Edgar Filing: FIRST BANCORP /PR/

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER 001-14793

FIRST BANCORP.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Puerto Rico

66-0561882

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification number)

1519 Ponce de León Avenue, Stop 23

Santurce, Puerto Rico

00908

(Address of principal executive offices)

(Zip Code)

(787) 729-8200

(Registrant’s 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock: 207,067,156 shares outstanding as of October 31, 2013.

FIRST BANCORP.

INDEX PAGE


		PAGE
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2013 and December 31, 2012		5

	Consolidated Statements of Income (Loss) (Unaudited) – Quarters ended September 30, 2013 and 2012 and nine-month periods ended September 30, 2013 and 2012		6

	Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Quarters ended September 30, 2013 and 2012 and nine-month periods ended September 30, 2013 and 2012		7

	Consolidated Statements of Cash Flows (Unaudited) – Nine-month periods ended September 30, 2013 and 2012		8

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine-month periods ended September 30, 2013 and 2012		9

	Notes to Consolidated Financial Statements (Unaudited)		10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		70
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		129
Item 4.	Controls and Procedures		129

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		130
Item 1A.	Risk Factors		130
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		134
Item 3.	Defaults Upon Senior Securities		135
Item 4.	Mine Safety Disclosures		135
Item 5.	Other Information		135
Item 6.	Exhibits		135

SIGNATURES

Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp. (the “Corporation”) with the Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”

Such “forward-looking statements,” which speak only as of the date made, and various factors, including, but not limited to, the following, could cause actual results to differ materially from those expressed in, or implied by such “forward-looking statements”:

•

uncertainty about whether the Corporation and FirstBank Puerto Rico (“FirstBank” or “the Bank”) will be able to fully comply with the written agreement dated June 3, 2010 (the “Written Agreement”) that the Corporation entered into with the Federal Reserve Bank of New York (the “New York FED” or “Federal Reserve”) and the consent order dated June 2, 2010 (the “FDIC Order”) and together with the Written Agreement, (the “Agreements”) that the Corporation’s banking subsidiary, FirstBank entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) that, among other things, require the Bank to maintain certain capital levels and reduce its special mention, classified, delinquent and non-performing assets;

•

the risk of being subject to possible additional regulatory actions;

•

uncertainty as to the availability of certain funding sources, such as retail brokered certificates of deposit (“brokered CDs”);

•

the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the FDIC Order;

•

the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders in the future due to the Corporation’s inability to receive approval from the New York FED and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to receive dividends from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;

•

the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and their impact on the credit quality of the Corporation’s loans and other assets, which has contributed and may continue to contribute to, among other things, the high levels of non-performing assets, charge-offs and provisions and may subject the Corporation to further risk from loan defaults and foreclosures;

•

the ability of FirstBank to realize the benefit of the deferred tax asset;

•

adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”) and the U.S. Virgin Islands (“USVI”), and British Virgin Islands (“BVI”), including the interest rate environment, market liquidity, housing absorption rates, real estate prices, and disruptions in the U.S. capital markets, which may reduce interest margins, impact funding sources, and affect demand for all of the Corporation’s products and services and reduce the Corporation’s revenues and earnings, and the value of the Corporation’s assets;

•

an adverse change in the Corporation’s ability to attract new clients and retain existing ones;

•

a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico, the current fiscal problems and budget deficit of the Puerto Rico government and recent credit downgrades of the Puerto Rico government;

•

a credit default by the Puerto Rico government or any of its public corporations or other instrumentalities, and recent and/or future downgrades of the long-term debt ratings of the Puerto Rico government, which could adversely affect economic conditions in Puerto Rico;

•

the risk that any portion of the unrealized losses in the Corporation’s investment portfolio is determined to be other-than-temporary, including unrealized losses on Puerto Rico government obligations;

•

uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., the USVI, and the BVI, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results;

•

uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. financial markets, and the impact such actions may have on the Corporation’s business, financial condition and results of operations;

•

changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the Federal Reserve Board, the New York FED, the FDIC, government-sponsored housing agencies, and regulators in Puerto Rico, the USVI and the BVI;

•

the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management policies may not be adequate;

•

the risk that the FDIC may further increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an additional increase in the Corporation’s non-interest expenses;

•

the impact on the Corporation’s results of operations and financial condition of acquisitions and dispositions;

•

a need to recognize additional impairments on financial instruments, goodwill or other intangible assets relating to acquisitions;

•

the risk that downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the Corporation’s ability to access necessary external funds;

•

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the Corporation’s businesses, business practices and cost of operations;

•

the risk of losses in the value of the Corporation’s investment in an unconsolidated entity that the Corporation does not control; and

•

general competitive factors and industry consolidation.

The Corporation does not undertake, and specifically disclaims any obligation, to update any of the “forward-looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, as well as “Part II, Item 1A, Risk Factors” in this quarterly report on Form 10-Q, for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	September 30, 2013			December 31, 2012
(In thousands, except for share information)
ASSETS
Cash and due from banks	$	623,019		$	730,016

Money market investments:
Time deposits with other financial institutions		300			505
Other short-term investments		201,065			216,330

Total money market investments		201,365			216,835

Investment securities available for sale, at fair value:
Securities pledged that can be repledged		1,050,006			1,070,968
Other investment securities		997,324			660,109

Total investment securities available for sale		2,047,330			1,731,077

Other equity securities		32,096			38,757

Investment in unconsolidated entity		13,172			23,970

Loans, net of allowance for loan and lease losses of $289,379 (2012 - $435,414)		9,219,255			9,618,700
Loans held for sale, at lower of cost or market		114,592			85,394

Total loans, net		9,333,847			9,704,094

Premises and equipment, net		172,371			181,363
Other real estate owned		133,284			185,764
Accrued interest receivable on loans and investments		49,848			51,671
Other assets		181,118			236,194

Total assets	$	12,787,450		$	13,099,741

LIABILITIES
Non-interest-bearing deposits	$	845,917		$	837,387
Interest-bearing deposits		9,108,280			9,027,159

Total deposits		9,954,197			9,864,546
Securities sold under agreements to repurchase		900,000			900,000
Advances from the Federal Home Loan Bank (FHLB)		353,440			508,440
Other borrowings		231,959			231,959
Accounts payable and other liabilities		127,261			109,773

Total liabilities		11,566,857			11,614,718

STOCKHOLDERS’ EQUITY
Preferred stock, authorized, 50,000,000 shares:
Non-cumulative Perpetual Monthly Income Preferred Stock: issued - 22,004,000 shares, outstanding 2,521,872 shares, aggregate liquidation value of $63,047		63,047			63,047

Common stock, $0.10 par value, authorized, 2,000,000,000 shares; issued, 207,588,787 shares (2012 - 206,730,318 shares issued)		20,759			20,673
Less: Treasury stock (at par value)		(55	)		(49	)

Common stock outstanding, 207,042,785 shares outstanding (2012 - 206,235,465 shares outstanding)		20,704			20,624

Additional paid-in capital		887,437			885,754
Retained earnings		307,890			487,166
Accumulated other comprehensive (loss) income, net of tax expense of $7,757 (2012 - $7,749)		(58,485	)		28,432

Total stockholders’ equity		1,220,593			1,485,023

Total liabilities and stockholders’ equity	$	12,787,450		$	13,099,741

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)


	Quarter Ended						Nine-Month Period Ended
	September 30,						September 30,
(In thousands, except per share information)	2013			2012			2013			2012

Interest income:
Loans	$	147,325		$	155,225		$	443,954		$	437,990
Investment securities		14,422			11,344			37,650			33,513
Money market investments		456			395			1,494			1,220

Total interest income		162,203			166,964			483,098			472,723

Interest expense:
Deposits		21,453			29,953			70,915			100,176
Securities sold under agreements to repurchase		6,531			6,707			19,418			21,825
Advances from FHLB		1,524			2,953			5,180			9,222
Notes payable and other borrowings		1,790			1,848			5,299			5,426

Total interest expense		31,298			41,461			100,812			136,649

Net interest income		130,905			125,503			382,286			336,074
Provision for loan and lease losses		22,195			28,952			220,782			90,033

Net interest income after provision for loan and lease losses		108,710			96,551			161,504			246,041

Non-interest income (loss):
Service charges on deposit accounts		3,157			3,267			9,635			9,754
Mortgage banking activities		3,521			4,728			12,924			13,260
Net gain (loss) on sale of investments (includes $42 accumulated other comprehensive income reclassification for other-than-temporary impairment on equity securities for the nine-month period ended September 30, 2013)		—			10			(42	)		36
Other-than-temporary impairment losses on available-for-sale debt securities:
Total other-than-temporary impairment losses		—			—			—			—
Portion of other-than-temporary impairment losses recognized in other comprehensive income		—			(557	)		(117	)		(1,933	)

Net impairment losses on available-for-sale debt securities		—			(557	)		(117	)		(1,933	)
Equity in loss of unconsolidated entity		(5,908	)		(2,199	)		(10,798	)		(10,926	)
Impairment of collateral pledged to Lehman		—			—			(66,574	)		—
Insurance income		1,303			1,429			4,831			4,221
Other non-interest income		7,987			8,448			22,167			23,211

Total non-interest income (loss)		10,060			15,126			(27,974	)		37,623

Non-interest expenses:
Employees’ compensation and benefits		32,823			31,058			99,493			93,770
Occupancy and equipment		15,134			15,208			45,150			46,065
Business promotion		3,538			4,004			10,726			10,026
Professional fees		11,840			7,469			36,707			19,768
Taxes, other than income taxes		4,693			3,499			13,921			10,350
Insurance and supervisory fees		11,513			13,023			37,018			39,333
Net loss on other real estate owned (OREO) and OREO operations		7,052			8,686			29,191			18,915
Credit and debit card processing expenses		2,682			2,574			8,040			3,516
Communications		1,866			1,797			5,565			5,276
Other non-interest expenses		8,013			4,525			22,676			16,959

Total non-interest expenses		99,154			91,843			308,487			263,978

Income (loss) before income taxes		19,616			19,834			(174,957	)		19,686
Income tax expense		(3,676	)		(761	)		(4,319	)		(4,439	)

Net income (loss)	$	15,940		$	19,073		$	(179,276	)	$	15,247

Net income (loss) attributable to common stockholders	$	15,940		$	19,073		$	(179,276	)	$	15,247

Net earnings (loss) per common share:
Basic	$	0.08		$	0.09		$	(0.87	)	$	0.07

Diluted	$	0.08		$	0.09		$	(0.87	)	$	0.07

Dividends declared per common share	$	—		$	—		$	—		$	—

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)


	Quarter Ended						Nine-Month Period Ended
	September 30,						September 30,
(In thousands)	2013			2012			2013			2012

