and the Corporation amended various agreements involving
approximately $218 million of securities collateralized by loans that were originally sold through
five grantor trusts. The modifications to the original agreements allow the Corporation to treat
these transactions as true sales for accounting and legal purposes. For further detail, refer to
the Corporations Current Report on Form 8-K filed with the SEC on February 16, 2007. The
execution of the agreements enabled First BanCorp to fulfill the remaining requirement of the
Consent Order signed with banking regulators relating to the mortgage-related transactions with R&G
that First BanCorp recharacterized for accounting and legal purposes as commercial loans secured by
the mortgage loans and pass-through trust certificates.
83
Consumer Loans
As of June 30, 2006, the Corporations consumer loans portfolio increased by $50.3 million,
$203.4 million, and $548.8 million as compared to the portfolio balances at December 31, 2005, June
30, 2005, and June 30, 2004, respectively. The increase is mainly driven by increases in the
Corporations auto loan portfolio. The growth of this portfolio has been achieved through a
strategy of providing outstanding service to selected auto dealers who provide the channel for the
bulk of the Corporations auto loan originations.
The above-mentioned strategy is directly linked to the Corporations commercial lending
activities as the Corporation maintains strong and stable auto floor plan relationships, which are
the foundation of a successful auto loan generation operation.
Finance Leases
As of June 30, 2006, finance leases, which are mostly composed of loans to individuals to
finance the acquisition of a motor vehicle, increased by $45.3 million, $83.1 million and $141.0
million as compared to portfolio balances as of December 31, 2005, June 30, 2005, and June 30,
2004, respectively. These leases typically have five-year terms and are collateralized by a
security interest in the underlying assets. The Corporations credit risk exposure for this
portfolio is similar to the credit exposure of an auto loan (extended to individuals) portfolio.
Investment Activities
As part of its strategy to diversify its revenue sources and maximize its net interest income,
First BanCorp maintains an investment portfolio that is classified as available for sale or
held-to-maturity. The Corporations investment portfolio at June 30, 2006 amounted to $5.3
billion, a decrease of $149.0 million, $789.1 million, and $471.7 million when compared with the
investment portfolio at December 31, 2005, June 30, 2005, and June 30, 2004, respectively. The
decrease in investment securities was due to the Corporations decision to deleverage its balance
sheet by not reinvesting maturities and prepayments received from the Corporations investment
portfolio, mainly mortgage-backed securities. The Corporations decision to deleverage its
investment portfolio was influenced, among other things, by the flat-to-inverted yield curve. As a
result, the Corporation decided to repay during the second half of 2006 higher rate maturing
liabilities, in particular brokered CDs, rather than investing the proceeds at an interest yield
lower than the Corporations cost of funds.
84
The following table presents the carrying value of investments at the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
Money market investments |
|
$ |
3,361,886 |
|
|
$ |
1,224,791 |
|
|
$ |
424,004 |
|
|
$ |
445,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government and agencies obligations |
|
|
2,132,688 |
|
|
|
2,190,714 |
|
|
|
2,377,308 |
|
|
|
2,429,554 |
|
PR Government obligations |
|
|
29,436 |
|
|
|
14,163 |
|
|
|
13,899 |
|
|
|
13,394 |
|
Mortgage-backed securities |
|
|
1,124,996 |
|
|
|
1,233,711 |
|
|
|
1,386,423 |
|
|
|
1,708,469 |
|
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,287,120 |
|
|
|
3,438,588 |
|
|
|
3,777,630 |
|
|
|
4,171,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government and agencies obligations |
|
|
390,717 |
|
|
|
389,650 |
|
|
|
397,484 |
|
|
|
285,912 |
|
PR Government obligations |
|
|
24,393 |
|
|
|
25,006 |
|
|
|
25,153 |
|
|
|
16,126 |
|
Mortgage-backed securities |
|
|
1,528,397 |
|
|
|
1,478,720 |
|
|
|
1,669,806 |
|
|
|
1,119,604 |
|
Corporate bonds |
|
|
4,386 |
|
|
|
25,381 |
|
|
|
52,525 |
|
|
|
44,290 |
|
Equity securities |
|
|
21,393 |
|
|
|
29,421 |
|
|
|
72,147 |
|
|
|
52,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,969,286 |
|
|
|
1,948,178 |
|
|
|
2,217,115 |
|
|
|
1,518,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities |
|
|
23,689 |
|
|
|
42,368 |
|
|
|
74,480 |
|
|
|
61,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
8,641,981 |
|
|
$ |
6,653,925 |
|
|
$ |
6,493,229 |
|
|
$ |
6,197,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities at the indicated dates consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates |
|
$ |
18,089 |
|
|
$ |
20,211 |
|
|
$ |
22,956 |
|
|
$ |
30,659 |
|
FNMA certificates |
|
|
1,106,907 |
|
|
|
1,213,500 |
|
|
|
1,363,467 |
|
|
|
1,677,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,124,996 |
|
|
|
1,233,711 |
|
|
|
1,386,423 |
|
|
|
1,708,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates |
|
|
8,420 |
|
|
|
9,962 |
|
|
|
11,510 |
|
|
|
9,487 |
|
GNMA certificates |
|
|
394,326 |
|
|
|
438,881 |
|
|
|
484,845 |
|
|
|
128,214 |
|
FNMA certificates |
|
|
1,125,265 |
|
|
|
1,029,474 |
|
|
|
1,173,019 |
|
|
|
981,273 |
|
Mortgage pass-through certificates |
|
|
386 |
|
|
|
403 |
|
|
|
432 |
|
|
|
630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,528,397 |
|
|
|
1,478,720 |
|
|
|
1,669,806 |
|
|
|
1,119,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
2,653,393 |
|
|
$ |
2,712,431 |
|
|
$ |
3,056,229 |
|
|
$ |
2,828,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
The carrying values of investment securities (excluding other equity securities) at June
30, 2006, by contractual maturity (excluding mortgage-backed securities, equity securities and
money market investments) are shown below:
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Weighted |
|
(Dollars in thousands) |
|
amount |
|
|
average yield % |
|
US Government and agencies obligations |
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
74,673 |
|
|
|
4.86 |
|
Due after five years through ten years |
|
|
378,084 |
|
|
|
4.30 |
|
Due after ten years |
|
|
2,070,648 |
|
|
|
5.83 |
|
|
|
|
|
|
|
|
|
|
|
2,523,405 |
|
|
|
5.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PR Government obligations |
|
|
|
|
|
|
|
|
Due after one year through five years |
|
|
9,754 |
|
|
|
5.57 |
|
Due after five years through ten years |
|
|
23,912 |
|
|
|
5.28 |
|
Due after ten years |
|
|
20,163 |
|
|
|
5.60 |
|
|
|
|
|
|
|
|
|
|
|
53,829 |
|
|
|
5.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
|
1,028 |
|
|
|
7.46 |
|
Due after ten years |
|
|
3,358 |
|
|
|
7.72 |
|
|
|
|
|
|
|
|
|
|
|
4,386 |
|
|
|
7.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,581,620 |
|
|
|
5.57 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
2,653,393 |
|
|
|
4.90 |
|
Equity securities |
|
|
21,393 |
|
|
|
1.18 |
|
|
|
|
|
|
|
|
Total
investment securities available-for-sale and
held-to-maturity |
|
$ |
5,256,406 |
|
|
|
5.21 |
|
|
|
|
|
|
|
|
Net interest income of future periods may be affected by the acceleration in prepayments
of mortgage-backed securities. Acceleration in the prepayments of mortgage-backed securities would
lower yields on securities purchased at a premium, as the amortization of premiums paid upon
acquisition of these securities would accelerate. Conversely, acceleration in the prepayments of
mortgage-backed securities would increase yields on securities purchased at a discount, as the
amortization of the discount would accelerate. Lower reinvestment rates and a time lag between
calls, prepayments and/or the maturity of investments and actual reinvestment of proceeds into new
investments might also affect net interest income. These risks are directly linked to future
period market interest rate fluctuations. Refer to the Risk Management discussion below for
further analysis of the effects of changing interest rates on the Corporations net interest income
and for the interest rate risk management strategies followed by the Corporation.
