Edgar Filing: FIRST BANCORP /PR/

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Form 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, 2012

¨	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: 206,179,368 shares outstanding as of October 31, 2012.

FIRST BANCORP.

INDEX PAGE


	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2012 and December 31, 2011		5
Consolidated Statements of Income (Loss) (Unaudited) – Quarters ended September 30, 2012 and September 30, 2011 and nine-month period ended September 30, 2012 and September 30, 2011		6
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Quarters ended September 30, 2012 and September 30, 2011 and nine-month period ended September 30, 2012 and September 30, 2011		7
Consolidated Statements of Cash Flows (Unaudited) – Nine-month period ended September 30, 2012 and September 30, 2011		8
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine-month period ended September 30, 2012 and September 30, 2011		9
Notes to Consolidated Financial Statements (Unaudited)		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		56
Item 3. Quantitative and Qualitative Disclosures About Market Risk		102
Item 4. Controls and Procedures		102

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		103
Item 1A. Risk Factors		103
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		104
Item 3. Defaults Upon Senior Securities		104
Item 4. Mine Safety Disclosures		104
Item 5. Other Information		104
Item 6. Exhibits		104

SIGNATURES		105

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.”

First BanCorp. wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and to advise readers that various factors, including but not limited to, the following could cause actual results to differ materially from those expressed in, or implied by such “forward-looking statements”:

•

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 “FED” or “Federal Reserve”) and the 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 FED 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, including the Corporation’s construction and commercial real estate loan portfolios, which have contributed and may continue to contribute to, among other things, the high levels of non-performing assets, charge-offs and the provision expense and may subject the Corporation to further risk from loan defaults and foreclosures;

•

adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”) and in 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, 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;

•

uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S. and the USVI and 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 regarding the timing and final substance of any capital or liquidity standards, including the Final Basel III requirements and their implementation through rulemaking by the Federal Reserve, including anticipated requirements to hold higher levels of regulatory capital and liquidity and meet higher regulatory capital ratios as a result of Final Basel III or other capital or liquidity standards;

•

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, the FDIC, government-sponsored housing agencies and regulators in Puerto Rico and the USVI and 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 risk of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;

•

the impact on the Corporation’s results of operations and financial condition of acquisition and disposition transactions;

•

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

•

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

•

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

•

general competitive factors and industry consolidation.

The Corporation does not undertake, and specifically disclaims any obligation, to update any 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, 2011, 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)


(In thousands, except for share information)	September 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	786,788		$	206,897

Money market investments:
Federal funds sold		—			2,603
Time deposits with other financial institutions		605			955
Other short-term investments		216,327			236,111

Total money market investments		216,932			239,669

Investment securities available for sale, at fair value:
Securities pledged that can be repledged		1,070,375			1,167,265
Other investment securities		527,472			756,003

Total investment securities available for sale		1,597,847			1,923,268

Other equity securities		39,656			37,951

Investment in unconsolidated entities		32,300			43,401

Loans, net of allowance for loan and lease losses of $445,531 (2011—$493,917)		9,742,633			10,065,475
Loans held for sale, at lower of cost or market		68,349			15,822

Total loans, net		9,810,982			10,081,297

Premises and equipment, net		182,733			194,942
Other real estate owned		177,001			114,292
Accrued interest receivable on loans and investments		53,216			49,957
Other assets		242,292			235,601

Total assets	$	13,139,747		$	13,127,275

LIABILITIES
Non-interest-bearing deposits	$	780,717		$	705,789
Interest-bearing deposits		9,115,685			9,201,965

Total deposits		9,896,402			9,907,754
Securities sold under agreements to repurchase		900,000			1,000,000
Advances from the Federal Home Loan Bank (FHLB)		518,440			367,440
Notes payable (including $15,968 measured at fair value as of December 31, 2011)		—			23,342
Other borrowings		231,959			231,959
Accounts payable and other liabilities		108,829			152,636

Total liabilities		11,655,630			11,683,131

Commitments and Contingencies (Note 22)
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 206,674,221 shares (2011—205,794,024 shares issued)		20,667			20,579
Less: Treasury stock (at par value)		(49	)		(66	)

Common stock outstanding, 206,179,368 shares outstanding (2011—205,134,171 shares outstanding)		20,618			20,513

Additional paid-in capital		885,329			884,002
Retained earnings		472,631			457,384
Accumulated other comprehensive income, net of tax expense of $7,843 (2011—$7,751)		42,492			19,198

Total stockholders’ equity		1,484,117			1,444,144

Total liabilities and stockholders’ equity	$	13,139,747		$	13,127,275

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)


	Quarter Ended						Nine-Month Period Ended
(In thousands, except per share information)	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Interest income:
Loans	$	155,225		$	144,934		$	437,990		$	449,219
Investment securities		11,344			13,283			33,513			52,610
Money market investments		395			325			1,220			1,034

Total interest income		166,964			158,542			472,723			502,863

Interest expense:
Deposits		29,953			46,140			100,176			149,724
Securities sold under agreements to repurchase		6,707			10,700			21,825			36,858
Advances from FHLB		2,953			3,796			9,222			12,760
Notes payable and other borrowings		1,848			3,651			5,426			8,552

Total interest expense		41,461			64,287			136,649			207,894

Net interest income		125,503			94,255			336,074			294,969
Provision for loan and lease losses		28,952			46,446			90,033			194,362

Net interest income after provision for loan and lease losses		96,551			47,809			246,041			100,607