Net income (loss)	$	15,940		$	19,073		$	(179,276	)	$	15,247

Available-for-sale debt securities on which other-than-temporary impairment has been recognized:
Subsequent unrealized gain on debt securities on which an other-than-temporary impairment has been recognized		1,304			898			2,739			4,443
Reclassification adjustment for other-than-temporary impairment on debt securities included in net income		—			557			117			1,933
All other unrealized gains and losses on available-for-sale securities:
All other unrealized holding (losses) gains arising during the period		(20,061	)		14,868			(89,807	)		17,009
Reclassification adjustment for other-than-temporary impairment on equity securities		—			—			42			—
Income tax benefit (expense) related to items of other comprehensive income		414			(442	)		(8	)		(92	)

Other comprehensive (loss) income for the period, net of tax		(18,343	)		15,881			(86,917	)		23,293

Total comprehensive (loss) income	$	(2,403	)	$	34,954		$	(266,193	)	$	38,540

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine-Month Period Ended
	September 30,			September 30,
(In thousands)	2013			2012
Cash flows from operating activities:
Net (loss) income	$	(179,276	)	$	15,247
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		17,911			18,404
Amortization and impairment of intangible assets		4,558			2,311
Provision for loan and lease losses		220,782			90,033
Deferred income tax (benefit) expense		(2,577	)		775
Stock-based compensation		2,088			395
Other-than-temporary impairments on debt securities		117			1,933
Other-than-temporary impairments on equity securities		42			—
Equity in loss of unconsolidated entity		10,798			10,926
Impairment of collateral pledged to Lehman		66,574			—
Derivative instruments and financial liabilities measured at fair value, gain		(762	)		(955	)
(Gain) loss on sale of premises and equipment and other assets		(4	)		259
Net gain on sales of loans		(1,603	)		(3,155	)
Net amortization of premiums, discounts and deferred loan fees and costs		(3,248	)		1,126
Originations and purchases of loans held for sale		(400,614	)		(295,607	)
Sales and repayments of loans held for sale		456,860			304,750
Loans held for sale valuation adjustment		6,553			—
Amortization of broker placement fees		6,094			7,607
Net amortization of premium and discounts on investment securities		7,473			10,087
Increase (decrease) in accrued income tax payable		1,130			(1,048	)
Decrease (increase) in accrued interest receivable		1,823			(909	)
Increase (decrease) in accrued interest payable		1,345			(293	)
Decrease in other assets		22,400			20,819
Increase in other liabilities		24,076			8,059

Net cash provided by operating activities		262,540			190,764

Cash flows from investing activities:
Principal collected on loans		2,081,371			2,227,673
Loans originated and purchased		(2,362,492	)		(2,284,750	)
Proceeds from sale of loans held for investment		309,024			22,203
Proceeds from sale of repossessed assets		70,805			59,442
Purchases of securities available for sale		(690,377	)		(788,191	)
Proceeds from principal repayments and maturities of securities available for sale		280,694			1,127,667
Additions to premises and equipment		(8,919	)		(7,494	)
Proceeds from sale of premises and equipments and other assets		4			1,040
Proceeds from securities litigation settlement and other proceeds		—			36
Net redemptions (purchases) of other equity securities		6,661			(1,705	)

Net cash (used in) provided by investing activities		(313,229	)		355,921

Cash flows from financing activities:
Net increase (decrease) in deposits		83,557			(19,611	)
Net repayments of securities sold under agreements to repurchase		—			(100,000	)
Net FHLB advances (paid) proceeds		(155,000	)		151,000
Repurchase of outstanding common stock		(335	)		—
Repayments of medium-term notes		—			(21,957	)
Proceeds from common stock sold		—			1,037

Net cash (used in) provided by financing activities		(71,778	)		10,469

Net (decrease) increase in cash and cash equivalents		(122,467	)		557,154
Cash and cash equivalents at beginning of period		946,851			446,566

Cash and cash equivalents at end of period	$	824,384		$	1,003,720

Cash and cash equivalents include:
Cash and due from banks	$	623,019		$	786,788
Money market instruments		201,365			216,932

	$	824,384		$	1,003,720

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Nine-Month Period Ended
(In thousands)	September 30, 2013			September 30, 2012

Preferred Stock	$	63,047		$	63,047

Common Stock outstanding:
Balance at beginning of period		20,624			20,513
Common stock issued as compensation		15			—
Repurchase of common stock		(5	)		—
Common stock sold		—			29
Restricted stock grants		74			76
Restricted stock forfeited		(4	)		—

Balance at end of period		20,704			20,618

Additional Paid-In-Capital:
Balance at beginning of period		885,754			884,002
Restricted stock grants		(74	)		(76	)
Restricted stock forfeited		4			—
Common stock sold		—			1,008
Stock-based compensation		2,088			395
Repurchase of common stock		(335	)		—

Balance at end of period		887,437			885,329

Retained Earnings:
Balance at beginning of period		487,166			457,384
Net (loss) income		(179,276	)		15,247

Balance at end of period		307,890			472,631

Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period		28,432			19,198
Other comprehensive (loss) income, net of tax		(86,917	)		23,294

Balance at end of period		(58,485	)		42,492

Total stockholders’ equity	$	1,220,593		$	1,484,117

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements (unaudited) of First BanCorp. (“the Corporation”) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2012, included in the Corporation’s 2012 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for the quarter ended September 30, 2013 are not necessarily indicative of the results to be expected for the entire year.

Adoption of new accounting requirements and recently issued but not yet effective accounting requirements

The Financial Accounting Standards Board (“FASB”) has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:

In December 2011, the FASB updated the Accounting Standards Codification (“the Codification”) to enhance and require converged disclosures about financial and derivative instruments that are either offset on the balance sheet, or are subject to an enforceable master netting arrangement (or other similar arrangement). Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB updated the Codification to clarify the scope of the disclosure to include only derivatives, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, and securities lending that are either offset or subject to an enforceable master netting agreement or similar agreement. The amendments in this Update are effective for interim and annual periods beginning on or after January 1, 2013. The Corporation adopted this guidance in 2013. Refer to Note 10 for required disclosures about offsetting assets and liabilities.

In February 2013, the FASB updated the Codification to improve the reporting of reclassifications out of accumulated other comprehensive income (“OCI”). The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated OCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated OCI is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. The amendments in this Update are effective prospectively for reporting periods beginning after December 31, 2012. The Corporation adopted this guidance in 2013 with no effect on the Corporation’s financial condition or results of operations since it impacted presentation only. The reclassifications out of accumulated other comprehensive income of the Corporation during the first nine-months of 2013 and 2012 were primarily related to credit losses on debt securities for which other-than-temporary impairment (“OTTI”) was previously recognized. The disclosure of credit losses on debt securities, and required identification in the statement of income (loss), is already required by Accounting Standard Codification (ASC) 320-10-50.

In July 2013, the FASB updated the Codification to add the Fed Funds Effective Swap Rates (or Overnight Index Swap Rate) as a U.S. benchmark interest rate for hedge accounting purposes. Previously, only the direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (LIBOR) swap rate were used. This Update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have an effect on the Corporation’s financial condition or results of operations as the Corporation’s derivative instruments are not designated or do not qualify for hedge accounting.

In July 2013, the FASB updated the Codification to provide explicit guidelines on how to present an unrecognized tax benefit in a financial statement when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law

of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments are effective for public entities with fiscal periods beginning after December 15, 2013. Early adoption is permitted. The Corporation is currently evaluating the impact of the adoption of this guidance on its financial statements.

NOTE 2 – EARNINGS PER COMMON SHARE

The calculations of earnings (losses) per common share for the quarters and nine month periods ended September 30, 2013 and 2012 are as follows:


	Quarter Ended				Nine-Month Period Ended
	September 30,		September 30,		September 30,			September 30,
	2013		2012		2013			2012
	(In thousands, except per share information)

Net income (loss)	$	15,940	$	19,073	$	(179,276	)	$	15,247

Net income (loss) attributable to common stockholders	$	15,940	$	19,073	$	(179,276	)	$	15,247

Weighted-Average Shares:
Basic weighted-average common shares outstanding		205,579		205,415		205,512			205,349
Average potential common shares		1,737		508		—			348

Diluted weighted-average number of common shares outstanding		207,316		205,923		205,512			205,697

Earnings (Loss) per common share:
Basic	$	0.08	$	0.09	$	(0.87	)	$	0.07

Diluted	$	0.08	$	0.09	$	(0.87	)	$	0.07

Earnings (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares issued and outstanding. Net income (loss) attributable to common stockholders represents net income (loss) adjusted for preferred stock dividends, including dividends declared, cumulative dividends related to the current dividend period that have not been declared as of the end of the period, and the accretion of discount on preferred stock issuances, if any. Basic weighted average common shares outstanding exclude unvested shares of restricted stock.

Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 104,499 and 114,757 for the quarters and nine-month periods ended September 30, 2013 and 2012, respectively. Warrants outstanding to purchase 1,285,899 shares of common stock and 1,435,220 unvested shares of restricted stock were excluded from the computation of diluted earnings per share for the nine-month period ended September 30, 2013 because the Corporation reported a net loss attributable to common stockholders for the period and their inclusion would have an antidilutive effect.

NOTE 3 – STOCK-BASED COMPENSATION

Between 1997 and January 2007, the Corporation had the 1997 stock option plan that authorized the granting of up to 579,740 options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. The maximum term to exercise these options is 10 years.

On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue in full force and effect, subject to their original terms. No awards for shares could be granted under the 1997 stock option plan as of its expiration.

The activity of stock options granted under the 1997 stock option plan for the nine-month period ended September 30, 2013 is set forth below:


	Number of Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (In thousands)
Beginning of period outstanding and exercisable		113,158		$	206.96
Options expired		(7,795	)		192.90
Options cancelled		(864	)		222.05

End of period outstanding and exercisable		104,499		$	207.94		2.3	$	—

On April 29, 2008, the Corporation’s stockholders approved the First BanCorp. 2008 Omnibus Incentive Plan, as amended (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. The Omnibus Plan authorizes the issuance of up to 8,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards subject to various limits and vesting restrictions that apply to individual and aggregate awards.