Sources of Funds
The Corporations principal funding sources are branch-based deposits, retail brokered
deposits, institutional deposits, federal funds purchased, securities sold under agreements to
repurchase, notes payable and FHLB advances.
As of June 30, 2006, total liabilities amounted to $19.0 billion, an increase of $301.6
million, $1.5 billion, and $5.6 billion as compared to balances as of December 31, 2005, June 30,
2005, and June 30, 2004, respectively. The net increase in total liabilities was mainly due to
increases in interest-bearing deposits, mainly brokered CDs, partially offset by decreases in FHLB
advances and federal funds purchased and securities sold under repurchase agreements. The use of
brokered CDs has been particularly important to the growth of the Corporation. The
86
Corporation
encounters intense competition in attracting and retaining deposits, as financial institutions are
at a competitive disadvantage since the income generated on other investment products available to
investors in Puerto Rico has been taxed at lower rates than tax rates for income generated on
deposit products. The brokered CDs
market is very competitive and liquid and the Corporation has been able to obtain substantial
amounts of funding in short periods of time. This strategy enhances the Corporations liquidity
position, since the brokered CDs are unsecured and can be obtained at substantially longer
maturities than other regular retail deposits. Also the Corporation has the ability to convert the
fixed-rate brokered CDs to short-term adjustable rate liabilities by entering into interest rate
swap agreements.
During 2005, the Corporations brokered CDs increased significantly. Significant amounts of
short-term brokered CDs were issued to fund the Corporations growth and to replace advances from
the Federal Home Loan Bank as these matured since the collateral for these funds was under
evaluation by the FHLB. During 2005, the FHLB evaluated the eligibility of collateral that secured
the commercial loans to local financial institutions and concluded that such collateral was not
eligible to secure advances from the FHLB. The rate of the short-term brokered CDs approximated
long-term rates given the flat to inverted yield curve. The Corporation decided to use a
significant portion of the funds received from the repayment of $2.4 billion of a secured
commercial loan extended to a local financial institution to repay short-term brokered CDs entered
in 2005 as these matured in the second half of 2006. The Corporations decision to repay maturing
brokered CDs was influenced, among other things, by the flat-to-inverted yield curve. The
Corporation decided to repay higher-rate maturing liabilities, in particular brokered CDs, rather
than investing the proceeds at an interest yield lower than the Corporations cost of funds.
CDs with denominations of $100,000 or higher , including brokered CDs, amounted to $10.5
billion at June 30, 2006. At June 30, 2006, brokered CDs amounted to $9.7 billion. Brokered CDs
are sold by third-party intermediaries in denominations of $100,000 or less. The following table
presents a maturity schedule of brokered CDs at June 30, 2006:
|
|
|
|
|
|
|
Total |
|
|
|
(In thousands) |
|
Three months or less |
|
$ |
1,959,809 |
|
Over three months to six months |
|
|
1,030,249 |
|
Over six months to one year |
|
|
2,000,905 |
|
Over one year to five years |
|
|
1,005,250 |
|
Over five years |
|
|
3,704,088 |
|
|
|
|
|
Total |
|
$ |
9,700,301 |
|
|
|
|
|
The Corporation maintains unsecured lines of credit with other banks. At June 30, 2006,
the Corporations total unused lines of credit with these banks amounted to $335.0 million. At June
30, 2006, the Corporation had an available line of credit with the FHLB, guaranteed with excess
collateral in the amount of $340.2 million.
The Corporations deposit products include regular savings accounts, demand deposit accounts,
money market accounts, CDs, and brokered CDs. Refer to Note 11 Deposits in the accompanying
notes to the unaudited interim consolidated financial statements for further details. Total
deposits amounted to $13.5 billion at June 30, 2006, as compared to $12.5 billion, $11.1 billion
and $7.0 billion at December 31, 2005, June 30, 2005 and 2004, respectively. The increase in total
deposits was mainly due to increases in brokered CDs.
Refer to the Net Interest Income discussion above for information about average balances of
interest-bearing deposits, and the average interest rate paid on deposits for the quarters and six
month periods ended June 30, 2006, 2005 and 2004.
87
Capital
The Corporations stockholders equity amounted to $1.16 billion at June 30, 2006, $1.20
billion at December 31, 2005, $1.29 billion at June 30, 2005, and $1.08 billion at June 30, 2004.
Total capital decreased by $38.4 million and $129.6 million compared to amounts at December 31,
2005 and June 30, 2005, respectively. The decrease was mainly due to dividends declared and paid
coupled with unrealized losses in the Corporations available for sale portfolio and the accrual by
the Corporation during the fourth quarter of 2005 of approximately $74.25 million for the potential
settlement of the class action lawsuits.
On
August 1, 2007, the United States District Court for the District of Puerto Rico issued a
Preliminary Order approving the stipulation of settlement filed in connection with the proposed
settlement of the class action lawsuit brought on behalf of First BanCorps shareholders against
the Corporation in the amount of $74.25 million.
The effectiveness of a final order to be issued by the Court is subject to:
- The payment of $61 million to be deposited by First BanCorp in a settlement fund within
fifteen calendar days of the date of issuance of the Preliminary Order; and
- The mailing of a notice to shareholders that describes the general terms of the
settlement.
The court hearing for the final order of approval of the settlement has been set for October
15, 2007. First BanCorp intends to comply with the $61 million payment requirement within the
timeframe set forth in the terms of the settlement. The remaining amount of $13,250,000 will be
paid before December 31, 2007. The monetary payment will have no impact on the Corporations
earnings or capital in 2007. As reflected in First BanCorps audited Consolidated Financial
Statements, included in the Corporations 2005 Annual Report on Form 10-K, the Corporation accrued
$74.25 million in 2005 for a possible settlement of the class action.