Non-interest income:
Service charges on deposit accounts		3,267			3,098			9,754			9,484
Other service charges		1,098			1,485			3,843			4,659
Mortgage banking activities		4,728			3,676			13,260			19,603
Net gain on sale of investments		10			12,506			36			53,796
Other-than-temporary impairment losses on investment securities:
Total other-than-temporary impairment losses		—			—			—			—
Portion of loss previously recognized in other comprehensive income		(557	)		(350	)		(1,933	)		(957	)

Net impairment losses on investment securities		(557	)		(350	)		(1,933	)		(957	)
Loss on early extinguishment of borrowings		—			(9,012	)		—			(10,835	)
Equity in losses of unconsolidated entities		(2,199	)		(4,357	)		(10,926	)		(5,893	)
Other non-interest income		8,779			6,918			23,589			23,454

Total non-interest income		15,126			13,964			37,623			93,311

Non-interest expenses:
Employees’ compensation and benefits		31,058			29,375			93,770			89,221
Occupancy and equipment		15,208			15,468			46,065			46,321
Business promotion		4,004			2,509			10,026			8,801
Professional fees		6,295			5,983			16,796			17,192
Taxes, other than income taxes		3,499			3,420			10,350			9,953
Insurance and supervisory fees		13,023			15,041			39,333			44,622
Net loss on real estate owned (REO) and REO operations		8,686			4,952			18,915			16,423
Other non-interest expenses		10,070			6,183			28,723			19,695

Total non-interest expenses		91,843			82,931			263,978			252,228

Income (loss) before income taxes		19,834			(21,158	)		19,686			(58,310	)
Income tax expense		(761	)		(2,888	)		(4,439	)		(9,080	)

Net income (loss)	$	19,073		$	(24,046	)	$	15,247		$	(67,390	)

Net income (loss) attributable to common stockholders	$	19,073		$	(31,143	)	$	15,247		$	(88,785	)

Net income (loss) per common share:
Basic	$	0.09		$	(1.46	)	$	0.07		$	(4.17	)

Diluted	$	0.09		$	(1.46	)	$	0.07		$	(4.17	)

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

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Quarter Ended						Nine-Month Period Ended
(In thousands)	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Net income (loss)	$	19,073		$	(24,046	)	$	15,247		$	(67,390	)

Available-for-sale debt securities on which an other-than-temporary impairment has been recognized:
Subsequent unrealized gain on debt securities on which an other-than-temporary impairment has been recognized		2,012			1,225			8,309			3,883
Reclassification adjustment for other-than-temporary impairment on debt securities included in net income		(557	)		(350	)		(1,933	)		(957	)
All other unrealized gains and losses on available-for-sale securities:
All other unrealized holding gains arising during the period		14,868			15,285			17,009			26,578
Reclassification adjustments for net gain included in net income		—			(12,504	)		—			(34,453	)
Net unrealized gains on securities reclassified from held to maturity to available for sale		—			—			—			2,789
Income tax expense related to items of other comprehensive income		(442	)		(2,364	)		(92	)		(1,631	)

Other comprehensive income (loss) for the period, net of tax		15,881			1,292			23,293			(3,791	)

Total comprehensive income (loss)	$	34,954		$	(22,754	)	$	38,540		$	(71,181	)

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine-Month Period Ended
(In thousands)	September 30, 2012			September 30, 2011
Cash flows from operating activities:
Net income (loss)	$	15,247		$	(67,390	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		18,404			18,209
Amortization of core deposit intangible		1,766			1,766
Amortization of purchased credit card relationship intangible		545			—
Provision for loan and lease losses		90,033			194,362
Deferred income tax expense		775			2,187
Stock-based compensation		395			69
Gain on sales of investments, net		—			(53,115	)
Loss on early extinguishment of borrowings		—			10,835
Other-than-temporary impairments on investment securities		1,933			957
Equity in losses of unconsolidated entities		10,926			5,893
Derivative instruments and financial liabilities measured at fair value (gain) loss		(955	)		4,179
Loss (gain) on sale of premises and equipment and other assets		259			(2,733	)
Net gain on sale of loans held for investment		(451	)		(13,347	)
Net amortization of premiums, discounts and deferred loan fees and costs		1,126			(1,267	)
Originations and purchases of loans held for sale		(295,607	)		(67,016	)
Sales and repayments of loans held for sale		302,046			74,518
Amortization of broker placement fees		7,607			13,217
Net amortization of premium and discounts on investment securities		10,087			3,600
(Decrease) increase in accrued income tax payable		(1,048	)		5,335
(Increase) decrease in accrued interest receivable		(909	)		11,560
Decrease in accrued interest payable		(293	)		(382	)
Decrease (increase) in other assets		20,819			(8,995	)
Increase (decrease) in other liabilities		8,059			(3,906	)

Net cash provided by operating activities		190,764			128,536

Cash flows from investing activities:
Principal collected on loans		2,227,673			1,907,704
Loans originated		(1,791,097	)		(1,681,084	)
Purchases of loans		(493,653	)		(118,445	)
Proceeds from sale of loans held for investment		22,203			675,450
Proceeds from sale of repossessed assets		59,442			79,974
Proceeds from sale of available-for-sale securities		—			1,181,065
Proceeds from sale of held-to-maturity securities		—			348,750
Purchases of securities available for sale		(788,191	)		(677,115	)
Proceeds from principal repayments and maturities of securities available for sale		1,127,667			619,375
Proceeds from principal repayments and maturities of securities held to maturity		—			33,726
Additions to premises and equipment		(7,494	)		(10,711	)
Proceeds from sale of premises and equipment and other assets		1,040			5,107
Proceeds from securities litigation settlement and other proceeds		36			679
(Increase) decrease in other equity securities		(1,705	)		15,265