Under the Omnibus Plan, during the third quarter of 2013, 22,218 shares of restricted stock were awarded to the Corporation’s independent directors subject to a one-year vesting period. In addition, during the first nine months of 2013, the Corporation issued 716,405 shares of restricted stock that will vest based on the employees’ continued service with the Corporation. Fifty percent (50%) of those shares vest in two years from the grant date and the remaining 50% vest in three years from the grant date. Included in those 716,405 shares of restricted stock are 582,905 shares granted to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule, which permit TARP recipients to grant “long-term restricted stock” without violating the prohibition on paying or accruing a bonus payment if it satisfies certain requirements: (i) the value of the grant may not exceed one-third of the amount of the employee’s annual compensation, (ii) no portion of the grant may vest before two years after the grant date and (iii) the grant must be subject to a further restriction on transfer or payment as described below. Hence, notwithstanding the vesting period mentioned above, the employees covered by TARP are restricted from transferring the shares. Specifically, the stock that has otherwise vested may not become transferable at any time earlier than as permitted under the schedule set forth by TARP, which is based on the repayment in 25% increments of the aggregate financial assistance received from the U.S. Department of Treasury (the “Treasury”).

The fair value of the shares of restricted stock granted in 2013 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. For the 582,905 shares of restricted stock granted under the TARP requirements, the market price was discounted due to post-vesting restrictions. For purposes of computing the discount, the Corporation estimated an appreciation of 13% in the value of the common stock using the Capital Asset Pricing Model as a basis of what would be a market participant’s expected return on the Corporation’s stock and assumed a holding period by the Treasury of its outstanding common stock of the Corporation of 2 years, resulting in a fair value of $3.02 for restricted shares granted under the TARP requirements. Also, the Corporation uses empirical data to estimate employee termination; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.

The following table summarizes the restricted stock activity in 2013 under the Omnibus Plan for both executive officers covered by the TARP requirements and other employees as well as for independent directors:


	Nine-Month Period Ended
	September 30, 2013
	Number of shares of restricted stock			Weighted-Average Grant Date Fair Value

Non-vested shares at beginning of year		770,507		$	2.51
Granted		738,623			3.69
Forfeited		(36,485	)		3.82
Vested		(37,425	)		3.34

Non-vested shares at September 30, 2013		1,435,220		$	3.07

For the quarter and nine-month period ended September 30, 2013, the Corporation recognized $0.5 million and $1.1 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $0.2 million and $0.4 million for the same periods in 2012. As of September 30, 2013, there was $2.7 million of total unrecognized compensation cost related to nonvested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.8 years.

During the third quarter of 2012, 44,910 shares of restricted stock were awarded to the Corporation’s independent directors subject to a one-year vesting period. In addition, early in 2012, the Corporation issued 719,500 shares of restricted stock that will vest based on the employees’ continued service with the Corporation. Fifty percent (50%) of those shares vest in two years from the grant date and the remaining 50% percent vest in three years from the grant date. Included in those 719,500 shares of restricted stock are 557,000 shares granted to certain senior officers consistent with the requirements of TARP. The employees covered by TARP are restricted from transferring the shares, subject to certain conditions as explained above.

The fair value of the shares of restricted stock granted in 2012 was based on the market price of the Corporation’s outstanding common stock on the date of the grant, $3.34 for restricted stocks granted during the third quarter of 2012 and $4.00 for the restricted stocks granted earlier in 2012. For the 557,000 shares of restricted stock granted under the TARP requirements, the market price was discounted due to post-vesting restrictions. For purposes of computing the discount, the Corporation assumed appreciation of 25% in the value of the common stock and a holding period by the Treasury of its outstanding common stock of the Corporation of 3 years, resulting in a fair value of $2.00 for restricted shares granted under the TARP requirements in 2012.

Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards that will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease in the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase in the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture. Approximately $0.1 million of compensation expense was reversed in 2013 related to forfeited awards.

Also, under the Omnibus Plan, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary amounts paid to certain executive officers for fiscal year 2013 primarily by paying the increased salary amounts in the form of shares of the Corporation’s common stock, instead of cash. During the first nine months of 2013, the Corporation issued 156,331 shares of common stock with a weighted average market value of $6.43 for compensation according to this determination. This resulted in a compensation expense of $1.0 million recorded in the first nine-months of 2013.

NOTE 4 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, approximate fair value, weighted average yield and contractual maturities of investment securities available for sale as of September 30, 2013 and December 31, 2012 were as follows:


	September 30, 2013
			Noncredit Loss Component of		Gross Unrealized
	Amortized cost		OTTI Recorded in OCI		gains		losses		Fair value		Weighted average yield%
	(Dollars in thousands)

U.S. Treasury securities:
Due within one year	$	7,495	$	—	$	3	$	—	$	7,498		0.12
Obligations of U.S. government-sponsored agencies:
After 1 to 5 years		50,000		—		—		1,207		48,793		1.05
After 5 to 10 years		214,284		—		—		11,394		202,890		1.31
Puerto Rico government obligations:
Due within one year		10,000		—		—		235		9,765		3.50
After 5 to 10 years		39,779		—		—		14,569		25,210		4.49
After 10 years		21,210		—		—		6,986		14,224		5.79

United States and Puerto Rico government obligations		342,768		—		3		34,391		308,380		1.96

Mortgage-backed securities:
FHLMC certificates:
After 10 years		341,854		—		750		6,924		335,680		2.15

		341,854		—		750		6,924		335,680		2.15

GNMA certificates:
After 1 to 5 years		97		—		4		—		101		3.51
After 5 to 10 years		745		—		38		—		783		2.59
After 10 years		442,842		—		23,460		—		466,302		3.82

		443,684		—		23,502		—		467,186		3.81

FNMA certificates:
After 1 to 5 years		1,533		—		70		—		1,603		4.88
After 5 to 10 years		8,207		—		491		—		8,698		4.11
After 10 years		902,038		—		4,450		23,052		883,436		2.34

		911,778		—		5,011		23,052		893,737		2.36

Collateralized mortgage obligations issued or guaranteed by the FHLMC:
After 1 to 5 years		122		—		—		1		121		3.01

		122		—		—		1		121		3.01

Other mortgage pass-through trust certificates:
Over 5 to 10 years		132		—		1		—		133		7.27
After 10 years		57,683		15,631		—		—		42,052		2.25

		57,815		15,631		1		—		42,185		2.25

Total mortgage-backed securities		1,755,253		15,631		29,264		29,977		1,738,909		2.68

Equity securities (without contractual maturity) ⁽¹⁾		36		—		5		—		41		—

Total investment securities available for sale	$	2,098,057	$	15,631	$	29,272	$	64,368	$	2,047,330		2.56

(1)	Represents common shares of another financial institution in Puerto Rico.


	December 31, 2012
	Amortized cost		Noncredit Loss Component of		Gross Unrealized				Fair value		Weighted average yield%
	Amortized cost		OTTI Recorded in OCI		gains		losses		Fair value		Weighted average yield%

U.S. Treasury securities:
Due within one year	$	7,497	$	—	$	2	$	—	$	7,499		0.17
Obligations of U.S. government-sponsored agencies:
After 1 to 5 years		25,650		—		7		—		25,657		0.35
After 5 to 10 years		214,323		—		8		415		213,916		1.31
Puerto Rico government obligations:
After 1 to 5 years		10,000		—		—		—		10,000		3.50
After 5 to 10 years		39,753		—		—		553		39,200		4.49
After 10 years		21,099		—		948		47		22,000		5.78

United States and Puerto Rico government obligations		318,322		—		965		1,015		318,272		1.97

Mortgage-backed securities:
FHLMC certificates:
Due within one year		63		—		—		—		63		3.34
After 10 years		125,747		—		3,430		—		129,177		2.13

		125,810		—		3,430		—		129,240		2.13

GNMA certificates:
After 1 to 5 years		143		—		7		—		150		3.57
After 5 to 10 years		479		—		37		—		516		3.52
After 10 years		564,376		—		39,630		—		604,006		3.98

		564,998		—		39,674		—		604,672		3.98

FNMA certificates:
Due within one year		119		—		—		—		119		2.93
After 1 to 5 years		2,270		—		149		—		2,419		4.88
After 5 to 10 years		10,963		—		874		—		11,837		3.91
After 10 years		602,623		—		10,638		—		613,261		2.49

		615,975		—		11,661		—		627,636		2.52

Collateralized mortgage obligations issued or guaranteed by the FHLMC:
After 5 to 10 years		301		—		—		1		300		3.01

		301		—		—		1		300		3.01

Other mortgage pass-through trust certificates:
Over 5 to 10 years		143		—		1		—		144		7.27
After 10 years		69,269		18,487		—		—		50,782		2.29

		69,412		18,487		1		—		50,926		2.29

Total mortgage-backed securities		1,376,496		18,487		54,766		1		1,412,774		3.07

Equity securities (without contractual maturity)⁽¹⁾		77		—		—		46		31		—

Total investment securities available for sale	$	1,694,895	$	18,487	$	55,731	$	1,062	$	1,731,077		2.87

(1)	Represents common shares of another financial institution in Puerto Rico.

Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the noncredit loss component of OTTI are presented as part of OCI.

The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2013 and December 31, 2012. It also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. Unrealized losses for which OTTI had been recognized have been reduced by any subsequent recoveries in fair value.


	As of September 30, 2013
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Debt securities:
Puerto Rico government obligations	$	47,956	$	20,946	$	1,243	$	844	$	49,199	$	21,790
US government agencies obligations		251,683		12,601		—		—		251,683		12,601
Mortgage-backed securities:
FNMA		722,735		23,052		—		—		722,735		23,052
FHLMC		263,628		6,924		—		—		263,628		6,924
Collateralized mortgage obligations issued or guaranteed by FHLMC		—		—		121		1		121		1
Other mortgage pass-through trust certificates		—		—		42,052		15,631		42,052		15,631

	$	1,286,002	$	63,523	$	43,416	$	16,476	$	1,329,418	$	79,999


	As of December 31, 2012
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Debt securities:
Puerto Rico government obligations	$	41,243	$	600	$	—	$	—	$	41,243	$	600
US government agencies obligations		183,709		415		—		—		183,709		415
Mortgage-backed securities:
Collateralized mortgage obligations issued or guaranteed by FHLMC		300		1		—		—		300		1
Other mortgage pass-through trust certificates		—		—		50,782		18,487		50,782		18,487
Equity securities		31		46		—		—		31		46

	$	225,283	$	1,062	$	50,782	$	18,487	$	276,065	$	19,549

Assessment for OTTI

On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered an OTTI. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other than temporary.

OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTTI, if any, is recorded as a component of net impairment losses on investment securities in the accompanying consolidated statements of income (loss), while the remaining portion of the impairment loss is recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, government-sponsored entities and the Treasury accounted for approximately 96% of the total available-for-sale portfolio as of September 30, 2013 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label mortgage-backed securities with an amortized cost of $57.7 million for which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

•

The length of time and the extent to which the fair value has been less than the amortized cost basis;

•

Changes in the near term prospects of the underlying collateral of a security, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions;

•

The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

•

Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

The Corporation recorded OTTI losses on available-for-sale debt securities as follows:


	Private Label MBS					Private Label MBS
	Quarter ended September 30,					Nine-Month Period Ended September 30,
	2013		2012			2013			2012
(In thousands)
Total other-than-temporary impairment losses	$	—	$	—		$	—		$	—
Credit loss on debt securities for which an OTTI was not previously recognized		—		—			—			—
Portion of other-than-temporary impairment losses recognized in OCI		—		(557	)		(117	)		(1,933	)

Net impairment losses recognized in earnings	$	—	$	(557	)	$	(117	)	$	(1,933	)

The following table summarizes the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:


	Quarter ended September 30,				Nine-Month Period Ended September 30,
	2013		2012		2013		2012
(In thousands)
Credit losses at the beginning of the period	$	5,389	$	5,199	$	5,272	$	3,823
Additions:
Credit losses on debt securities for which an OTTI was previously recognized		—		557		117		1,933

Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI	$	5,389	$	5,756	$	5,389	$	5,756

During the first nine months of 2013, the $0.1 million credit-related impairment loss was related to private label MBS, which are collateralized by fixed-rate mortgages on single-family, residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single-family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:


	September 30, 2013				December 31, 2012
	Weighted Average			Range	Weighted Average			Range

Discount rate		14.5	%	14.5%		14.5	%	14.5%
Prepayment rate		32	%	20.41%-100.00%		32	%	21.85%-69.97%
Projected Cumulative Loss Rate		6.6	%	.69%-38.58%		8	%	0.73%-38.79%

The Corporation recorded OTTI losses of $42,000 on equity securities held in the available-for-sale investment portfolio in the first nine months of 2013. No OTTI losses on equity securities were recognized in the nine-month period ended September 30, 2012.

As of September 30, 2013, the Corporation held approximately $71.0 million of Puerto Rico government and agencies bond obligations as part of its available-for-sale investment securities portfolio that were reflected at their aggregate fair value of $49.2 million, down $18.2 million from June 30, 2013. In May, the 30-year general obligation bonds of the Puerto Rico government, which are widely held by mutual funds, carried a yield of about 5.3%, which increased during the third quarter, surpassing 10% at one point in September amid a general run-up in interest rates and significant selling by investors after Detroit filed for the largest municipal bankruptcy in United States history. The debt carried a yield of approximately 8.5% as of September 30, 2013. The debt ratings have suffered downgrades in the last ten months, and such downgrades could have an adverse impact on economic conditions, but the ultimate impact is unpredictable and may not be immediately apparent. The Commonwealth of Puerto Rico debt is rated Baa3 with a negative outlook by Moody’s Investor Service (“Moody’s”), BBB- with a negative outlook by Standard & Poor’s (“S&P”), and BBB- with a negative outlook by Fitch, Inc., all one notch above noninvestment grade. Based on the Corporation’s ability and intent to hold these securities until a recovery of the fair value occurs, the unrealized losses are considered temporary. The Corporation will continue to closely monitor Puerto Rico’s political and economic status and evaluate the portfolio for any declines in value that could be considered other-than-temporary.

NOTE 5 – OTHER EQUITY SECURITIES

Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.

As of September 30, 2013 and December 31, 2012, the Corporation had investments in FHLB stock with a book value of $30.8 million and $37.5 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the quarter and nine-month period ended September 30, 2013 was $0.3 million and $1.0 million, respectively, compared to $0.3 million and $1.1 million for the comparable periods in 2012.

The shares of FHLB stock owned by the Corporation are issued by the FHLB of New York and by the FHLB of Atlanta. Both Banks are part of the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission.

The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of September 30, 2013 and December 31, 2012 was $1.3 million.

NOTE 6 – LOANS HELD FOR INVESTMENT

The following table provides information about the loan portfolio held for investment:


	September 30, 2013			December 31, 2012
	(In thousands)

Residential mortgage loans, mainly secured by first mortgages	$	2,519,457		$	2,747,217

Commercial loans:
Construction loans⁽¹⁾		163,610			361,875
Commercial mortgage loans⁽¹⁾		1,857,794			1,883,798
Commercial and Industrial loans^(1) (2)		2,663,793			2,793,157
Loans to local financial institutions collateralized by real estate mortgages		244,554			255,390

Commercial loans		4,929,751			5,294,220

Finance leases		243,553			236,926

Consumer loans		1,815,873			1,775,751

Loans held for investment		9,508,634			10,054,114
Allowance for loan and lease losses		(289,379	)		(435,414	)

Loans held for investment, net⁽³⁾	$	9,219,255		$	9,618,700

(1)

During the second quarter of 2013, after a comprehensive review of substantially all of the loans in the commercial portfolios, the classification of certain loans was revised to more accurately depict the nature of the underlying loans. This reclassification resulted in a net increase of $269.0 million in commercial mortgage loans, since the principal source of repayment for such loans is derived primarily from the operation of the underlying real estate, with a corresponding decrease of $246.8 million in commercial and industrial loans and a $22.2 million decrease in construction loans. The Corporation evaluated the impact of this reclassification on the provision for loan losses and determined that the effect of this adjustment was not material to any previously reported results.

(2)	As of September 30, 2013, includes $1.2 billion of commercial loans that are secured by real estate (owner-occupied commercial loans secured by real estate) but are not dependent upon the real estate for repayment.

(3)

During the first half of 2013, the Corporation completed two separate bulk sales of assets including: (i) non-performing residential mortgage loans with a book value before allowance for loan losses of $203.8 million, and (ii) adversely classified loans, mainly commercial loans, with a book value before allowance for loan losses of $211.4 million. In addition the Corporation transferred $181.6 million of commercial non-performing loans to held for sale as further discussed below.

Loans held for investment on which accrual of interest income had been discontinued were as follows:


(In thousands)	September 30, 2013		December 31, 2012
Non-performing loans:
Residential mortgage	$	142,002	$	313,626
Commercial mortgage		127,374		214,780
Commercial and Industrial		127,584		230,090
Construction		64,241		178,190
Consumer:
Auto loans		19,481		19,210
Finance leases		2,603		3,182
Other consumer loans		15,100		16,483

Total non-performing loans held for investment^{(1) (2)}	$	498,385	$	975,561

(1)	As of September 30, 2013 and December 31, 2012, excludes $80.2 million and $2.2 million, respectively, in non-performing loans held for sale.

(2)	Amount excludes purchased credit impaired (“PCI”) loans with a carrying value of approximately $6.0 million and $10.6 million as of September 30, 2013 and December 31, 2012, respectively, acquired as part of the credit card portfolio purchased in the second quarter of 2012.

The Corporation’s aging of the loans held for investment portfolio is as follows:


As of September 30, 2013 (In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 days or more Past Due ⁽¹⁾		Total Past Due ⁽⁴⁾		Purchased Credit- Impaired Loans ⁽⁴⁾		Current		Total loans held for investment		90 days past due and still accruing ⁽⁵⁾
Residential mortgage:
FHA/VA and other government-guaranteed loans^{(2) (3) (5)}	$	—	$	9,857	$	78,925	$	88,782	$	—	$	115,385	$	204,167	$	78,925
Other residential mortgage loans⁽³⁾		—		85,819		155,090		240,909		—		2,074,381		2,315,290		13,088
Commercial:
Commercial and Industrial loans		18,419		16,336		150,692		185,447		—		2,722,900		2,908,347		23,108
Commercial mortgage loans⁽³⁾		—		2,399		135,734		138,133		—		1,719,661		1,857,794		8,360
Construction loans⁽³⁾		—		318		64,368		64,686		—		98,924		163,610		127
Consumer:
Auto loans		77,243		15,616		19,481		112,340		—		986,796		1,099,136		—
Finance leases		9,870		2,645		2,603		15,118		—		228,435		243,553		—
Other consumer loans		12,486		9,227		19,227		40,940		5,963		669,834		716,737		4,127

Total loans held for investment	$	118,018	$	142,217	$	626,120	$	886,355	$	5,963	$	8,616,316	$	9,508,634	$	127,735

(1)	Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges fees until charged-off at 180 days.

(2)	As of September 30, 2013, includes $7.8 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.

(3)

According to the Corporation’s delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government guaranteed loans, other residential mortgage loans, commercial mortgage loans and construction loans past due 30-59 days amounted to $23.8 million, $199.6 million, $80.4 million and $1.5 million, respectively.

(4)	Purchased credit–impaired loans are excluded from delinquency and non-performing statistics as further discussed below.

(5)

It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $36.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA, that are over 18 months delinquent, and are no longer accruing interest as of September 30, 2013.


As of December 31, 2012 (In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 days or more Past Due⁽¹⁾		Total Past Due ⁽⁴⁾		Purchased Credit- Impaired Loans ⁽⁴⁾		Current		Total loans held for investment		90 days past due and still accruing ⁽⁵⁾
Residential mortgage:
FHA/VA and other government-guaranteed loans^{(2) (3) (5)}	$	—	$	10,592	$	93,298	$	103,890	$	—	$	104,723	$	208,613	$	93,298
Other residential mortgage loans⁽³⁾		—		83,807		324,965		408,772		—		2,129,832		2,538,604		11,339
Commercial:
Commercial and Industrial loans		22,323		8,952		258,989		290,264		—		2,758,283		3,048,547		28,899
Commercial mortgage loans⁽³⁾		—		6,367		218,379		224,746		—		1,659,052		1,883,798		3,599
Construction loans⁽³⁾		—		843		178,876		179,719		—		182,156		361,875		686
Consumer:
Auto loans		64,991		15,446		19,210		99,647		—		926,579		1,026,226		—
Finance leases		10,938		2,682		3,182		16,802		—		220,124		236,926		—
Other consumer loans		12,268		6,850		20,674		39,792		10,602		699,131		749,525		4,191

Total loans held for investment	$	110,520	$	135,539	$	1,117,573	$	1,363,632	$	10,602	$	8,679,880	$	10,054,114	$	142,012

(1)	Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e. FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.

(2)	As of December 31, 2012, includes $14.8 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.

(3)

According to the Corporation’s delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government guaranteed loans, other residential mortgage loans, commercial mortgage loans, and construction loans past due 30-59 days amounted to $22.2 million, $186.3 million, $164.9 million, and $21.1 million, respectively.

(4)	Purchased credit-impaired loans are excluded from delinquency and non-performing statistics as further discussed below.

(5)

It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $35.3 million of residential mortgage loans insured by the FHA or guaranteed by the VA, that are over 18 months delinquent, and are no longer accruing interest as of December 31, 2012.