On August 7, 2007, First BanCorp announced that the SEC approved a final settlement with the
Corporation, which resolves the previously disclosed SEC investigation of the Corporation. Under
the settlement, the Corporation agreed, without admitting or denying any wrongdoing, to be enjoined
from future violations of certain provisions of the securities laws. The Corporation also agreed
to pay an $8.5 million civil penalty and the disgorgement of $1 to the SEC. The SEC may request
that the civil penalty be subject to distribution pursuant to the Fair Fund provisions of Section
308(a) of the Sarbanes-Oxley Act of 2002. The monetary payment will have no impact on the
Corporations earnings or capital in 2007. As reflected in First BanCorps previously filed audited
Consolidated Financial Statements for 2005, the Corporation accrued $8.5 million in 2005 for the
potential settlement with the SEC. In connection with the settlement, the Corporation consented to
the entry of a final judgment to implement the terms of the
agreement. The United States District
Court for the Southern District of New York must consent to the entry
of the final judgment in
order to consummate the settlement.
During the first quarter of 2007, the Corporation agreed to issue, subject to regulatory
approval, approximately 9.250 million shares of its common stock to The Bank of Nova Scotia
(Scotiabank), through a private placement offering, valuing the stock at $10.25 per share for a
total purchase price of approximately $94.8 million. The valuation reflects a premium of
approximately 5% over the volume weighted- average closing share price over the 30 trading-day
period that ended January 30, 2007. After the investment, Scotiabank will hold approximately 10% of
First BanCorps currently outstanding common shares. The original agreement provided that the
agreement may be terminated at any time prior to the closing by either the Corporation or
Scotiabank if the
88
closing did not occur by July 31, 2007 (the Termination Date). The agreement was subsequently
amended to change the Termination Date to August 31, 2007. On August 9, 2007, First BanCorp
announced the approval by the Federal Reserve Board of the private placement offering with
Scotiabank.
On March 17, 2006, First BanCorp and its banking subsidiary FirstBank entered into consent
orders with the Board of Governors of the Federal Reserve System, the FDIC and the Office of the
Commissioner relating to mortgage-related transactions with Doral and R&G. For additional
information about these orders, please refer to the Current Report on Form 8-K filed with the SEC
on March 20, 2006.
Effective January 1, 2007, the Corporation early adopted the provision of SFAS 157 and SFAS
159. Refer to Note 2 of the accompanying unaudited consolidated financial statement for additional
information. Regulatory capital increased by the positive adjustment to retained earnings
recognized as part of the adoption of SFAS 159, exceeding by higher margins the capital levels
required to be classified as well-capitalized and strengthening the Corporations current
regulatory capital ratios.
As of June 30, 2006, First BanCorp, FirstBank Puerto Rico and FirstBank Florida were in
compliance with the regulatory capital requirements that were applicable to them as a financial
holding company, a state non-member bank and a thrift, respectively (i.e., total capital and Tier 1
capital to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average
assets of at least 4%). Set forth below are First BanCorp, FirstBank Puerto Rico and FirstBank
Floridas regulatory capital ratios as of June 30, 2006, based on existing Federal Reserve, Federal
Deposit Insurance Corporation and the Office of Thrift Supervision guidelines.
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking subsidiaries |
|
|
|
|
|
|
|
|
|
|
FirstBank |
|
To be well |
REGULATORY CAPITAL RATIOS |
|
First Bancorp |
|
FirstBank |
|
Florida |
|
capitalized |
Total Capital (Total capital to risk-weighted assets) |
|
|
12.60 |
% |
|
|
12.74 |
% |
|
|
10.08 |
% |
|
|
10.00 |
% |
Tier 1 Capital Ratio (Tier I capital to risk-weighted assets) |
|
|
11.47 |
% |
|
|
11.56 |
% |
|
|
9.73 |
% |
|
|
6.00 |
% |
Leverage Ratio (1) |
|
|
6.56 |
% |
|
|
6.53 |
% |
|
|
7.36 |
% |
|
|
5.00 |
% |
|
|
|
(1) |
|
Tier 1 capital to average assets in the case of First BanCorp and First Bank and Tier 1 capital to adjusted total assets in the case of First Bank Florida. |
Dividends
For each of the six-months periods ended on June 30, 2006 and 2005, the Corporation declared
cash dividends of $0.14 per common share representing a 16.7% increase over the aggregate cash
dividend of $0.12 per common share declared for the same period in 2004. Total cash dividends paid
on common shares amounted to $11.6 million for the six-month period ended June 30, 2006 (or a 75%
dividend payout ratio), $11.3 million for the same period in 2005 (or an 11% dividend payout ratio)
and $9.6 million for the corresponding 2004 period (or a 36% dividend payout ratio). Dividends
declared on preferred stock amounted to approximately $20.1 million for each of the six month
periods ended on June 30, 2006, 2005, and 2004.
Off Balance Sheet Arrangements
In the ordinary course of business, the Corporation engages in financial transactions
that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that
are different than the full contract or notional amount of the transaction. These transactions are
designed to (1) meet the financial needs of customers, (2) manage the Corporations credit, market
or liquidity risks, (3) diversify the Corporations funding sources and (4) optimize capital.
As a provider of financial services, the Corporation routinely commits to financial
instruments with off-balance sheet risk to meet the financial needs of its customers. These
financial instruments may include loan commitments and standby letters of credit. These
commitments are subject to the same credit policies and approval process used for on-balance sheet
instruments. These instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the statements of financial position. At June 30, 2006,
commitments to extend credit and commercial and financial standby letters of credit amounted to
approximately $1.9 billion and $105.2 million, respectively. Commitments to extend credit are
agreements to lend to customers as long as the conditions established in the contract are met.
Generally, the Corporations mortgage banking activities do not enter into interest rate lock
agreements with its prospective borrowers.