Net cash provided by investing activities		355,921			2,379,740

Cash flows from financing activities:
Net decrease in deposits		(19,611	)		(1,416,329	)
Net repayments and cancellation costs of securities sold under agreements to repurchase		(100,000	)		(410,587	)
Net FHLB advances proceeds (paid) and cancellation costs		151,000			(244,248	)
Repayments of medium-term notes		(21,957	)		(7,000	)
Proceeds from common stock sold		1,037			—

Net cash provided (used in) financing activities		10,469			(2,078,164	)

Net increase in cash and cash equivalents		557,154			430,112
Cash and cash equivalents at beginning of period		446,566			370,283

Cash and cash equivalents at end of period	$	1,003,720		$	800,395

Cash and cash equivalents include:
Cash and due from banks	$	786,788		$	612,721
Money market instruments		216,932			187,674

	$	1,003,720		$	800,395

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, 2012			September 30, 2011
Preferred Stock:
Balance at beginning of period	$	63,047		$	425,009
Accretion of preferred stock discount		—			5,489

Balance at end of period		63,047			430,498

Common Stock outstanding:
Balance at beginning of period		20,513			2,130
Common stock sold		29			—
Restricted stock grants		76			—

Balance at end of period		20,618			2,130

Additional Paid-In-Capital:
Balance at beginning of period		884,002			319,459
Restricted stock grants		(76	)		—
Common stock sold		1,008			—
Stock-based compensation		395			69

Balance at end of period		885,329			319,528

Retained Earnings:
Balance at beginning of period		457,384			293,643
Net income (loss)		15,247			(67,390	)
Accretion of preferred stock discount		—			(5,489	)

Balance at end of period		472,631			220,764

Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period		19,198			17,718
Other comprehensive income (loss), net of tax		23,294			(3,791	)

Balance at end of period		42,492			13,927

Total stockholders’ equity	$	1,484,117		$	986,847

The accompanying notes are an integral part of these statements.

FIRST BANCORP.

PART I - 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, 2011. 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, 2011, included in the Corporation’s 2011 Annual Report on Form 10-K. On May 30, 2012, the Corporation purchased an approximate $406 million credit cards portfolio, of which a portion were purchased credit impaired loans. Refer to Note 6 for additional information about this transaction, including the accounting and reporting policies related to this portfolio. 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 and nine-month period ended September 30, 2012 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 April 2011, the FASB updated the Accounting Standards Codification (“Codification”) to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The Board concluded that this criterion is not a determining factor of effective control. Consequently, the amendments in this Update also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repurchase agreements and other similar transactions. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Corporation adopted this guidance with no impact on the financial statements.

In May 2011, the FASB updated the Codification to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (IFRSs). The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements and result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The amendments in this Update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Corporation adopted this guidance in 2012, refer to note 19 for applicable disclosures. The adoption of this guidance did not have a material impact in the Corporation’s consolidated financial position or results of operations.

In June 2011, the FASB updated the Codification to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under the amendments, an entity has the option to present the total comprehensive income either in a single continuous statement or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Additionally, this update requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this Update should be applied retrospectively and are effective for fiscal years beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Beginning with the financial statements for the quarter and six-month period ended June 30, 2011, the Corporation is following the guidance of separate but consecutive presentation of the statement of net income and the statement of other comprehensive income.

In September 2011, the FASB updated the Codification to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed

directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in this Update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Corporation will incorporate this guidance into the annual goodwill impairment evaluation process to be conducted in the fourth quarter of 2012.

In December 2011, the FASB updated the Codification to clarify the guidance on the derecognition of in substance real estate in order to resolve the diversity in practice when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. That is, even if the reporting entity ceases to have a controlling financial interest, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. The Corporation adopted this guidance with no impact on the consolidated financial statements.

In December 2011, the FASB updated the Codification to enhance and provided 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 November 2012, the FASB decided to amend and clarify the scope of the disclosures to include only derivatives, repurchase agreements and securities lending transactions. The FASB plans to release an exposure draft with the revised scope language during November 2012. The amendments in this Update are effective for interim and annual period beginning on or after January 1, 2013. The Corporation is currently evaluating the impact of the adoption of this guidance, if any, on its consolidated financial statements.

In July 2012, the FASB updated the Codification to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this Update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of date before July 27, 2012, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Corporation is currently evaluating the impact of the adoption of this guidance, if any, on its consolidated financial statements.

2 – EARNINGS PER COMMON SHARE

The calculations of earnings per common share for the quarters and nine-month period ended on September 30, 2012 and 2011 are as follows:


	Quarter Ended					Nine-Month Period Ended
	September 30, 2012		September 30, 2011			September 30, 2012		September 30, 2011
	(In thousands, except per share information)
Net Income (Loss):
Net income (loss)	$	19,073	$	(24,046	)	$	15,247	$	(67,390	)
Cumulative convertible preferred stock dividends (Series G)		—		(5,302	)		—		(15,906	)
Preferred stock discount accretion (Series G)		—		(1,795	)		—		(5,489	)

Net income (loss) attributable to common stockholders	$	19,073	$	(31,143	)	$	15,247	$	(88,785	)

Weighted-Average Shares:
Basic weighted-average common shares outstanding		205,415		21,303			205,349		21,303
Average potential common shares		508		—			348		—

Diluted weighted-average number of common shares outstanding		205,923		21,303			205,697		21,303

Income (loss) per common share:
Basic	$	0.09	$	(1.46	)	$	0.07	$	(4.17	)
Diluted	$	0.09	$	(1.46	)	$	0.07	$	(4.17	)

Earning (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average common shares issued and outstanding. Net income (loss) attributable to common stockholders represents net income (loss) adjusted for preferred stock dividends including dividends declared, and 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. 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 anti-dilutive effect on earnings per share. Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 114,757 and 129,934 for the quarter and nine-month period ended September 30, 2012 and 2011, respectively. Warrants outstanding to purchase 389,483 shares of common stock for the quarter and nine-month period ended September 30, 2011, and 720 unvested shares of restricted stock for the quarter and nine-month period ended September 30, 2011, were excluded from the computation of diluted earnings per share because the Corporation reported a net loss attributable to common stockholders and their inclusion would have an antidilutive effect.