The Corporation’s credit quality indicators by loan type as of September 30, 2013 and December 31, 2012 are summarized below:


	Commercial Credit Exposure-Credit Risk Profile Based on Creditworthiness category:
September 30, 2013	Substandard		Doubtful		Loss		Total Adversely Classified ⁽¹⁾⁽²⁾		Total Portfolio
	(In thousands)
Commercial mortgage	$	325,334	$	15,426	$	—	$	340,760	$	1,857,794
Construction		74,475		9,179		—		83,654		163,610
Commercial and Industrial		181,343		25,576		1,185		208,104		2,908,347


	Commercial Credit Exposure-Credit Risk Profile Based on Creditworthiness category:
December 31, 2012	Substandard		Doubtful		Loss		Total Adversely Classified ⁽¹⁾⁽²⁾		Total Portfolio
	(In thousands)
Commercial mortgage	$	401,597	$	6,867	$	—	$	408,464	$	1,883,798
Construction		184,977		14,556		605		200,138		361,875
Commercial and Industrial		372,100		30,651		1,143		403,894		3,048,547

(1)

During the first quarter of 2013, the Corporation completed a bulk sale of assets, mainly commercial adversely classified loans with a book value before allowance for loan losses of $211.4 million and, in addition, transferred $181.6 million of non-performing loans to held for sale as further discussed below.

(2)	Excludes $80.2 million ($30.4 million commercial mortgage; $49.8 million construction) and $2.2 million ($1.1 million commercial mortgage and $1.1 million commercial and industrial) as of September 30, 2013 and December 31, 2012, respectively, of non-performing loans held for sale.

The Corporation considers a loan to be adversely classified if its risk rating is Substandard, Doubtful or Loss. These categories are defined as follows:

Substandard- A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful- Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but Loss cannot be determined because of specific reasonable pending factors which may strengthen the credit in the near term.

Loss- Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.


September 30, 2013	Consumer Credit Exposure-Credit Risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/ Guaranteed⁽¹⁾		Other residential loans		Auto		Finance Leases		Other Consumer
	(In thousands)
Performing	$	204,167	$	2,173,288	$	1,079,655	$	240,950	$	695,674
Purchased Credit-Impaired		—		—		—		—		5,963
Non-performing		—		142,002		19,481		2,603		15,100

Total	$	204,167	$	2,315,290	$	1,099,136	$	243,553	$	716,737

(1)

It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $36.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA, that are over 18 months delinquent, and are no longer accruing interest as of September 30, 2013.


December 31, 2012	Consumer Credit Exposure-Credit Risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/ Guaranteed⁽¹⁾		Other residential loans		Auto		Finance Leases		Other Consumer
	(In thousands)
Performing	$	208,613	$	2,224,978	$	1,007,016	$	233,744	$	722,440
Purchased Credit-Impaired		—		—		—		—		10,602
Non-performing		—		313,626		19,210		3,182		16,483

Total	$	208,613	$	2,538,604	$	1,026,226	$	236,926	$	749,525

(1)

It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $35.3 million of residential mortgage loans insured by the FHA or guaranteed by the VA, that are over 18 months delinquent, and are no longer accruing interest as of December 31, 2012.

The following tables present information about impaired loans excluding purchased credit-impaired loans, which are reported separately as discussed below:


Impaired Loans
(In thousands)
									Quarter ended				Nine-month Period Ended
									September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Specific Allowance		Year-To- Date Average Recorded Investment		Interest Income Recognized Accrual Basis		Interest Income Recognized Cash Basis		Interest Income Recognized Accrual Basis		Interest Income Recognized Cash Basis
As of September 30, 2013
With no related allowance recorded:
FHA/VA-Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortgage loans		219,685		232,295		—		222,764		2,768		255		7,359		1,013
Commercial:
Commercial mortgage loans		45,489		46,384		—		46,126		307		243		767		467
Commercial and Industrial Loans		36,095		76,965		—		40,092		14		37		22		49
Construction Loans		16,418		19,001		—		18,918		9		8		13		25
Consumer:
Auto loans		—		—		—		—		—		—		—		—
Finance leases		—		—		—		—		—		—		—		—
Other consumer loans		2,997		4,418		—		3,261		31		14		81		42

	$	320,684	$	379,063	$	—	$	331,161	$	3,129	$	557	$	8,242	$	1,596

With an allowance recorded:
FHA/VA-Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortgage loans		177,340		191,181		17,982		179,713		1,518		310		4,251		870
Commercial:
Commercial mortgage loans		160,165		167,579		28,316		167,019		444		500		1,230		1,480
Commercial and Industrial Loans		164,190		180,335		34,438		178,565		1,285		7		2,955		115
Construction Loans		57,064		69,448		21,785		59,519		256		51		676		234
Consumer:
Auto loans		13,731		13,731		2,364		12,607		242		—		726		—
Finance leases		2,290		2,290		77		2,183		57		—		167		—
Other consumer loans		9,045		9,595		1,213		8,982		421		16		1,050		28

	$	583,825	$	634,159	$	106,175	$	608,588	$	4,223	$	884	$	11,055	$	2,727

Total:
FHA/VA-Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortgage loans		397,025		423,476		17,982		402,477		4,286		565		11,610		1,883
Commercial:
Commercial mortgage loans		205,654		213,963		28,316		213,145		751		743		1,997		1,947
Commercial and Industrial Loans		200,285		257,300		34,438		218,657		1,299		44		2,977		164
Construction Loans		73,482		88,449		21,785		78,437		265		59		689		259
Consumer:
Auto loans		13,731		13,731		2,364		12,607		242		—		726		—
Finance leases		2,290		2,290		77		2,183		57		—		167		—
Other consumer loans		12,042		14,013		1,213		12,243		452		30		1,131		70

	$	904,509	$	1,013,222	$	106,175	$	939,749	$	7,352	$	1,441	$	19,297	$	4,323


(In thousands)
	Recorded Investments		Unpaid Principal Balance		Related Specific Allowance		Year-To-Date Average Recorded Investment
As of December 31, 2012
With no related allowance recorded:
FHA/VA-Guaranteed loans	$	—	$	—	$	—	$	—
Other residential mortgage loans		122,056		130,306		—		148,125
Commercial:
Commercial mortgage loans		44,495		54,753		—		45,420
Commercial and Industrial Loans		35,673		41,637		—		22,780
Construction Loans		21,179		44,797		—		35,379
Consumer:
Auto loans		—		—		—		—
Finance leases		—		—		—		—
Other consumer loans		2,615		3,570		—		2,443

	$	226,018	$	275,063	$	—	$	254,147

With an allowance recorded:
FHA/VA-Guaranteed loans	$	—	$	—	$	—	$	—
Other residential mortgage loans		462,663		518,446		47,171		447,491
Commercial:
Commercial mortgage loans		310,030		330,117		50,959		316,535
Commercial and Industrial Loans		284,357		363,012		80,167		239,757
Construction Loans		159,504		275,398		39,572		154,680
Consumer:
Auto loans		11,432		11,432		1,456		11,090
Finance leases		2,019		2,019		78		1,987
Other consumer loans		9,271		10,047		2,346		8,912

	$	1,239,276	$	1,510,471	$	221,749	$	1,180,452

Total:
FHA/VA-Guaranteed loans	$	—	$	—	$	—	$	—
Other residential mortgage loans		584,719		648,752		47,171		595,616
Commercial:
Commercial mortgage loans		354,525		384,870		50,959		361,955
Commercial and Industrial Loans		320,030		404,649		80,167		262,537
Construction Loans		180,683		320,195		39,572		190,059
Consumer:
Auto loans		11,432		11,432		1,456		11,090
Finance leases		2,019		2,019		78		1,987
Other consumer loans		11,886		13,617		2,346		11,355

	$	1,465,294	$	1,785,534	$	221,749	$	1,434,599

Interest income of approximately $8.7 and $24.2 million was recognized on impaired loans for the third quarter and nine-month period ended September 30, 2012, respectively.

The following tables show the activity for impaired loans and the related specific reserve for the quarter and nine-month period ended September 30, 2013:


	Quarter Ended			Nine-Month Period Ended
	September 30, 2013 (In thousands)
Impaired Loans:
Balance at beginning of period	$	908,245		$	1,465,294
Loans determined impaired during the period		57,520			208,298
Net charge-offs		(19,703	)		(291,675	)
Loans sold, net of charge-offs		—			(201,409	)
Increases to impaired loans- additional disbursements		383			6,403
Transfer of loans to held for sale, net of charges-offs		—			(147,100	)
Foreclosures		(2,306	)		(25,151	)
Loans no longer considered impaired		(12,412	)		(38,201	)
Paid in full or partial payments		(27,218	)		(71,950	)

Balance at end of period	$	904,509		$	904,509


	Quarter Ended			Nine-Month Period Ended
	September 30, 2013
	(In thousands)
Specific Reserve:
Balance at beginning of period	$	114,953		$	221,749
Provision for loan losses		10,925			176,101
Net charge-offs		(19,703	)		(291,675	)

Balance at end of period	$	106,175		$	106,175

Acquired loans including PCI Loans

On May 30, 2012, the Corporation reentered the credit card business with the acquisition of an approximate $406 million portfolio of FirstBank-branded credit card loans from FIA Card Services (“FIA”). These loans were recorded on the Consolidated Statement of Financial Condition at estimated fair value on the acquisition date of $368.9 million. The Corporation concluded that a portion of these acquired loans were PCI loans. PCI loans are acquired loans with evidence of credit quality deterioration since origination for which it is probable at the date of purchase that the Corporation will be unable to collect all contractually required payments. The loans that the Corporation concluded were credit impaired had a contractual outstanding unpaid principal and interest balance at acquisition of $34.6 million and an estimated fair value of $15.7 million. Given that the initial fair value of these loans included an estimate of credit losses expected to be realized over the remaining lives of the loans, the Corporation’s subsequent accounting for PCI loans differs from the accounting for non–PCI loans; therefore, the Corporation separately tracks and reports PCI loans and excludes these loans from delinquency and non-performing loan statistics.

Initial Fair Value and Accretable Yield of PCI Loans

At acquisition, the Corporation estimated the cash flows the Corporation expected to collect on credit card loans acquired with a deteriorated credit quality. Under the accounting guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the Corporation’s Consolidated Statement of Financial Condition. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective-yield method. The table below displays the contractually required principal and interest, cash flows expected to be collected and the fair value at acquisition of PCI loans that the Corporation acquired. The table also displays the nonaccretable difference and the accretable yield at acquisition.