Contractual Obligations and Commitments
The following table presents a detail of the maturities of the Corporations contractual
obligations and commitments, which consist of CDs, long-term contractual debt obligations, other
contractual obligations, commitments to sell loans and commitments to extend credit:
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commitments |
|
|
|
As of June 30, 2006 |
|
|
|
(In thousands) |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
After 5 years |
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits |
|
$ |
11,377,092 |
|
|
$ |
6,332,631 |
|
|
$ |
875,009 |
|
|
$ |
462,808 |
|
|
$ |
3,706,644 |
|
Federal funds purchased and
securities sold under agreements
to repurchase |
|
|
4,022,686 |
|
|
|
1,710,186 |
|
|
|
250,000 |
|
|
|
387,500 |
|
|
|
1,675,000 |
|
Advances from FHLB |
|
|
194,000 |
|
|
|
105,000 |
|
|
|
89,000 |
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
176,851 |
|
|
|
|
|
|
|
|
|
|
|
7,510 |
|
|
|
169,341 |
|
Other borrowings |
|
|
231,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
16,002,299 |
|
|
$ |
8,147,817 |
|
|
$ |
1,214,009 |
|
|
$ |
857,818 |
|
|
$ |
5,782,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to purchase mortgage loans |
|
$ |
10,533 |
|
|
$ |
10,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to sell mortgage loans |
|
$ |
144,173 |
|
|
$ |
144,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
105,171 |
|
|
$ |
105,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
1,248,093 |
|
|
$ |
1,248,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
52,130 |
|
|
|
52,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans |
|
|
595,798 |
|
|
|
595,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
1,896,021 |
|
|
$ |
1,896,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation has obligations and commitments to make future payments under contracts,
such as outstanding debt securities, and under other commitments to sell mortgage loans at fair
value and commitments to extend credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the contract. Since
certain commitments are expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. In the case of credit cards and personal
lines of credit, the Corporation can at any time and without cause cancel the unused credit
facility. In the ordinary course of business, the Corporation enters into operating leases and
other commercial commitments. There have been no significant changes in such contractual
obligations since the end of 2005.
RISK MANAGEMENT
The Corporation has in place a risk management framework to monitor, evaluate and manage the
principal risks assumed in conducting its activities. First BanCorps business is subject to eight
broad categories of risks: (1) interest rate, (2) market risk, (3) credit risk, (4) liquidity risk,
(5) operational risk, (6) legal and compliance risk, (7) reputation risk, and (8) contingency risk.
First BanCorp has adopted policies and procedures which have been designed to identify and manage
risks to which the Corporation is exposed specifically those relating to interest rate risk, credit
risk, liquidity risk, and operational risk.
Interest Rate Risk Management
First BanCorp manages its asset/liability position in order to limit the effects of changes in
interest rates on net interest income. The Managements Investment and Asset Liability Committee of
FirstBank (MIALCO) oversees interest rate risk, liquidity management and other related matters.
The MIALCO, which reports to the Investment Sub-committee of the Board of Directors
Asset/Liability Risk Committee, is composed of senior management officers, including the Chief
Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Risk Manager of
the Treasury and Investment Department, the Economist and the Treasurer.
91
Committee meetings focus on, among other things, current and expected conditions in world
financial markets, competition and prevailing rates in the local deposit market, liquidity,
unrealized gains and losses in securities, recent or proposed changes to the investment portfolio,
alternative funding sources and their costs, hedging and the possible purchase of derivatives such
as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. The
MIALCO approves funding decisions in light of the Corporations overall growth strategies and
objectives. On a quarterly basis, the MIALCO performs a comprehensive asset/liability review,
examining interest rate risk as described below together with other issues such as liquidity and
capital.
The Corporation uses scenario analysis to measure the effects of changes in interest rates on
net interest income. These simulations are carried out over a one-year and a two-year time horizon,
assuming gradual upward and downward interest rate movements of 200 basis points. Simulations are
carried out in two ways:
|
(1) |
|
using a static balance sheet as the Corporation had on the simulation date, and |
|
|
(2) |
|
using a growing balance sheet based on recent growth patterns and strategies. |
The balance sheet is divided into groups of assets and liabilities in order to simplify the
projections. As interest rates rise or fall, these simulations incorporate expected future lending
rates, current and expected future funding sources and cost, the possible exercise of options,
changes in prepayment rates, and other factors which may be important in projecting the future
growth of net interest income. These projections are carried out for First BanCorp on a fully
consolidated basis.
The Corporation uses asset-liability management software to project future movements in the
Corporations balance sheet and income statement. The starting point of the projections generally
corresponds to the actual values of the balance sheet on the date of the simulations. Interest
rates used for the simulations also correspond to actual rates at the start of the projection
period.
These simulations are highly complex, and use many simplifying assumptions that are intended
to reflect the general behavior of the Corporation over the period in question. There can be no
assurance that actual events will match these assumptions in all cases. For this reason, the
results of these simulations are only approximations of the true sensitivity of net interest income
to changes in market interest rates. There have been no significant changes in the Corporations
interest rate risk profile since the end of 2005.
Derivatives. First BanCorp uses derivative instruments and other strategies to manage its exposure
to interest rate risk caused by changes in interest rates beyond managements control. The
following summarizes major strategies, including derivatives activities, used by the Corporation in
managing interest rate risk:
Interest rate swaps Interest rate swap agreements generally involve the exchange of
fixed- and floating-rate interest payment obligations without the exchange of the underlying
principal. Since a substantial portion of the Corporations loans, mainly commercial loans,
yield variable-rates, the interest rate swaps are utilized to convert fixed-rate brokered CDs
(liabilities) to a variable-rate to better match the variable-rate nature of these loans.
Interest rate cap agreements Interest rate cap agreements provide the right to
receive cash if a reference interest rate rises above a contractual rate. The value increases
as the reference interest rate rises. The Corporation enters into interest rate cap
agreements to protect against rising interest rates. Specifically, the interest rate of the
Corporations commercial loans to other financial institutions is generally a variable rate
limited to the weighted-average coupon of the referenced residential mortgage collateral,
less a contractual servicing fee. The Corporation utilizes interest rate cap agreements to
protect against rising interest rates.
92
Structured repurchase agreements The Corporation uses structured repurchase
agreements, with embedded call options, to reduce the Corporations exposure to interest rate
risk by lengthening the contractual maturities of its liabilities, while keeping funding
costs low. Another type of structured repurchase agreement includes repurchased agreements
with embedded cap corridors; these instruments also provide protection for a rising rate
scenario.