3 – STOCK-BASED COMPENSATION

Between 1997 and January 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) that authorized the granting of up to 579,740 options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not less than the fair market value of the stock on the date the option was granted. Stock options were fully vested upon grant. The maximum term to exercise the options is ten years. The stock option plan provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuances and distributions such as stock appreciation rights.

Under the 1997 stock option plan, the Compensation and Benefits Committee (the “Compensation Committee”) had the authority to grant stock appreciation rights at any time subsequent to the grant of an option. Pursuant to stock appreciation rights, the optionee surrenders the right to exercise an option granted under the plan in consideration for payment by the Corporation of an amount equal to the excess of the fair market value of the shares of common stock subject to such option surrendered over the total option price of such shares. Any option surrendered is cancelled by the Corporation and the shares subject to the option are not eligible for further grants under the option plan. 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 for the nine-month period ended September 30, 2012 is set forth below:


	Nine-Month Period Ended September 30, 2012
	Number of Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (In thousands)
Beginning of period		129,934		$	202.99
Options expired		(9,713	)		140.15
Options cancelled		(5,464	)		236.27

End of period outstanding and exercisable		114,757		$	206.72		3.1	$	—

On April 29, 2008, the Corporation’s stockholders approved the First BanCorp. 2008 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. This plan allows 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 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 which 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 the 719,500 shares of restricted stock are 557,000 shares granted to certain senior executive officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule. 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 following table summarizes the restricted stock activity in 2012 under the Omnibus Plan for both executive officers covered by the TARP requirements and other employees as well as for the independent directors:


	Nine-Month Period Ended September 30, 2012
	Number of shares of restricted stock		Weighted-Average Grant Date Fair Value
Non-vested shares at beginning of period		—	$	—
Granted		764,410		2.50

Non-vested shares at September 30, 2012		764,410	$	2.50

For the quarter and nine-month period ended September 30, 2012, the Corporation recognized $0.2 million and $0.4 million, respectively, of stock based compensation expense related to the aforementioned restricted stock awards. For the quarter and nine-month period ended September 30, 2011, the Corporation recognized $23,333 and $69,999, respectively, of stock based compensation related to 720 shares of restricted stock granted in 2008 to members of the Board of Directors that vested in the fourth quarter of 2011. As of September 30, 2012, there was $1.4 million of total unrecognized compensation cost related to nonvested shares of restricted stock. That cost is expected to be recognized for 6% of the awards over the next 8 months, for 47% of the awards over the next 1.5 years and the remaining 47% over the next 2.5 years, as if they were multiple awards. No shares of restricted stock were granted or vested during the nine-month period ended September 30, 2011.

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 assumes a common stock appreciation of 25% 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. 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.

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 to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to 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.

4 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) on securities with changes in fair value recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale were as follows:


	September 30, 2012												December 31, 2011
	Amortized cost		Non-Credit Loss Component of OTTI Recorded in OCI		Gross Unrealized				Fair value		Weighted average yield%		Amortized cost		Non-Credit Loss Component of OTTI Recorded in OCI		Gross Unrealized				Fair value		Weighted average yield%
(Dollars in thousands)	Amortized cost		Non-Credit Loss Component of OTTI Recorded in OCI		gains		losses		Fair value		Weighted average yield%		Amortized cost		Non-Credit Loss Component of OTTI Recorded in OCI		gains		losses		Fair value		Weighted average yield%
U.S. Treasury securities:
Due within one year	$	7,494	$	—	$	1	$	—	$	7,495		0.17	$	476,665	$	—	$	327	$	—	$	476,992		0.34
Obligations of U.S. Government sponsored agencies:
Due within one year		—		—		—		—		—		—		300,381		—		1,204		—		301,585		1.15
After 1 to 5 years		25,650		—		11		—		25,661		0.35		—		—		—		—		—		—
Puerto Rico Government obligations:
Due within one year		—		—		—		—		—		—		8,560		—		110		—		8,670		4.20
After 1 to 5 years		—		—		—		—		—		—		70,590		—		171		1		70,760		2.63
After 5 to 10 years		39,744		—		1,335		—		41,079		4.49		118,186		—		76		13		118,249		5.07
After 10 years		21,102		—		1,190		25		22,267		5.78		24,154		—		781		1		24,934		5.74

United States and Puerto Rico Government obligations		93,990		—		2,537		25		96,502		3.31		998,536		—		2,669		15		1,001,190		1.47

Mortgage-backed securities:
FHLMC certificates:
Due within one year		206		—		1		—		207		3.57		—		—		—		—		—		—
After 1 to 5 years		—		—		—		—		—		—		928		—		8		—		936		3.67
After 10 years		135,512		—		4,186		—		139,698		2.28		24,974		—		238		—		25,212		2.59

		135,718		—		4,187		—		139,905		2.28		25,902		—		246		—		26,148		2.62

GNMA certificates:
After 1 to 5 years		159		—		8		—		167		3.59		179		—		9		—		188		3.88
After 5 to 10 years		562		—		45		—		607		3.60		596		—		47		—		643		4.09
After 10 years		604,294		—		44,793		—		649,087		4.00		717,237		—		43,938		—		761,175		3.98