(In thousands)	At acquisition
	Purchased Credit- Impaired Loans
Contractually outstanding principal and interest at acquisition	$	34,577
Less: Nonaccretable difference		(15,408	)

Cash flows expected to be collected at acquisition		19,169
Less: Accretable yield		(3,451	)

Fair value of loans acquired	$	15,718

Outstanding balance and Carrying value of PCI loans

The table below presents the outstanding contractual balance and carrying value of the PCI Loans as of September 30, 2013 and December 31, 2012:


(In thousands)	Purchased Credit- Impaired Loans (September 30, 2013)		Purchased Credit- Impaired Loans (December 31, 2012)
Contractual balance	$	23,921	$	28,778
Carrying value		5,963		10,602

Changes in accretable yield of acquired loans

Subsequent to acquisition, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s provision for loan and lease losses, resulting in an increase to the allowance for loan losses. During the first nine months of 2013, the Corporation did not record charges to the provision for loan losses related to PCI loans.

The following table presents changes in the accretable yield related to the PCI loans acquired from FIA:


(In thousands)
	PCI Loans
Accretable yield at acquisition	$	3,451
Accretion recognized in earnings		(1,280	)

Accretable yield as of December 31, 2012		2,171
Reclassification to nonaccretable		(1,352	)
Accretion recognized in earnings		(819	)

Accretable yield as of September 30, 2013	$	—

During the first nine months of 2013, the Corporation purchased $185.4 million of residential mortgage loans consistent with a strategic program established by the Corporation in 2005 to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. Generally, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions depending upon whether the Corporation wants to retain high-yielding loans and improve net interest margins or generate profits by selling loans. When the Corporation sells such loans, it generally keeps the servicing of the loans.

In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to the Government National Mortgage Association (“GNMA”) and government-sponsored entities (“GSEs”). GNMA and GSEs, such as Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”), generally securitize the transferred loans into mortgage-backed securities for sale into the secondary market. The Corporation sold approximately $189.8 million of performing residential mortgage loans to FNMA and FHLMC during the first nine months of 2013. Also, the Corporation securitized $300.2 million of FHA/VA mortgage loans into GNMA mortgage-backed securities during the first nine months of 2013. The Corporation’s continuing involvement in these loan sales consists primarily of servicing the loans. In addition, the Corporation agreed to repurchase loans when it breaches any of the representations and warranties included in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e., ensuring that the mortgage was properly underwritten according to established guidelines).

For loans sold to GNMA, the Corporation holds an option to repurchase individual delinquent loans issued on or after January 1, 2003 when the borrower fails to make any payment for three consecutive months. This option gives the Corporation the ability, but not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA.

Under ASC Topic 860, once the Corporation has the unilateral ability to repurchase the delinquent loan, it is considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan.

During the first nine months of 2013, the Corporation repurchased pursuant to its repurchase option with GNMA $27.6 million of loans previously sold to GNMA. The principal balance of these loans is fully guaranteed and the risk of loss related to repurchases is generally limited to the difference between the delinquent interest payment advanced to GNMA computed at the loan’s interest rate and the interest payments reimbursed by FHA, which are computed at a pre-determined debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to maintain acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA. The Corporation generally remediates any breach of representations and warranties related to the underwriting of such loans according to established GNMA guidelines without incurring losses. The Corporation does not maintain a liability for estimated losses as a result of breaches in representations and warranties.

Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation repurchased at par loans previously sold to FNMA and FHLMC in the amount of $4.0 million during the first nine months of 2013. The Corporation’s risk of loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation deficiencies. The amount of loan repurchases over the last three years represents less than 2% of total sales of loans to FNMA and FHLMC and subsequent losses are estimated to have been less than $0.3 million. As a consequence, the Corporation does not maintain a liability for estimated losses on loans expected to be repurchased as a result of breaches in loan and servicer representations and warranties.

Bulk Sales of Assets and Transfer of Loans to Held For Sale

On June 21, 2013, the Corporation announced that it had completed a sale of non-performing residential mortgage loans with a book value of $203.8 million and OREO properties with a book value of $19.2 million in a cash transaction. The sales price of this bulk sale was $128.3 million. Approximately $30.1 million of reserves had already been allocated to the loans. This transaction resulted in total charge-offs of $98.0 million and an incremental loss of $69.8 million, reflected in the provision for loan and lease losses for the first nine months of 2013. In addition, the Corporation recorded $3.1 million of professional service fees specifically related to this bulk sale of non-performing residential assets. This transaction resulted in a total pre-tax loss of $72.9 million.

On March 28, 2013, the Corporation completed the sale of adversely classified loans with a book value of $211.4 million ($100.1 million of commercial and industrial loans, $68.8 million of commercial mortgage loans, $41.3 million of construction loans, and $1.2 million of residential mortgage loans), and $6.3 million of OREO properties in a cash transaction. Included in the bulk sale was $185.0 million of non-performing assets. The sales price of this bulk sale was $120.2 million. Approximately $39.9 million of reserves had already been allocated to the loans. This transaction resulted in total charge-offs of $98.5 million and an incremental loss of $58.9 million, reflected in the provision for loan and lease losses for the first nine months of 2013. In addition, the Corporation recorded $3.9 million of professional fees specifically related to this bulk sale of assets. This transaction resulted in a total pre-tax loss of $62.8 million.

In addition, during the first quarter of 2013, the Corporation transferred to held for sale non-performing loans with an aggregate book value of $181.6 million. These transfers resulted in charge-offs of $36.0 million and an incremental loss of $5.2 million reflected in the provision for loan and lease losses for the first nine months of 2013.

During the second quarter of 2013, the Corporation completed the sale of a $40.8 million non-performing commercial mortgage loan that was among the loans transferred to held for sale in the first quarter without incurring additional losses.

In a separate transaction during the second quarter, the Corporation entered into an agreement to receive foreclosed real estate in partial satisfaction of debt related to one of the loans written-off and transferred to held for sale in the first quarter. The remaining balance of such partially satisfied commercial mortgage loan held for sale was restructured, resulting in a loss of $3.4 million recorded as part of “Other income” in the second quarter of 2013.

Furthermore, in the third quarter of 2013, approximately $6.4 million of construction loan held for sale participations were paid-off, resulting in a gain of $0.3 million included as part of “Other income” in the third quarter of 2013.

The Corporation’s primary goal with respect to these sales is to accelerate the disposition of non-performing assets, which is the main priority of the Corporation’s Strategic Plan. The opportunistic sale of distressed assets is a pivotal and tactical step in the Corporation’s efforts to reduce balance sheet risk, improve earnings in the future through reductions of credit related costs and enhance credit quality consistent with regulators’ expectations of adequate levels of adversely classified assets for financial institutions.

Loan Portfolio Concentration

The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, First Bank, also lends in the USVI and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment of $9.5 billion as of September 30, 2013, approximately 85% have credit risk concentration in Puerto Rico, 9 % in the United States, and 6 % in the USVI and BVI.

As of September 30, 2013, the Corporation had $326.7 million outstanding in credit facilities granted to the Puerto Rico government, its municipalities and public corporations, compared to $158.4 million as of December 31, 2012, and $40.9 million granted to the government of the Virgin Islands, compared to $35.5 million as of December 31, 2012. Approximately $199.0 million of the granted facilities to the Puerto Rico government or political subdivisions consists of loans to municipalities for which, in most cases, the good faith, credit, and unlimited taxing power of the applicable municipality has been pledged to their repayment. Approximately $79.6 million consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power. Public corporations have varying degrees of independence from the central government and many receive appropriations or other payments from it. Approximately $48.1 million consists of loans to units of the Puerto Rico central government. Furthermore, the Corporation had $198.9 million outstanding as of September 30, 2013 in financing to the hotel industry in Puerto Rico guaranteed by the Puerto Rico Tourism Development Fund.

The Puerto Rico economy has been in a recession since March 2006. For fiscal years 2007, 2008, 2009, 2010 and 2011, the Puerto Rico’s real gross national product decreased by 1.2%, 2.9%, 3.8%, 3.6%, and 1.6%, respectively. According to the latest information and projections issued by the Puerto Rico Planning Board, in fiscal year 2012, the Puerto Rico’s real gross national product, increased by 0.1% and, is projected to decrease by 0.03% for fiscal year 2013 and 0.8% for 2014.

The Puerto Rico government has faced fiscal challenges, including an imbalance between its General Fund total revenues and expenditures. The imbalance reached its highest level in fiscal year 2009, when the deficit was approximately $2.86 billion. Since that time, the Puerto Rico government has been able to reduce its deficit every year, except fiscal year 2012, through various measures designed to increase revenues and reduce expenses. The projected deficit for fiscal year 2014 is expected to decline to $820 million.

The Corporation cannot predict at this time the impact that the current fiscal situation of the Commonwealth of Puerto Rico and the various legislative and other measures adopted and to be adopted by the Puerto Rico government in response to such fiscal situation will have on the Puerto Rico economy and on the Corporation’s financial condition and results of operations.

In addition to loans extended to government entities, the largest loan to one borrower as of September 30, 2013 in the amount of $244.6 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real-estate loans, mostly 1-4 single family residential mortgage loans.

Troubled Debt Restructurings

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the U.S. government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans in the U.S. mainland fit the definition of a troubled debt restructuring (a “TDR”). A restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of September 30, 2013, the Corporation’s total TDR loans held for investment of $636.9 million consisted of $335.0 million of residential mortgage loans, $102.0 million of commercial and industrial loans, $154.5 million of commercial mortgage loans, $19.3 million of construction loans, and $26.2 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $0.8 million as of September 30, 2013.

The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments for a significant period of time, and reduction of interest rates either permanently (offered up to 2010) or for a period of up to two years (step-up rates). Additionally, in certain cases, the restructuring may provide for the forgiveness of contractually due principal or interest. Uncollected interest is added to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off.

These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and would lose their homes in a foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, properties are foreclosed.

Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification. As of September 30, 2013, we classified an additional $3.2 million of residential mortgage loans as TDRs that were participating in or had been offered a trial modification.

For the commercial real estate, commercial and industrial, and construction portfolios, at the time of a restructuring, the Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the borrower’s financial difficulty. Concessions granted for commercial loans could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of borrower covenants; forgiveness of principal or interest; or other contract changes that would be considered a concession. The Corporation mitigates loan defaults for its commercial loan portfolios through its collections function. The function’s objective is to minimize both early stage delinquencies and losses upon default of commercial loans. In the case of the commercial and industrial, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or adversely classified status. The SAG utilizes relationship officers, collection specialists, and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary. The SAG utilizes its collections infrastructure of workout collection officers, credit work-out specialists, in-house legal counsel, and third-party consultants. In the case of residential construction projects and large commercial loans, the function also utilizes third-party specialized consultants to monitor the residential and commercial construction projects in terms of construction, marketing and sales, and assists with the restructuring of large commercial loans. In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which are mainly one year in term and therefore are required to be renewed annually. Other facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, timing of completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions, renewals, and restructurings are done in the normal course of business and not considered concessions, and the loans continue to be recorded as performing.