The following table summarizes the notional amount of all derivative instruments as of June
30, 2006, December 31, 2005, June 30, 2005, and June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed versus receive floating |
|
$ |
89,320 |
|
|
$ |
109,320 |
|
|
$ |
109,320 |
|
|
$ |
113,165 |
|
Receive fixed versus pay floating |
|
|
5,457,923 |
|
|
|
5,751,128 |
|
|
|
4,850,107 |
|
|
|
3,579,521 |
|
Embedded written options |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Purchased options |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
125,200 |
|
|
|
150,200 |
|
|
|
48,000 |
|
|
|
25,000 |
|
Purchased interest rate cap agreements |
|
|
348,897 |
|
|
|
386,750 |
|
|
|
475,299 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,048,370 |
|
|
$ |
6,424,428 |
|
|
$ |
5,509,756 |
|
|
$ |
3,769,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the notional amount of all derivatives by the
Corporations designation as of June 30, 2006, December 31, 2005, June 30, 2005 and June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Designated hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed rate certificates of deposit |
|
$ |
4,874,960 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest rate swaps used to hedge
fixed and step rate notes payable |
|
|
165,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges |
|
$ |
5,040,402 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic undesignated hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed rate certificates of deposit and loans |
|
$ |
506,841 |
|
|
$ |
5,860,448 |
|
|
$ |
4,959,427 |
|
|
$ |
3,692,686 |
|
Embedded options on stock index deposits |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Purchased options used to manage exposure to
the stock market on embedded stock index options |
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
125,200 |
|
|
|
150,200 |
|
|
|
48,000 |
|
|
|
25,000 |
|
Purchased interest rate cap agreements |
|
|
348,897 |
|
|
|
386,750 |
|
|
|
475,299 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedge |
|
$ |
1,007,968 |
|
|
$ |
6,424,428 |
|
|
$ |
5,509,756 |
|
|
$ |
3,769,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,048,370 |
|
|
$ |
6,424,428 |
|
|
$ |
5,509,756 |
|
|
$ |
3,769,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the fair value changes of the Corporations derivatives as
well as the source of the fair values:
|
|
|
|
|
|
|
Six
month |
|
|
|
period ended |
|
(In thousands) |
|
June 30, 2006 |
|
Fair value of contracts outstanding at the beginning of the period |
|
$ |
(142,347 |
) |
Contracts realized or otherwise settled during the period |
|
|
1,312 |
|
Changes in fair value during the period |
|
|
(119,093 |
) |
|
|
|
|
Fair value of contracts outstanding at June 30, 2006 |
|
$ |
(260,128 |
) |
|
|
|
|
93
Source of Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Payments Due by Period |
|
|
Maturity |
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
Less Than |
|
Maturity |
|
Maturity |
|
In Excess |
|
Total |
As of June 30, 2006 |
|
One Year |
|
1-3 Years |
|
3-5 Years |
|
of 5 Years |
|
Fair Value |
Prices provided by external sources |
|
$ |
(1,511 |
) |
|
$ |
(8,473 |
) |
|
$ |
(11,243 |
) |
|
$ |
(238,901 |
) |
|
$ |
(260,128 |
) |
Prior to April 2006, none of the derivative instruments held by the Corporation were
qualified for hedge accounting. Effective April 3, 2006, the Corporation adopted the long-haul
method of effectiveness testing under SFAS 133 for substantially all of the interest rate swaps
that hedge its brokered CDs and medium-term notes. The long-haul method requires periodic
assessment of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness results
to the extent the changes in the fair value of the derivative do not offset the changes in fair
values of the hedged liabilities due to changes in the hedged risk. Prior to the implementation of
fair value hedge accounting, the Corporation recorded unrealized losses in the valuation of
interest rate swaps of approximately $68.0 million during the first quarter of 2006.
With the implementation of the long-haul method with respect to the brokered CDs and
medium-term notes on April 3, 2006, the basis differential between the market value and book value
of the hedged liabilities at the inception of fair value hedge accounting, of approximately $200.0
million, amortizes or accretes as a yield adjustment over the remaining term of the hedged
liabilities. For the quarter ended June 30, 2006, the Corporation recorded an amortization of $1.3
million as a basis adjustment.
Effective January 1, 2007, the Corporation decided to early adopt SFAS 159 for the callable
brokered CDs and the callable fixed medium-term notes (Notes) that were hedged with interest rate
swaps. One of the main considerations to early adopt SFAS 159 for these instruments is to
eliminate the operational procedures required by the long-haul method of accounting in terms of
documentation, effectiveness assessment, and manual procedures followed by the Corporation to
fulfill the requirements specified by SFAS 133. Upon adoption of SFAS 159, First BanCorp selected
the fair value measurement for approximately 63% of the brokered CDs portfolio and for certain
medium-term notes. The CDs and Notes chosen for the fair value measurement option are the ones
hedged at January 1, 2007 by callable interest rate swaps with the same terms and conditions. The
adoption of SFAS 159 also resulted on a positive after-tax impact to retained earnings of
approximately $92.2 million. Under SFAS 159, this one-time credit will not be recognized in
current earnings.
The use of derivatives involves market and credit risk. The market risk of derivatives stems
principally from the potential for changes in the value of derivatives contracts based on changes
in interest rates. The credit risk of derivatives arises from the potential of a counterpartys
default on its contractual obligations. To manage this credit risk, the Corporation deals with
counterparties of good credit standing, enters into master netting agreements whenever possible
and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off
that provide for the net settlement of contracts with the same counterparty in the event of
default.
Credit Risk Management
First BanCorp is subject to credit risk mainly with respect to its portfolio of loans
receivable and off-balance sheet instruments, mainly derivatives and loan commitments. Loans
receivable represent loans that First BanCorp
holds for investment and, therefore, First BanCorp is at risk for the term of the loan. Loan
commitments represent commitments to extend credit, subject to specific condition, for specific
amounts and maturities. These commitments may expose the Corporation to credit risk and are
subject to the same review and approval process as loans. Refer to Contractual Obligations and
Commitments above for further details. The credit risk of
94
derivatives arises from the potential
of a counterpartys default on its contractual obligations. To manage this credit risk, the
Corporation deals with counterparties of good credit standing, enters into master netting
agreements whenever possible and, when appropriate, obtains collateral. For further details and
information on the Corporations derivative credit risk exposure, refer to Interest Rate Risk
Management section above. The Corporation manages its credit risk through credit policy,
underwriting, and quality control. The Corporation also employs proactive collection and loss
mitigation efforts.
The Corporation may also encounter risk of default in relation to its securities portfolio.
The securities held by the Corporation are principally mortgage-backed securities, U.S. Treasury
and agency securities. Thus, a substantial portion of these instruments are guaranteed by
mortgages, a U.S. government-sponsored entity or the full faith and credit of the U.S. government
and are deemed to be of the highest credit quality.
Managements Credit Committee, comprised of the Corporations Chief Credit Risk Officer and
other senior executives, has primary responsibility for setting strategies to achieve the
Corporations credit risk goals and objectives. Those goals and objectives are documented in the
Corporations Credit Policy.
Non-performing Assets and Allowance for Loan and Lease Losses
Allowance for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings to maintain the allowance for
loan and lease losses at a level that the Corporation considers adequate to absorb probable losses
inherent in the portfolio. The Corporation establishes the allowance for loan and lease losses
based on its asset classification report to cover the total amount of any assets classified as a
loss, the probable loss exposure of other classified assets, and the estimated losses of assets
not classified. The adequacy of the allowance for loan and lease losses is also based upon a
number of additional factors including historical loan loss experience, current economic
conditions, the fair value of the underlying collateral, and the financial condition of the
borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation.
Although management believes that the allowance for loan and lease losses is adequate, factors
beyond the Corporations control, including factors affecting the Puerto Rico, the state of
Florida, US VI or British VI economies may contribute to delinquencies and defaults, thus
necessitating additional reserves.