		605,015		—		44,846		—		649,861		4.00		718,012		—		43,994		—		762,006		3.98

FNMA certificates:
Due within one year		282		—		10		—		292		3.55		—		—		—		—		—		—
After 1 to 5 years		—		—		—		—		—		—		1,019		—		42		—		1,061		3.82
After 5 to 10 years		14,517		—		810		—		15,327		4.04		18,826		—		1,007		—		19,833		3.97
After 10 years		624,983		—		15,872		—		640,855		2.56		47,485		—		3,285		—		50,770		5.46

		639,782		—		16,692		—		656,474		2.59		67,330		—		4,334		—		71,664		5.02

Collateralized Mortgage Obligations issued or guaranteed by FHLMC,
After 5 to 10 years		377		—		—		1		376		3.01		—		—		—		—		—		—

Other mortgage pass-through trust certificates:
After 10 years		72,555		31,951		14,085		—		54,689		2.34		85,014		31,951		8,143		—		61,206		2.19

Total mortgage-backed securities		1,453,447		31,951		79,810		1		1,501,305		3.13		896,258		31,951		56,717		—		921,024		3.85

Corporate bonds:
After 10 years		—		—		—		—		—		—		1,447		434		—		—		1,013		5.80

Equity securities (without contractual maturity)⁽¹⁾		77		—		—		37		40		—		77		—		—		36		41		—

Total investment securities available for sale	$	1,547,514	$	31,951	$	82,347	$	63	$	1,597,847		3.15	$	1,896,318	$	32,385	$	59,386	$	51	$	1,923,268		2.60

(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 as was the case with approximately $194.5 million of Puerto Rico Government Obligations called during the first nine months of 2012. 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 non-credit 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, 2012 and December 31, 2011. 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, 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	$	2,065	$	25	$	—	$	—	$	2,065	$	25
Mortgage-backed securities:
Collateralized mortgage obligations issued or guaranteed by FHLMC		376		1		—		—		376		1
Other mortgage pass-through trust certificates		—		—		54,540		17,867		54,540		17,867
Equity securities		—		—		40		37		40		37

	$	2,441	$	26	$	54,580	$	17,904	$	57,021	$	17,930


	As of December 31, 2011
	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	$	15,982	$	15	$	—	$	—	$	15,982	$	15
Mortgage-backed securities:
Other mortgage pass-through trust certificates		—		—		61,017		23,809		61,017		23,809
Corporate bonds		—		—		1,013		434		1,013		434
Equity securities		41		36		—		—		41		36

	$	16,023	$	51	$	62,030	$	24,243	$	78,053	$	24,294

Total proceeds from the sale of securities available for sale during the first nine months of 2011 amounted to approximately $1.2 billion, none in the first nine months of 2012.

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 U.S. Treasury accounted for more than 92% of the total available-for-sale portfolio as of September 30, 2012 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 $72.6 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,
(In thousands)	2012			2011			2012			2011
Total other-than-temporary impairment losses	$	—		$	—		$	—		$	—
Portion of loss previously recognized in other comprehensive income		(557	)		(350	)		(1,933	)		(957	)

Net impairment losses recognized in earnings	$	(557	)	$	(350	)	$	(1,933	)	$	(957	)

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,
(In thousands)	2012		2011		2012		2011
Credit losses at the beginning of the period	$	5,199	$	2,459	$	3,823	$	1,852
Additions:
Credit losses on debt securities for which an OTTI was previously recognized⁽¹⁾		557		350		1,933		957

Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI	$	5,756	$	2,809	$	5,756	$	2,809

(1)	Related to private label MBS.

During the first nine-months of 2012, the $1.9 million credit related impairment loss is related to Private label MBS, which are collateralized by fixed-rate mortgages on single family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

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 follow:


	September 30, 2012			December 31, 2011
	Weighted Average		Range	Weighted Average		Range
Discount rate		14.5%	14.5%		14.5%	14.5%
Prepayment rate		33%	23.81% - 43.58%		27%	21.33% -37.97%
Projected Cumulative Loss Rate		7%	0.71% - 17.51%		6%	1.94% - 11.89%

No OTTI losses on equity securities held in the available-for-sale investment portfolio were recognized for the first nine-months of 2012 or 2011.

5 – OTHER EQUITY SECURITIES

Institutions that are members of the Federal Home Loan Bank (“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, 2012 and December 31, 2011, the Corporation had investments in FHLB stock with a book value of $38.4 million and $36.7 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, 2012 amounted to $0.3 million and $1.1 million, respectively, compared to $0.4 million and $1.4 million for the comparable periods in 2011.

The FHLB stocks 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, 2012 and December 31, 2011 was $1.3 million.

6 – LOAN PORTFOLIO

The following is a detail of the loan portfolio held for investment:


	September 30, 2012			December 31, 2011
	(In thousands)
Residential mortgage loans, mainly secured by first mortgages	$	2,762,418		$	2,873,785

Commercial loans:
Construction loans		352,891			427,863
Commercial mortgage loans		1,459,118			1,565,411
Commercial and Industrial loans		3,369,305			3,856,695
Loans to local financial institutions collateralized by real estate mortgages		258,341			273,821

Commercial loans		5,439,655			6,123,790

Finance leases		239,556			247,003

Consumer loans		1,746,535			1,314,814

Loans held for investment		10,188,164			10,559,392
Allowance for loan and lease losses		(445,531	)		(493,917	)

Loans held for investment, net	$	9,742,633		$	10,065,475

Loans held for investment classified as non-performing were as follows:


(In thousands)	September 30, 2012		December 31, 2011
Non-performing loans:
Residential mortgage	$	320,913	$	338,208
Commercial mortgage		231,163		240,414
Commercial and Industrial		230,459		270,171
Construction		189,458		250,022
Consumer:
Auto loans		17,639		19,641
Finance leases		3,061		3,485
Other consumer loans		15,351		16,421

Total non-performing loans held for investment⁽¹⁾	$	1,008,044	$	1,138,362

(1)	Amount exclude purchased credit-impaired loans with a carrying value of approximately $12.7 million acquired as part of the credit cards portfolio purchased in the second quarter of 2012 as further discussed below.