Selected information on TDRs that includes the recorded investment by loan class and modification type is summarized in the following tables. This information reflects all TDRs:


	September 30, 2013
(In thousands)	Interest rate below market		Maturity or term extension		Combination of reduction in interest rate and extension of maturity		Forgiveness of principal and/or interest		Other⁽¹⁾		Total
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans	$	22,907	$	6,455	$	273,691	$	—	$	31,902	$	334,955
Commercial Mortgage Loans		37,960		13,033		84,989		7		18,471		154,460
Commercial and Industrial Loans		12,304		16,371		7,188		7,365		58,728		101,956
Construction Loans		6,911		2,212		8,996		—		1,207		19,326
Consumer Loans - Auto		—		773		8,446		—		4,511		13,730
Finance Leases		—		1,066		1,224		—		—		2,290
Consumer Loans - Other		356		309		7,778		—		1,699		10,142

Total Troubled Debt Restructurings⁽²⁾	$	80,438	$	40,219	$	392,312	$	7,372	$	116,518	$	636,859

(1)	Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation or a combination of the concessions listed in the table.

(2)

Included in the bulk sales of assets completed during the first half of 2013 was $188.1 million of TDRs, and the transfer of loans to held for sale included TDRs with a book value of $158.4 million at the time of the transfer. The carrying value of TDRs held for sale amounted to $71.0 million as of September 30, 2013.


	December 31, 2012
(In thousands)	Interest rate below market		Maturity or term extension		Combination of reduction in interest rate and extension of maturity		Forgiveness of principal and/or interest		Forbearance agreement⁽¹⁾		Other⁽²⁾		Total
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans	$	21,288	$	4,178	$	338,731	$	—	$	—	$	47,687	$	411,884
Commercial Mortgage Loans		103,203		15,578		105,695		46,855		—		16,332		287,663
Commercial and Industrial Loans		28,761		15,567		26,054		11,951		9,492		41,244		133,069
Construction Loans		6,441		4,195		9,160		—		61,898		4,499		86,193
Consumer Loans - Auto		—		1,012		7,452		—		—		2,968		11,432
Finance Leases		—		1,512		507		—		—		—		2,019
Consumer Loans - Other		451		438		6,472		—		—		2,109		9,470

Total Troubled Debt Restructurings	$	160,144	$	42,480	$	494,071	$	58,806	$	71,390	$	114,839	$	941,730

(1)	Mainly related to one construction relationship amounting to $53.4 million transferred to held for sale in 2013.

(2)	Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation or a combination of the concessions listed in the table.

The following table presents the Corporation’s TDR activity:


(In thousands)	Quarter Ended			Nine-Month Period Ended
	September 30, 2013
Beginning balance of TDRs	$	613,129		$	941,730
New TDRs		46,089			110,687
Increases to existing TDRs - additional disbursements		284			2,802
Charge-offs post modification		(1,497	)		(125,257	)
Sales, net of charge-offs		—			(104,915	)
Foreclosures		(1,425	)		(7,537	)
Removed from TDR classification		(185	)		(6,603	)
TDRs transferred to held for sale		—			(131,649	)
Paid-off and partial payments		(19,536	)		(42,399	)

Ending balance of TDRs	$	636,859		$	636,859

TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure generally for a minimum of six months and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loans being returned to accrual at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a non-performing loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and avoid increases in foreclosure and OREO costs. The Corporation continues to consider a modified loan as an impaired loan for purposes of estimating the allowance for loan and lease losses. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring if it is in compliance with its modified terms. During the nine-month period ended September 30, 2013, $6.6 million was removed from the TDR classification, as reflected in the table above.

The following table provides a breakdown between accrual and nonaccrual status of TDRs:


(In thousands)	September 30, 2013
	Accrual		Nonaccrual ⁽¹⁾⁽²⁾		Total TDRs
Non-FHA/VA Residential Mortgage loans	$	270,211	$	64,744	$	334,955
Commercial Mortgage Loans		83,572		70,888		154,460
Commercial and Industrial Loans		53,664		48,292		101,956
Construction Loans		1,164		18,162		19,326
Consumer Loans - Auto		8,163		5,567		13,730
Finance Leases		2,207		83		2,290
Consumer Loans - Other		8,163		1,979		10,142

Total Troubled Debt Restructurings	$	427,144	$	209,715	$	636,859

(1)

Included in non-accrual loans are $78.4 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectability.

(2)	Excludes non-accrual TDRs held for sale with a carrying value of $71.0 million as of September 30, 2013.


(In thousands)	December 31, 2012
	Accrual		Nonaccrual⁽¹⁾		Total TDRs
Non- FHA/VA Residential Mortgage loans	$	287,198	$	124,686	$	411,884
Commercial Mortgage Loans		163,079		124,584		287,663
Commercial and Industrial Loans		36,688		96,381		133,069
Construction Loans		2,554		83,639		86,193
Consumer Loans - Auto		6,615		4,817		11,432
Finance Leases		1,900		119		2,019
Consumer Loans - Other		6,744		2,726		9,470

Total Troubled Debt Restructurings	$	504,778	$	436,952	$	941,730

(1)

Included in non-accrual loans are $197.2 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectability.

TDRs exclude restructured mortgage loans that are government guaranteed (i.e., FHA/VA loans) in an amount totaling $94.4 million. The Corporation excludes government guaranteed loans from TDRs given that in the event that the borrower defaults on the loan, the principal and interest (debenture rate) are guaranteed by the U.S. government; therefore, the risk of loss on these types of loans is very low. The Corporation does not consider loans with government guarantees to be impaired loans for the purpose of calculating the allowance for loan and lease losses.

Loan modifications that are considered TDRs completed during the quarter and nine-month period ended September 30, 2013 and 2012 were as follows:


(Dollars in thousands)	Quarter ended September 30, 2013
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans		140	$	29,530	$	29,984
Commercial Mortgage Loans		15		4,481		4,586
Commercial and Industrial Loans		13		8,528		7,925
Construction Loans		3		133		136
Consumer Loans - Auto		149		2,006		2,006
Finance Leases		16		334		334
Consumer Loans - Other		271		1,118		1,118

Total Troubled Debt Restructurings		607	$	46,130	$	46,089


(Dollars in thousands)	Nine-Month period ended September 30, 2013
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans		253	$	42,628	$	43,106
Commercial Mortgage Loans		16		4,972		5,077
Commercial and Industrial Loans		21		76,579		50,588
Construction Loans		8		536		539
Consumer Loans - Auto		434		5,874		5,874
Finance Leases		54		1,063		1,063
Consumer Loans - Other		1,001		4,440		4,440

Total Troubled Debt Restructurings		1,787	$	136,092	$	110,687


(Dollars in thousands)	Quarter ended September 30, 2012
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans		147	$	23,421	$	23,431
Commercial Mortgage Loans		14		57,100		57,100
Commercial and Industrial Loans		11		1,278		1,271
Construction Loans		3		4,380		4,380
Consumer Loans - Auto		156		2,044		2,044
Finance Leases		24		462		462
Consumer Loans - Other		304		1,986		1,986

Total Troubled Debt Restructurings		659	$	90,671	$	90,674


(Dollars in thousands)	Nine-Month period ended September 30, 2012
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans		403	$	64,412	$	64,773
Commercial Mortgage Loans		35		100,036		100,072
Commercial and Industrial Loans		47		33,162		29,593
Construction Loans		8		9,671		9,661
Consumer Loans - Auto		445		5,473		5,430
Finance Leases		76		1,384		1,384
Consumer Loans - Other		827		5,289		5,289

Total Troubled Debt Restructurings		1,841	$	219,427	$	216,202

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-performing loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to make payments of either principal, interest, or both for a period of 90 days or more.

Loan modifications considered TDRs that defaulted during the quarters and nine-month periods ended September 30, 2013 and September 30, 2012 and had become TDRs during the 12-months preceding the default date were as follows:


	Quarter ended September 30,
(Dollars in thousands)	2013				2012
	Number of contracts		Recorded Investment		Number of contracts		Recorded Investment

Non-FHA/VA Residential Mortgage loans		11	$	1,934		49	$	8,031
Commercial Mortgage Loans		—		—		1		338
Commercial and Industrial Loans		—		—		1		1,910
Construction Loans		—		—		—		—
Consumer Loans - Auto		—		—		3		38
Consumer Loans - Other		—		—		6		37
Finance Leases		1		18		—		—

Total		12	$	1,952		60	$	10,354


	Nine-Month Period Ended September 30,
(Dollars in thousands)	2013				2012
	Number of contracts		Recorded Investment		Number of contracts		Recorded Investment

Non-FHA/VA Residential Mortgage loans		75	$	11,549		137	$	20,841
Commercial Mortgage Loans		1		46,102		9		5,549
Commercial and Industrial Loans		2		3,829		5		8,189
Construction Loans		3		252		2		8,382
Consumer Loans - Auto		7		54		39		431
Consumer Loans - Other		40		219		12		155
Finance Leases		3		38		1		27

Total		131	$	62,043		205	$	43,574

For certain TDRs, the Corporation splits the loans into two new notes, A and B notes. The A note is restructured to comply with the Corporation’s lending standards at current market rates, and is tailored to suit the customer’s ability to make timely interest and principal payments. The B note includes the granting of the concession to the borrower and varies by situation. The B note is charged off but the obligation is not forgiven to the borrower, and any payments collected are accounted for as recoveries. At the time of restructuring, the A note is identified and classified as a TDR. If the loan performs for at least six months according to the modified terms, the A note may be returned to accrual status. The borrower’s payment performance prior to the restructuring is included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring. In the periods following the calendar year in which a loan is restructured, the A note may no longer be reported as a TDR if it is on accrual, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the restructure).

The recorded investment in loans held for investment restructured using the A/B note restructure workout strategy was approximately $90.9 million at September 30, 2013. The following table provides additional information about the volume of this type of loan restructuring and the effect on the allowance for loan and lease losses in the first nine months of 2013 and 2012:


(In thousands)	September 30, 2013		September 30, 2012
Principal balance deemed collectible at end of period	$	90,914	$	128,651

Amount charged off	$	25,389	$	2,735

Charges to the provision for loan losses	$	567	$	1,939

Allowance for loan losses at end of period	$	1,588	$	5,951

Of the loans held for investment comprising the $90.9 million that have been deemed collectible, approximately $89.1 million were placed in accrual status as the borrowers have exhibited a period of sustained performance. These loans continue to be individually evaluated for impairment purposes.

NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The changes in the allowance for loan and lease losses were as follows:


(In thousands)	Residential Mortgage Loans			Commercial Mortgage Loans			Commercial & Industrial Loans			Construction Loans			Consumer Loans			Total
Quarter ended September 30, 2013
Allowance for loan and lease losses:
Beginning balance	$	35,581		$	88,013		$	87,677		$	34,728		$	55,048		$	301,047
Charge-offs		(8,698	)		(5,944	)		(7,419	)		(1,824	)		(15,559	)		(39,444	)
Recoveries		241			26			1,701			1,895			1,718			5,581
Provision		4,663			(59	)		1,090			1,304			15,197			22,195

Ending balance	$	31,787		$	82,036		$	83,049		$	36,103		$	56,404		$	289,379

Ending balance: specific reserve for impaired loans	$	17,982		$	28,316		$	34,438		$	21,785		$	3,654		$	106,175

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	—		$	—

Ending balance: general allowance	$	13,805		$	53,720		$	48,611		$	14,318		$	52,750		$	183,204

Loans held for investment:
Ending balance	$	2,519,457		$	1,857,794		$	2,908,347		$	163,610		$	2,059,426		$	9,508,634

Ending balance: impaired loans	$	397,025		$	205,654		$	200,285		$	73,482		$	28,063		$	904,509

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	5,963		$	5,963

Ending balance: loans with general allowance	$	2,122,432		$	1,652,140		$	2,708,062		$	90,128		$	2,025,400		$	8,598,162



(In thousands)	Residential Mortgage Loans			Commercial Mortgage Loans			Commercial & Industrial Loans			Construction Loans			Consumer Loans			Total
Nine-Month period ended September 30, 2013
Allowance for loan and lease losses:
Beginning balance	$	68,354		$	97,692		$	146,900		$	61,600		$	60,868		$	435,414
Charge-offs		(25,351	)		(25,214	)		(54,849	)		(30,070	)		(46,673	)		(182,157	)
Charge-offs related to bulk sales		(98,972	)		(40,057	)		(44,678	)		(12,784	)		—			(196,491	)
Recoveries		868			64			3,460			2,042			5,397			11,831
Provision		86,888			38,860			41,656			16,566			36,812			220,782
Reclassification ⁽¹⁾		—			10,691			(9,440	)		(1,251	)		—			—

Ending balance	$	31,787		$	82,036		$	83,049		$	36,103		$	56,404		$	289,379

Ending balance: specific reserve for impaired loans	$	17,982		$	28,316		$	34,438		$	21,785		$	3,654		$	106,175

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	—		$	—

Ending balance: general allowance	$	13,805		$	53,720		$	48,611		$	14,318		$	52,750		$	183,204

Loans held for investment:
Ending balance	$	2,519,457		$	1,857,794		$	2,908,347		$	163,610		$	2,059,426		$	9,508,634

Ending balance: impaired loans	$	397,025		$	205,654		$	200,285		$	73,482		$	28,063		$	904,509

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	5,963		$	5,963

Ending balance: loans with general allowance	$	2,122,432		$	1,652,140		$	2,708,062		$	90,128		$	2,025,400		$	8,598,162

(1)	Refer to Note 6 for information about the reclassification of certain loans between commercial and industrial, construction, and commercial mortgage made in the second quarter of 2013.


(In thousands)	Residential Mortgage Loans			Commercial Mortgage Loans			Commercial & Industrial Loans			Construction Loans			Consumer Loans			Total

Quarter ended September 30, 2012
Allowance for loan and lease losses:
Beginning balance	$	67,440		$	100,846		$	166,021		$	67,858		$	54,988		$	457,153
Charge-offs		(7,586	)		(5,681	)		(12,795	)		(9,012	)		(9,444	)		(44,518	)
Recoveries		228			679			534			686			1,817			3,944
Provision (release)		9,083			(6,617	)		8,117			6,379			11,990			28,952

Ending balance	$	69,165		$	89,227		$	161,877		$	65,911		$	59,351		$	445,531

Ending balance: specific reserve for impaired loans	$	49,640		$	51,351		$	57,001		$	33,349		$	2,813		$	194,154

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	—		$	—

Ending balance: general allowance	$	19,525		$	37,876		$	104,876		$	32,562		$	56,538		$	251,377

Loans held for investment:
Ending balance	$	2,762,418		$	1,459,118		$	3,627,646		$	352,891		$	1,986,091		$	10,188,164

Ending balance: impaired loans	$	594,788		$	363,533		$	238,512		$	178,462		$	24,843		$	1,400,138

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	12,741		$	12,741

Ending balance: loans with general allowance	$	2,167,630		$	1,095,585		$	3,389,134		$	174,429		$	1,948,507		$	8,775,285


(In thousands)	Residential Mortgage Loans			Commercial Mortgage Loans			Commercial & Industrial Loans			Construction Loans			Consumer Loans			Total

Nine-Month period ended September 30, 2012
Allowance for loan and lease losses:
Beginning balance	$	68,678		$	108,991		$	164,490		$	91,386		$	60,372		$	493,917
Charge-offs		(27,976	)		(15,588	)		(35,494	)		(42,908	)		(29,327	)		(151,293	)
Recoveries		676			721			2,179			4,004			5,294			12,874
Provision		27,787			(4,897	)		30,702			13,429			23,012			90,033

Ending balance	$	69,165		$	89,227		$	161,877		$	65,911		$	59,351		$	445,531

Ending balance: specific reserve for impaired loans	$	49,640		$	51,351		$	57,001		$	33,349		$	2,813		$	194,154

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	—		$	—

Ending balance: general allowance	$	19,525		$	37,876		$	104,876		$	32,562		$	56,538		$	251,377

Loans held for investment:
Ending balance	$	2,762,418		$	1,459,118		$	3,627,646		$	352,891		$	1,986,091		$	10,188,164

Ending balance: impaired loans	$	594,788		$	363,533		$	238,512		$	178,462		$	24,843		$	1,400,138

Ending balance: purchased credit-impaired loans	$	—		$	—		$	—		$	—		$	12,741		$	12,741

Ending balance: loans with general allowance	$	2,167,630		$	1,095,585		$	3,389,134		$	174,429		$	1,948,507		$	8,775,285

The bulk sale of approximately $217.7 million of adversely classified assets in the first quarter of 2013, mainly commercial loans, resulted in charge-offs of approximately $98.5 million. In determining the historical loss rate for the computation of the general reserve for commercial loans, the Corporation includes the portion of these charge-offs that was related to the acceleration of previously reserved credit losses amounting to approximately $39.9 million. The Corporation considered that the portion not deemed to be credit-related losses was not indicative of the ultimate losses that may have occurred had the assets been resolved on an individual basis, over time and not in a steeply discounted bulk sale. A transaction, such as this one, entered into to expedite the reduction of non-performing and adversely classified assets, can result in charge-offs that are not reflective of true credit-related charge-off history since there is a component related to the discounted value realized on a bulk sale basis. Accordingly, the Corporation concluded that it is reasonable to exclude the component related to the discounted value from its historical charge-offs analysis used in estimating its allowance for loan losses.

As of September 30, 2013, the Corporation maintained a $0.9 million reserve for unfunded loan commitments mainly related to outstanding construction and commercial and industrial loan commitments. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition.

NOTE 8 – LOANS HELD FOR SALE

The Corporation’s loans held-for-sale portfolio was composed of:


	September 30, 2013		December 31, 2012
	(In thousands)
Residential mortgage loans	$	34,358	$	82,753
Construction loans		49,824		—
Commercial and Industrial loans		—		1,178
Commercial mortgage loans		30,410		1,463

Total	$	114,592	$	85,394

Non-performing loans held for sale totaled $80.2 million as of September 30, 2013 ($30.4 million commercial mortgage and $49.8 million construction loans) and $2.2 million ($1.1 million commercial and industrial and $1.1 million commercial mortgage) as of December 31, 2012. As previously discussed, during the first quarter of 2013, the Corporation transferred to held for sale $181.6 million of non-performing loans. In connection with the transfer, the Corporation recorded charge-offs of $36.0 million in the first quarter of 2013.

Furthermore, in the third quarter of 2013 approximately $6.4 million of construction loan held for sale participations were paid-off, resulting in a gain of $0.3 million, recorded as part of “Other income” in the third quarter of 2013.

The Corporation continues with its effort to resolve and dispose its non-performing commercial and construction loans held for sale.

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The Corporation designates a derivative as a fair value hedge, a cash flow hedge or an economic undesignated hedge when it enters into the derivative contract. As of September 30, 2013 and December 31, 2012, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.

The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:

Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Specifically, the interest rate on certain of the Corporation’s 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.

Interest rate swaps - Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of September 30, 2013 and December 31, 2012, most of the interest rate swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.

Forward Contracts - Forward contracts are sales of to-be-announced (“TBA”) mortgage-backed securities that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts with no net settlement provision and no market mechanism to facilitate net settlement and they provide for delivery of a security within the time generally established by regulations or conventions in the market place or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked-to-market. These securities are used to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains (losses) are recognized as part of mortgage banking activities in the Consolidated Statements of Income (Loss).

To satisfy the needs of its customers, the Corporation may enter into nonhedging transactions. On these transactions, generally, the Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions.

In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

The following table summarizes the notional amounts of all derivative instruments:


	Notional Amounts
	As of September 30, 2013		As of December 31, 2012
	(In thousands)
Economic undesignated hedges:
Interest rate contracts:
Interest rate swap agreements used to hedge loans	$	31,187	$	38,097
Written interest rate cap agreements		38,697		—
Purchased interest rate cap agreements		38,697		—
Forward Contracts:
Sale of TBA GNMA MBS pools		33,500		6,000

	$	142,081	$	44,097

Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.

The following table summarizes the fair value of derivative instruments and the location of the derivative instruments in the Statement of Financial Condition:


	Asset Derivatives					Liability Derivatives
	Statement of Financial	September 30, 2013		December 31, 2012			September 30, 2013		December 31, 2012
	Condition Location	Fair Value		Fair Value		Statement of Financial Condition Location	Fair Value		Fair Value
	(In thousands)

Economic undesignated hedges:
Interest rate contracts:
Interest rate swap agreements used to hedge loans	Other assets	$	193	$	288	Accounts payable and other liabilities	$	4,350	$	5,776
Written interest rate cap agreements	Other assets		—		—	Accounts payable and other liabilities		80		—
Purchased interest rate cap agreements	Other assets		79		—	Accounts payable and other liabilities		—		—
Forward Contracts:
Sales of TBA GNMA MBS pools	Other assets		2		3	Accounts payable and other liabilities		582		5

		$	274	$	291		$	5,012	$	5,781

The following table summarizes the effect of derivative instruments on the Statement of Income (Loss):

Gain (or Loss)

Location of Gain or (loss)

Quarter Ended<

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company