For small, homogeneous loans, including residential mortgage loans, auto loans, consumer
loans, finance lease loans, and commercial and construction loans under $1.0 million, the
Corporation evaluates a specific allowance based on average historical loss experience for each
corresponding type of loans. The methodology of accounting for all probable losses is made in
accordance with the guidance provided by Statement of Accounting Standards No. 5, Accounting for
Contingencies.
Commercial and construction loans in amounts of over $1.0 million are individually evaluated
on a quarterly basis for impairment following the provisions of SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. A loan is impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The impairment loss, if any, on each individual loan
identified as impaired is generally measured based on the present value of expected cash flows
discounted at the loans effective interest rate. As a practical expedient, impairment may be
measured based on the loans observable market price, or the fair value of the collateral, if the
loan is collateral dependent.
95
The following table sets forth an analysis of the activity in the allowance for loan and lease
losses during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six Month Period Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
|
2006 |
|
|
2005 |
|
|
(As Restated) |
|
Allowance for loan and lease losses, beginning of period |
|
$ |
152,596 |
|
|
$ |
144,201 |
|
|
$ |
130,357 |
|
|
$ |
147,999 |
|
|
$ |
141,036 |
|
|
$ |
126,378 |
|
Provision for loan and lease losses |
|
|
9,354 |
|
|
|
11,075 |
|
|
|
13,200 |
|
|
|
28,730 |
|
|
|
22,029 |
|
|
|
26,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
(487 |
) |
|
|
(677 |
) |
|
|
(59 |
) |
|
|
(700 |
) |
|
|
(742 |
) |
|
|
(85 |
) |
Commercial and Construction |
|
|
(1,024 |
) |
|
|
(1,813 |
) |
|
|
(1,785 |
) |
|
|
(3,011 |
) |
|
|
(3,296 |
) |
|
|
(3,321 |
) |
Finance leases |
|
|
(1,022 |
) |
|
|
(406 |
) |
|
|
(765 |
) |
|
|
(1,716 |
) |
|
|
(839 |
) |
|
|
(1,313 |
) |
Consumer |
|
|
(14,279 |
) |
|
|
(8,102 |
) |
|
|
(8,672 |
) |
|
|
(27,834 |
) |
|
|
(16,720 |
) |
|
|
(17,258 |
) |
Recoveries |
|
|
1,389 |
|
|
|
1,876 |
|
|
|
1,402 |
|
|
|
3,059 |
|
|
|
3,323 |
|
|
|
2,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(15,423 |
) |
|
|
(9,122 |
) |
|
|
(9,879 |
) |
|
|
(30,202 |
) |
|
|
(18,274 |
) |
|
|
(19,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
146,527 |
|
|
$ |
146,154 |
|
|
$ |
133,678 |
|
|
$ |
146,527 |
|
|
$ |
146,154 |
|
|
$ |
133,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to period end total
loans receivable |
|
|
1.35 |
% |
|
|
1.24 |
% |
|
|
1.68 |
% |
|
|
1.35 |
% |
|
|
1.24 |
% |
|
|
1.68 |
% |
Net charge-offs annualized to average loans
outstanding during the period |
|
|
0.50 |
% |
|
|
0.32 |
% |
|
|
0.52 |
% |
|
|
0.48 |
% |
|
|
0.34 |
% |
|
|
0.52 |
% |
Provision for loan and lease losses to net charge-
offs during the period |
|
|
0.61 |
x |
|
|
1.21 |
x |
|
|
1.34 |
x |
|
|
0.95 |
x |
|
|
1.21 |
x |
|
|
1.38 |
x |
First BanCorps allowance for loan and lease losses was $146.5 million at June 30, 2006,
compared to $146.2 million at June 30, 2005 and $133.7 million at June 30, 2004. The provision for
loan and lease losses for the second quarter and first half of 2006 amounted to $9.4 million and
$28.7 million, respectively, compared to $11.1 million and $22.0 million, respectively, for the
corresponding periods in 2005 and $13.2 million and $26.4 million, respectively, for the
corresponding periods in 2004. The decrease in this provision for the second quarter of 2006
compared to the second quarter of 2005 was mainly due to a significant reduction in the
Corporations secured commercial loans to local financial institutions portfolio due to the payment
of $2.4 billion received during the second quarter of 2006 that reduced the outstanding balance of
a secured commercial loan extended to a local financial institution.
The increase in the provision for the first half of 2006, compared to the same period in 2005,
principally reflects growth in the Corporations commercial (other than secured commercial loan to
local financial institutions) and consumer portfolios coupled with increasing trends in
non-performing loans and charge-offs experienced during 2006 as compared to 2005. The
Corporations net charge-offs were affected by the fiscal and economic situation of Puerto Rico.
According to the Puerto Rico Planning Board, Puerto Rico is currently in a midst of a recession.
The latest Gross National Product forecast by the Puerto Rico Planning Board expects a 1.4%
reduction in fiscal year 2007 compared to fiscal year 2006. The slowdown in activity is the result
of, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the
upward trend in short-term interest rates and the flattening of the yield curve, and higher levels
of oil prices. The decrease in the provision during 2005 as compared to 2004 was primarily
attributable to the seasoning of the commercial loans portfolio, a decrease in net charge-offs
experienced during 2005, and the stability of non-performing loans.
First BanCorps ratio of the allowance for loan and lease losses to period end total loans was
1.35% at June 30, 2006, compared to 1.24% at June 30, 2005 and 1.68% at June 30, 2004. During
2005, the Corporation determined that, based on an analysis of credit quality, the composition of
the Corporations loan portfolio, and recent loss experience, specifically for commercial and
residential real estate portfolio, a smaller provision was required and hence a smaller ratio
resulted during 2005, compared to 2004.
96
The Corporations ratio of the provision for loan and lease losses to net charge-offs for the
second quarter and first half of 2006 was 61% and 95%, respectively, compared to 121% for each of
the corresponding periods in 2005. During the second quarter of 2006, due to a significant
reduction in the Corporations secured commercial loans to local financial institutions portfolio,
the Corporations provision for loan and lease losses decreased by $1.7 million compared to the
second quarter of 2005. As a result, the Corporations ratio of the provision for loan and lease
losses to net charge-offs decreased by 60 basis points in the second quarter of 2006 compared to
the second quarter of 2005. For the first half of 2006, the Corporations ratio of provision for
loan and lease losses to net charge-offs decreased by 26 basis points, compared to the same period
in 2005, mainly due to the reduction in the Corporations commercial portfolio coupled with changes
in the mix of the Corporations as the proportion of loans collateralized by residential real
estate to total loans increased during 2006. In 2005 compared to 2004, the ratio of provision for
loan and lease losses to net charge-offs decreased due to the Corporations loss experience, the
credit quality of the portfolio, and change in the mix of the loans portfolio .
Non-accruing and Non-performing Assets
Total non-performing assets are the sum of non-accruing loans, foreclosed real estate, and
other repossessed properties. Non-accruing loans are loans as to which interest is no longer
being recognized. When loans fall into non-accruing status, all previously accrued and uncollected
interest is charged against interest income.