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


As of September 30, 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)}		$—	$	12,406	$	91,422	$	103,828	$	—	$	112,662	$	216,490	$	91,422
Other residential mortgage loans⁽³⁾		—		109,309		333,903		443,212		—		2,102,716		2,545,928		12,990
Commercial:
Commercial & Industrial loans		14,436		11,516		258,354		284,306		—		3,343,340		3,627,646		27,895
Commercial mortgage loans⁽³⁾		—		11,744		235,955		247,699		—		1,211,419		1,459,118		4,792
Construction loans⁽³⁾		—		2,160		189,489		191,649		—		161,242		352,891		31
Consumer:
Auto loans		67,561		19,738		17,639		104,938		—		891,681		996,619		—
Finance leases		10,098		3,122		3,061		16,281		—		223,275		239,556		—
Other consumer loans		13,373		7,533		19,249		40,155		12,741		697,020		749,916		3,898

Total loans held for investment		$105,468	$	177,528	$	1,149,072	$	1,432,068	$	12,741	$	8,743,355	$	10,188,164	$	141,028

(1)	Includes non-performing loans and accruing loans which 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 September 30, 2012, includes $6.1 million of defaulted loans collateralizing Ginnie Mae (“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, residential mortgage, commercial mortgage and construction loans are considered past due when the borrower is in arrears 2 or more monthly payments.

(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 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 $34.6 million of residential mortgage loans insured by FHA or guaranteed by the VA, which are over 18 months delinquent, that are no longer accruing interest as of September 30, 2012.


As of December 31, 2011 (In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 days or more Past Due⁽¹⁾		Total Past Due		Current		Total loans held for investment		90 days past due and still accruing
Residential mortgage:
FHA/VA and other government guaranteed loans^{(2) (3)}	$	—	$	17,548	$	85,188	$	102,736	$	165,417	$	268,153	$	85,188
Other residential mortgage loans⁽³⁾		—		90,274		350,495		440,769		2,164,863		2,605,632		12,287
Commercial:
Commercial & Industrial loans		27,674		10,714		294,723		333,111		3,797,405		4,130,516		24,552
Commercial mortgage loans⁽³⁾		—		8,891		240,414		249,305		1,316,106		1,565,411		—
Construction loans⁽³⁾		—		8,211		258,811		267,022		160,841		427,863		8,789
Consumer:
Auto loans		61,265		18,963		19,641		99,869		837,697		937,566		—
Finance leases		11,110		4,172		3,485		18,767		228,236		247,003		—
Other consumer loans		10,170		4,699		16,421		31,290		345,958		377,248		—

Total loans held for investment	$	110,219	$	163,472	$	1,269,178	$	1,542,869	$	9,016,523	$	10,559,392	$	130,816

(1)	Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e. FHA/VA and other guaranteed loans).

(2)	As of December 31, 2011, includes $66.4 million of defaulted loans collateralizing Ginnie Mae (“GNMA”) securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.

(3)

The Corporation’s credit quality indicators by loan type are summarized below:


	Commercial Credit Exposure-Credit risk Profile based on Creditworthiness category:
September 30, 2012	Substandard		Doubtful		Loss		Total Adversely Classified		Total Portfolio
	(In thousands)
Commercial Mortgage	$	388,225	$	6,526	$	—	$	394,751	$	1,459,118
Construction		188,051		22,184		605		210,840		352,891
Commercial and Industrial		405,897		23,728		1,240		430,865		3,627,646

	Commercial Credit Exposure-Credit risk Profile based on Creditworthiness category:
December 31, 2011	Substandard		Doubtful		Loss		Total Adversely Classified		Total Portfolio
	(In thousands)
Commercial Mortgage	$	414,355	$	8,462	$	—	$	422,817	$	1,565,411
Construction		247,560		32,059		2,916		282,535		427,863
Commercial and Industrial		457,927		31,100		1,373		490,400		4,130,516

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

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

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

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


September 30, 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		$216,490		$2,225,015		$978,980		$236,495		$721,824
Purchased Credit-Impaired		—		—		—		—		12,741
Non-performing		—		320,913		17,639		3,061		15,351

Total		$216,490		$2,545,928		$996,619		$239,556		$749,916

(1)


December 31, 2011	Consumer Credit Exposure-Credit risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/ Guaranteed		Other residential loans		Auto		Finance Leases		Other Consumer
	(In thousands)
Performing	$	268,153	$	2,267,424	$	917,925	$	243,518	$	360,827
Non-performing		—		338,208		19,641		3,485		16,421

Total	$	268,153	$	2,605,632	$	937,566	$	247,003	$	377,248

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

Impaired Loans


(Dollars in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized Quarter to date		Interest Income Recognized Year to date
As of September 30, 2012 With no related allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortgage loans		106,554		112,039		—		171,070		1,144		2,733
Commercial:
Commercial mortgage loans		50,043		62,819		—		40,939		442		1,003
Commercial & Industrial Loans		31,047		38,017		—		20,128		51		74
Construction Loans		38,863		64,637		—		37,314		33		70
Consumer:
Auto loans		—		—		—		—		—		—
Finance leases		—		—		—		—		—		—
Other consumer loans		1,647		2,597		—		2,729		25		51

	$	228,154	$	280,109	$	—	$	272,180	$	1,695	$	3,931

With an allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortgage loans		488,234		550,123		49,640		428,808		3,857		10,851
Commercial:
Commercial mortgage loans		313,490		333,339		51,351		324,053		2,369		6,646
Commercial & Industrial Loans		207,465		272,977		57,001		236,896		479		1,503
Construction Loans		139,599		235,137		33,349		171,178		36		289
Consumer:
Auto loans		11,813		11,813		1,404		10,317		194		616
Finance leases		2,045		2,045		73		1,968		50		134
Other consumer loans		9,338		9,968		1,336		9,028		48		206

	$	1,171,984	$	1,415,402	$	194,154	$	1,182,248	$	7,033	$	20,244

Total:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortgage loans		594,788		662,162		49,640		599,878		5,001		13,584
Commercial:
Commercial mortgage loans		363,533		396,158		51,351		364,992		2,811		7,649
Commercial & Industrial Loans		238,512		310,994		57,001		257,024		530		1,577
Construction Loans		178,462		299,774		33,349		208,492		69		359
Consumer:		—		—		—		—		—		—
Auto loans		11,813		11,813		1,404		10,317		194		616
Finance leases		2,045		2,045		73		1,968		50		134
Other consumer loans		10,985		12,565		1,336		11,757		73		257

	$	1,400,138	$	1,695,511	$	194,154	$	1,454,428	$	8,728	$	24,176


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
As of December 31, 2011
With no related allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortgage loans		181,081		192,757		—
Commercial:
Commercial mortgage loans		13,797		15,283		—
Commercial & Industrial Loans		40,453		45,948		—
Construction Loans		33,759		45,931		—
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		2,840		3,846		—

	$	271,930	$	303,765	$	—

With an allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortgage loans		423,340		465,495		48,566
Commercial:
Commercial mortgage loans		354,954		383,890		59,167
Commercial & Industrial Loans		223,572		316,641		58,652
Construction Loans		213,388		344,035		44,768
Consumer:
Auto loans		8,710		8,710		1,039
Finance leases		1,804		1,804		41
Other consumer loans		9,678		9,678		2,669

	$	1,235,446	$	1,530,253	$	214,902

Total:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortgage loans		604,421		658,252		48,566
Commercial:
Commercial mortgage loans		368,751		399,173		59,167
Commercial & Industrial Loans		264,025		362,589		58,652
Construction Loans		247,147		389,966		44,768
Consumer:
Auto loans		8,710		8,710		1,039
Finance leases		1,804		1,804		41
Other consumer loans		12,518		13,524		2,669

	$	1,507,376	$	1,834,018	$	214,902

Interest income of approximately $10.2 million and $25.1 million was recognized on impaired loans for the third quarter and first nine months of 2011, respectively.

The following tables show the activity for impaired loans and the related specific reserve:


	Quarter ended			Nine-Month Period Ended
	September 30, 2012
	(In thousands)
Impaired Loans:
Balance at beginning of period	$	1,432,469		$	1,507,376
Loans determined impaired during the period		55,292			222,841
Net charge-offs		(30,971	)		(107,458	)
Increases to impaired loans (disbursements)		11,039			30,160
Foreclosures		(26,353	)		(113,737	)
Loans no longer considered impaired		(5,351	)		(42,269	)
Paid in full or partial payments		(35,987	)		(96,775	)

Balance at end of period	$	1,400,138		$	1,400,138


	Quarter Ended			Nine-Month Period Ended
	September 30, 2012
	(In thousands)
Specific Reserve:
Balance at beginning of period	$	209,860		$	214,902
Provision for loan losses		15,265			87,070
Net charge-offs		(30,971	)		(107,818	)

Balance at end of period	$	194,154		$	194,154

Acquired loans including Purchased Credit-Impaired Loans

On May 30, 2012, the Corporation re-entered the credit card business with the acquisition of an approximate $406 million portfolio of FirstBank-branded credit card portfolio from FIA Card Services (FIA). These loans were recorded on the Consolidated Statement of Financial Condition at estimated fair value on acquisition date of $368.9 million. The Corporation concluded that a portion of these loans acquired were purchased credit-impaired (“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 for which the Corporation concluded were credit impaired had a contractual outstanding unpaid principal and interest balance of $34.6 million and an estimated fair value of $15.7 million. Given 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 report PCI loans and exclude these loans from delinquency and nonperforming loan statistics. Credit card loans continue to accrue finance charges and fees until charged-off at 180 days delinquent and the methodology employed to calculate the allowance for loan losses for non-PCI loans is similar to the methodology used for other consumer loans, except for that the loss rates are determined evaluating 12 months of historical performance, instead of 24 months.

Initial Fair value and Accretable Yield of Acquired 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 fair value at acquisition related to the loans 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 principal balance and carrying value of the PCI loans as of September 30, 2012:


(In thousands)	Purchased Credit- Impaired Loans
Contractual balance	$	31,364
Carrying value		12,741

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 third quarter and first nine-months of 2012, the Corporation did not record 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:


(Dollars in thousands)	PCI Loans
Accretable yield at acquisition	$	3,451
Accretion recognized in earnings		(740	)

Accretable yield as of September 30, 2012	$	2,711

In addition to the credit card portfolio acquired from FIA, the Corporation purchased during the first nine-months of 2012 $149.5 million of residential mortgage loans consistent with a strategic program established by the Corporation in 2005 to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. Generally, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions depending upon 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. The Corporation sold approximately $156.3 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during the first nine months of 2012. Also, the Corporation securitized approximately $165.3 million of FHA/VA mortgage loans into GNMA mortgage-backed securities during the first nine-months of 2012.