Non-accruing Loans Policy
Residential Real Estate Loans - The Corporation classifies real estate loans in
non-accruing status when interest and principal have not been received for a period of 90 days or
more.
Commercial Loans - The Corporation places commercial loans (including commercial real estate
and construction loans) in non-accruing status when interest and principal have not been received
in a period of 90 days or more. 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.
Finance Leases Finance leases are classified in non-accruing 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-accruing status when interest and
principal have not been received for a period of 90 days or more.
Other Real Estate Owned (OREO)
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 the real estate at the date of acquisition
(estimated realizable value).
Other Repossessed Property
The other repossessed property category 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
Past due loans are accruing commercial loans, which are contractually delinquent for 90 days
or more. Past due commercial loans are current as to interest but delinquent in the payment of
principal.
The following table presents non-performing assets at the dates indicated:
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
2004 |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
(As Restated) |
|
Non-accruing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
85,542 |
|
|
$ |
54,777 |
|
|
$ |
37,155 |
|
|
$ |
28,207 |
|
Commercial, commercial real estate
and construction |
|
|
49,140 |
|
|
|
35,814 |
|
|
|
29,210 |
|
|
|
44,274 |
|
Finance leases |
|
|
6,125 |
|
|
|
3,272 |
|
|
|
2,465 |
|
|
|
2,684 |
|
Consumer |
|
|
43,169 |
|
|
|
40,459 |
|
|
|
24,015 |
|
|
|
15,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,976 |
|
|
|
134,322 |
|
|
|
92,845 |
|
|
|
90,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
3,435 |
|
|
|
5,019 |
|
|
|
8,463 |
|
|
|
5,599 |
|
Other repossessed property |
|
|
15,000 |
|
|
|
9,631 |
|
|
|
8,259 |
|
|
|
5,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
202,411 |
|
|
$ |
148,972 |
|
|
$ |
109,567 |
|
|
$ |
102,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due loans |
|
$ |
31,366 |
|
|
$ |
27,501 |
|
|
$ |
31,426 |
|
|
$ |
16,519 |
|
Non-performing assets to total assets |
|
|
1.00 |
% |
|
|
0.75 |
% |
|
|
0.58 |
% |
|
|
0.71 |
% |
Non-accruing loans to total loans receivable |
|
|
1.70 |
% |
|
|
1.06 |
% |
|
|
0.79 |
% |
|
|
1.14 |
% |
Allowance for loan and lease losses |
|
$ |
146,527 |
|
|
$ |
147,999 |
|
|
$ |
146,154 |
|
|
$ |
133,678 |
|
Allowance to total non-accruing loans |
|
|
80 |
% |
|
|
110 |
% |
|
|
157 |
% |
|
|
147 |
% |
Allowance to total non-accruing loans,
excluding residential real estate loans |
|
|
149 |
% |
|
|
186 |
% |
|
|
262 |
% |
|
|
213 |
% |
Due to deteriorating economic conditions in Puerto Rico, increased delinquencies, and
overall growth of the Corporations loan portfolio, First BanCorp increased its allowance for loan
and lease losses from $133.7 million as of June 30, 2004 to $146.5 million as of June 30, 2006.
As a result of the increase in delinquencies, the Corporations non-accruing loans to total
loans receivable ratio has increased over time from 1.14% at June 30, 2004 to 1.70% at June 30,
2006. The increase was mainly due to increases in non-accruing loans in the residential real
estate portfolio. Historically, the Corporation has experienced the lowest rates of losses for
this portfolio. As a consequence, the provision and allowance for loan and lease losses did not
increase proportionately with the increase in non-accruing loans. As of June 30, 2006, the
Corporations ratio of the allowance for loan and lease losses to non-performing loans decreased by
67 basis points from 147% as of June 30, 2004 to 80% as of June 30, 2006. Excluding residential
real estate loans, the ratio of the allowance for loan and lease losses to non-accruing loans
decreased by 64 basis points from 213% at June 30, 2004 to 149% at June 30, 2006.
The increase in consumer non-accrual loans mainly relates to increases in the Corporations
auto and personal unsecured portfolios.
Liquidity Risk Management
Liquidity refers to the level of cash and eligible investments to meet loan and investment
commitments, potential deposit outflows and debt repayments. MIALCO, using measures of liquidity
developed by management, which involves the use of several assumptions, reviews the Corporations
liquidity position on a weekly basis.
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 as
it protects the Corporations liquidity from market disruptions. The principal sources of
short-term funds are deposits, securities sold under agreements to repurchase, and lines of credit
with the FHLB as well as other unsecured lines established with financial institutions. MIALCO
reviews credit availability on a regular basis. In the past, the Corporation has
98
securitized and sold auto and mortgage loans as supplementary sources of funding. Additional
funding is provided by the sale of commercial paper as well as long-term funding through the
issuance of notes and long-term brokered CDs. The cost of these different alternatives, among other
things, is taken into consideration. The Corporations principal uses of funds are the origination
of loans and the repayment of maturing deposit accounts and borrowings.
A large portion of the Corporations funding is retail brokered CDs issued by the banking
subsidiaries. In the event that the Corporations bank subsidiaries are not well-capitalized
institutions, they might not be to replace this source of funding. The banking subsidiaries
currently comply with the minimum requirements ratios for well-capitalized institutions and the
Corporation does not foresee any risks to their ability to issue brokered deposits. In addition,
the average life of the retail brokered CDs was approximately 5.5 years at June 30, 2006.
Approximately 44% of these certificates are callable, but only at the Corporations option.
Refer to the Sources of Funds section above for further details on the Corporations
brokered CDs.
Operational Risk
The Corporation faces ongoing and emerging risk and regulatory pressures 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, its 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 Corporations 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, legal and
compliance, the Corporation has specialized groups, such as the Legal Department, Information
Security, Corporate Compliance, Information Technology 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Corporation is exposed, see the information
contained under the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations Risk Management.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Control and Procedures
First BanCorps management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation of First BanCorps
disclosure controls and procedures as of June 30, 2006. Disclosure controls and procedures are
defined under SEC rules as controls and other procedures that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required
time periods. Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports that it files or
submits
99
under the Securities Exchange Act of 1934 is accumulated and communicated to the issuers
management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions regarding required
disclosure. As a result of this evaluation, First BanCorps Chief Executive
Officer and its current Chief Financial Officer have concluded that the Corporations disclosure
controls and procedures were not effective as of June 30, 2006
due to the existence of the material weaknesses discussed below.
A material weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis by management or employees
in the normal course of their assigned functions.
As
reported in the Corporations 2005 Annual Report on Form 10-K,
dated February 9, 2007, management previously
concluded that its internal control over financial reporting was not effective as of December 31,
2005. Such conclusion resulted from the identification of the following material weaknesses:
|
1. |
|
Ineffective Control Environment. |
|
|
2. |
|
Ineffective controls over the documentation and communication of relevant terms of
certain mortgage loans bulk purchase transactions. |
|
|
3. |
|
Ineffective controls over communications to the Audit Committee. |
|
|
4. |
|
Ineffective controls over communication to the Corporations independent registered
public accounting firm. |
|
|
5. |
|
Ineffective anti-fraud controls and procedures. |
|
|
6. |
|
Insufficient accounting resources and expertise. |
|
|
7. |
|
Ineffective controls over the accounting for mortgage-related transactions. |
|
|
8. |
|
Ineffective controls over the accounting for derivative financial instruments. |
|
|
9. |
|
Ineffective controls over the valuation of premiums and discounts on mortgage-backed
securities. |
These material weaknesses are discussed in greater detail in our Annual Report on Form 10-K
for the year ended December 31, 2005.
Remediation
of previously disclosed material weaknesses
During
the first quarter of 2006, First BanCorp completed the implementation
of the following remediation steps to fully remediate the material
weakness number 9 Ineffective controls over the valuation of
premiums and discounts on mortgage-backed securities as of
March 31, 2006. The remediation steps taken by management were
to adjust the balances to reflect the use of the effective interest
method. In addition, the Corporation reviewed the accounting policy
to require the use of the interest method for the amortization of
premiums and discounts on mortgage-backed securities. As a result of
such review, effective January 1, 2006, the Corporation
implemented the interest method for the amortization of premiums and
discounts on mortgage-backed securities.
During the second quarter of 2006, First BanCorp completed the implementation of the
following remediation steps to fully remediate the material weaknesses number 7 and
8:
|
|
|
Ineffective controls over the accounting for mortgage-related transactions. The
Corporations management believes that, as of June 30, 2006, the Corporation has fully
remediated the material weakness in its internal control over financial reporting with
respect to purchases of mortgages in bulk and the purchases of mortgages where the seller
of the mortgages retains the servicing responsibilities. The
Corporation has implemented controls that
specify that the terms of any recourse provisions or retained servicing arrangements must
be reviewed by the General Counsel before they are included in purchase agreements. In
addition, the Board has reviewed the Corporations risk
management program and enhanced the
communication to the Audit Committee. |
100
|
|
|
Ineffective controls over the accounting for derivative financial instruments. The
Corporations management believes that, as of June 30, 2006, the Corporation has fully
remediated the material weakness in its internal control over financial reporting with
respect to the identification of derivatives and the measurement of hedge effectiveness.
With respect to the identification of derivatives, the Corporation has implemented the
following changes: |
|
|
|
The Corporation created the Investment and Derivative Risk Manager
Position, which is responsible for the evaluation of complex transactions, such as
derivatives, implementation of policies and procedures and monitoring of external
consultants analyses/computations. |
|
|
|
|
The legal and accounting departments must review any new forms of
transactions or any variants of forms of transactions for which the Corporation has
not determined the accounting in order to identify any derivatives resulting from
the structure of such transactions; and |
|
|
|
|
Periodic testing of the hedge effectiveness process is required to make sure that it
is operating effectively to ensure compliance with SFAS 133. |
|
|
|
|
Education of personnel on derivative financial instruments and
involvement of outside experts, as necessary. |
With respect to the measurement of hedge effectiveness, the Corporation has revised its
control accounting procedures to state that the receipt of an upfront payment from interest
swap counterparty precludes the use of the short-cut method of accounting under SFAS 133.
Changes
in Internal Control over Financial Reporting
In
addition to the remediation of the above mentioned material
weaknesses, the following are changes in the Corporations
internal control over financial reporting that occurred during the
period ended June 30, 2006 that materially affected, or are
reasonably likely to materially affect, the Corporations
internal control over financial reporting.
|
1. |
|
Changes in Management and Clarification of the Role, Responsibilities and
Authority of Management. In addition to the previous
appointments of a new CEO and COO, in February 15, 2006 the Board appointed a new General Counsel, who reports to the CEO. |
|
|
2. |
|
Board Membership Changes. In November 2005, the Board elected Fernando Rodriguez-Amaro as a new
independent director to serve as an additional audit committee financial expert, and
thereafter appointed him Chairman of the Audit Committee as of January 1, 2006. Also, in
the first quarter of 2006, the Board appointed Jose Menendez Cortada as the Lead
Independent Director of the Board. |
|
|
3. |
|
Risk Management Program. During the first quarter of 2006, the Board reviewed
the Corporations risk management program with the assistance of outside consultants and
legal counsel and began a process of realigning the risk management
functions and the adoption of an enterprise risk management process.
During the second quarter of 2006, the Board appointed a senior management officer as Chief Risk Officer and
appointed this officer to the Risk Management Council with reporting responsibilities to
the CEO and the Audit Committee. |
|
|
4. |
|
Corporate Governance Review. During the first quarter of 2006, with the
assistance of outside consultants and outside counsel, the Corporate Governance Committee
of the Board re-evaluated the Corporations corporate governance policies and made
recommendations to the full Board for changes. This effort is expected to result in a
clearer understanding of the responsibilities and duties of the Board and its committees
and in an alignment of those responsibilities with the industrys best practices. |
|
|
5. |
|
Ethical training of employees and directors. During the second quarter of
2006, the Corporation designed and started offering enhanced corporate compliance seminars
to every employee and director of the Corporation. Through the corporate compliance
training program, the Corporation is emphasizing the importance of compliance with the
Corporations policies and procedures and control |
101
systems, including the new policy regarding full and complete documentation of agreements
and prohibiting oral and side agreements, the Corporations Code of Ethics and Code of
Conduct, the Corporations various legal compliance programs, and the availability of
mechanisms to report possible unethical behavior, such as the Audit Committees
whistleblower hotline.
As
discussed in First BanCorps 2006 Annual Report on Form 10-K
filed with the SEC on July 9, 2007, First BanCorp completed the execution of its
remediation plan, evaluated and tested the effectiveness of the controls as of December 31, 2006,
and determined that the material weaknesses described above had been remediated.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is subject to various legal proceedings arising as a result of the restatement
of the Corporations financial statements for the years 2004, 2003 and 2002. For information on
these proceedings, please refer to Note 17 to the unaudited interim financial statements included
in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
For a detailed discussion of certain risk factors that could affect First BanCorps
operations, financial condition or results for future periods see Item 1A, Risk Factors, in First
BanCorps 2005 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
102
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.
Registrant
|
|
Date: August 20, 2007 |
By: |
/s/ Luis M. Beauchamp
|
|
|
|
Luis M. Beauchamp
Chairman, President and Chief
Executive Officer |
|
|
|
|
|
Date: August 20, 2007 |
By: |
/s/ Fernando Scherrer
|
|
|
|
Fernando Scherrer |
|
|
|
Executive Vice President
and Chief Financial Officer |
|
|
103