The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, FirstBank, also lends in the U.S. and British Virgin Islands markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment portfolio of $10.2 billion as of September 30, 2012, approximately 85% have credit risk concentration in Puerto Rico, 7% in the United States and 8% in the Virgin Islands.

As of September 30, 2012, the Corporation had $148.7 million outstanding in credit facilities granted to the Puerto Rico Government and/or its political subdivisions, down from $360.1 million as of December 31, 2011, and $117.7 million granted to the Government of the Virgin Islands, down from $139.4 million as of December 31, 2011. A substantial portion of these credit facilities consist of loans to municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Another portion of these obligations consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power and water utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it.

In addition to loans extended to government entities, the largest loan to one borrower as of September 30, 2012 in the amount of $258.3 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 residential mortgage loans.

Troubled Debt Restructurings

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and in accordance with the 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 Troubled

debt restructurings (“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, 2012, the Corporation’s total TDR loans of $925.1 million consisted of $410.2 million of residential mortgage loans, $107.5 million of commercial and industrial loans, $298.1 million of commercial mortgage loans, $86.6 million of construction loans and $22.7 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $4.4 million as of September 30, 2012.

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 remote 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 foreclosure action absent some lender concession. Notwithstanding, 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 three month period whereby 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 enters into a permanent modification. As a result of new accounting guidance on TDRs, 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 TDR regardless of whether the borrower enters into a permanent modification. At September 30, 2012, we classified and additional $5.7 million of residential mortgage loans as TDRs that were participating in or had been offered a trial modification.

For the commercial real estate, commercial and industrial, and the construction portfolios, at the time of the 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; waiving 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 C&I, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of REO. 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 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 table. This information reflects all TDRs at September 30, 2012:


	September 30, 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	$	17,437	$	4,196	$	346,314	$	—	$	—	$	42,300	$	410,247
Commercial Mortgage Loans		102,643		16,251		117,014		46,903		—		15,235		298,046
Commercial & Industrial Loans		16,878		12,394		21,708		7,333		9,521		39,723		107,557
Construction Loans		6,349		2,027		9,094		—		63,477		5,634		86,581
Consumer Loans - Auto		—		1,067		7,851		—		—		2,895		11,813
Finance Leases		—		1,669		375		—		—		—		2,044
Consumer Loans - Other		353		497		5,808		—		—		2,198		8,856

Total Troubled Debt Restructurings	$	143,660	$	38,101	$	508,164	$	54,236	$	72,998	$	107,985	$	925,144

(1)	Mainly related to one construction relationship amounting to $53.4 million.

(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, 2012
Beginning Balance of TDRs	$	861,932		$	820,499
New TDRs		90,674			216,202
Increases to existing TDRs (disbursements)		5,690			21,825
Charge-offs post modification		(15,636	)		(41,198	)
Foreclosures		(2,513	)		(30,768	)
Removed from TDR classification		—			(7,051	)
Paid-off and partial payments		(15,003	)		(54,365	)

Ending balance of TDRs	$	925,144		$	925,144

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 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 interest income by returning a non-performing loan to performing status, if applicable, and increase cash flows by providing for payments to be made by the borrower, and avoid increases in foreclosure and real estate owned (“REO”) 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, 2012, $7.1 million were 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, 2012
	Accrual		Nonaccrual⁽¹⁾		Total TDRs
Non- FHA/VA Residential Mortgage loans	$	294,184	$	116,063	$	410,247
Commercial Mortgage Loans		157,445		140,601		298,046
Commercial & Industrial Loans		24,749		82,808		107,557
Construction Loans		2,490		84,091		86,581
Consumer Loans - Auto		7,114		4,699		11,813
Finance Leases		1,985		59		2,044
Consumer Loans - Other		7,037		1,819		8,856

Total Troubled Debt Restructurings	$	495,004	$	430,140	$	925,144

(1)

Included in non-accrual loans are $203.6 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual 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) totaling $94.3 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 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, 2012 and 2011 were as follows:


(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 & 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 & 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


(Dollars in thousands)	Quarter ended September 30, 2011
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Non- FHA/VA Residential Mortgage loans		190	$	30,724	$	31,395
Commercial Mortgage Loans		21		37,686		39,998
Commercial & Industrial Loans		19		24,355		24,085
Construction Loans		7		14,532		14,423
Consumer Loans - Auto		188		2,359		2,359
Finance Leases		32		409		409
Consumer Loans - Other		234		2,730		2,820

Total Troubled Debt Restructurings		691	$	112,795	$	115,489


(Dollars in thousands)	Nine-Month Period Ended September 30, 2011
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Non- FHA/VA Residential Mortgage loans		607	$	98,168	$	101,367
Commercial Mortgage Loans		61		149,340		121,078
Commercial & Industrial Loans		43		44,561		43,702
Construction Loans		14		106,204		106,278
Consumer Loans - Auto		600		7,423		7,423
Finance Leases		87		1,501		1,501
Consumer Loans - Other		910		8,758		8,892

Total Troubled Debt Restructurings		2,322	$	415,955	$	390,241

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 troubled debt restructurings that defaulted during the quarter and nine-month period ended September 30, 2012 and 2011 and had been modified in a TDR during the 12-months preceding the default date were as follows:


	Quarter ended September 30,
(Dollars in Thousands)	2012				2011
	Number of contracts		Recorded Investment		Number of contracts		Recorded Investment
Non- FHA/VA Residential Mortgage loans		49	$	8,031		31	$	4,108
Commercial Mortgage Loans		1		338		5		2,783
Commercial & Industrial Loans		1		1,910		1		128
Construction Loans		—		—		—		—
Consumer Loans - Auto

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