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FBP > SEC Filings for FBP > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FIRST BANCORP /PR/

Form 10-Q for FIRST BANCORP /PR/


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

SELECTED FINANCIAL DATA



                                                                       Quarter ended                Nine-Month Period Ended
(In thousands, except for per share and financial ratios)              September 30,                     September 30,
                                                                   2012            2011              2012              2011
Condensed Income Statements:
Total interest income                                            $ 166,964       $ 158,542       $    472,723        $ 502,863
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
Non-interest income                                                 15,126          13,964             37,623           93,311
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 )
Per Common Share Results:
Net earnings (loss) per share basic                              $    0.09       $   (1.46 )     $       0.07        $   (4.17 )
Net earnings (loss) per share diluted                            $    0.09       $   (1.46 )     $       0.07        $   (4.17 )
Cash dividends declared                                          $      -        $      -        $         -         $      -
Average shares outstanding                                         205,415          21,303            205,349           21,303
Average shares outstanding diluted                                 205,923          21,303            205,697           21,303
Book value per common share                                      $    6.89       $   26.12       $       6.89        $   26.12
Tangible book value per common share (1)                         $    6.59       $   24.22       $       6.59        $   24.22
Selected Financial Ratios (In Percent):
Profitability:
Return on Average Assets                                              0.59           (0.69 )             0.16            (0.62 )
Interest Rate Spread (2)                                              3.77            2.61               3.31             2.55
Net Interest Margin (2)                                               4.02            2.86               3.59             2.81
Return on Average Total Equity                                        5.19           (9.46 )             1.41            (8.78 )
Return on Average Common Equity                                       5.43          (21.33 )             1.47           (19.83 )
Average Total Equity to Average Total Assets                         11.37            7.31              11.20             7.02
Tangible common equity ratio (1)                                     10.39            3.84              10.39             3.84
Dividend payout ratio                                                   -               -                  -                -
Efficiency ratio (3)                                                 65.31           76.63              70.64            64.96
Asset Quality:
Allowance for loan and lease losses to loans held for
investment                                                            4.37            4.89               4.37             4.89
Net charge-offs (annualized) to average loans (4)                     1.58            2.50               1.79             2.72
Provision for loan and lease losses to net charge-offs               71.36           68.67              65.04            85.36
Non-performing assets to total assets (4)                             9.58           10.22               9.58            10.22
Non-performing loans held for investment to total loans held
for investment (4)                                                    9.89           11.13               9.89            11.13
Allowance to total non-performing loans held for investment
(4)                                                                  44.20           43.90              44.20            43.90
Allowance to total non-performing loans held for investment
excluding residential real estate loans (4)                          64.84           63.44              64.84            63.44
Other Information:
Common Stock Price: End of period                                $    4.42       $    2.80       $       4.42        $    2.80




                                              As of September 30,           As of December 31,
                                                     2012                          2011
Balance Sheet Data:
Loans, including loans held for sale         $          10,256,513         $         10,575,214
Allowance for loan and lease losses                        445,531                      493,917
Money market and investment securities                   1,854,435                    2,200,888
Intangible assets                                           61,941                       39,787
Deferred tax asset, net                                      4,577                        5,442
Total assets                                            13,139,747                   13,127,275
Deposits                                                 9,896,402                    9,907,754
Borrowings                                               1,650,399                    1,622,741
Total preferred equity                                      63,047                       63,047
Total common equity                                      1,378,578                    1,361,899
Accumulated other comprehensive
income, net of tax                                          42,492                       19,198
Total equity                                             1,484,117                    1,444,144

(1) Non-GAAP measure. Refer to "Capital" discussion below for additional information of the components and reconciliation of these measures.

(2) On a tax-equivalent basis and excluding the changes in fair value of derivative instruments and financial liabilities measured at fair value (see "Net Interest Income" discussion below for a reconciliation of this non-GAAP measure).

(3) Non-interest expense to the sum of net interest income and non-interest income. The denominator includes non-recurring income and changes in the fair value of derivative instruments and financial instruments measured at fair value.

(4) Loans used in the denominator in calculating net charge-off, non-performing loan and non-performing asset rates include purchased credit-impaired ("PCI") loans. However, the Corporation separately tracks and reports PCI loans and exclude these from delinquency, non-performing loan and non-performing asset statistics.


Table of Contents

The following Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the accompanying consolidated unaudited financial statements of First BanCorp. (the "Corporation" or "First BanCorp.") and should be read in conjunction with such financial statements and the notes thereto.

EXECUTIVE SUMMARY

First BanCorp. is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp. is the holding company of FirstBank Puerto Rico ("FirstBank" or the "Bank") and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States and British Virgin Islands and the State of Florida (USA) concentrating in commercial banking, residential mortgage loan originations, finance leases, personal loans, small loans, auto loans, insurance agency and broker-dealer activities.

As described in Note 22, Regulatory Matters, Commitment and Contingencies, FirstBank is currently operating under a Consent Order (the "Order") with the Federal Deposit Insurance Corporation ("FDIC") and First BanCorp has entered into a Written Agreement (the "Written Agreement" and collectively with the Order the "Agreements") with the Board of Governors of the Federal Reserve System (the "FED" or "Federal Reserve").

OVERVIEW OF RESULTS OF OPERATIONS

First BanCorp.'s results of operations generally depend primarily upon its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation's results of operations also depend on the provision for loan and lease losses, which significantly affected the results for the past three years, non-interest expenses (such as personnel, occupancy, deposit insurance premiums and other costs), non-interest income (mainly service charges and fees on loans and deposits, insurance income and revenues from broker-dealer operations), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.

Net income for the quarter ended September 30, 2012 amounted to $19.1 million or $0.09 per diluted common share, compared to a net loss of $24.0 million or ($1.46) per diluted common share for the quarter ended September 30, 2011. The Corporation's financial results for the third quarter of 2012, as compared to the third quarter of 2011, were principally impacted by: (i) a $31.2 million increase in net interest income mainly achieved through reductions in the overall cost of funding and the impact of the $406 million credit cards portfolio acquired in late May 2012, (ii) a decrease of $17.5 million in the provision for loan and lease losses which reflected primarily a lower provision for commercial mortgage loans due to improvements in the cumulative charge-off history used for the general reserve determination, the decrease in the amount of adversely classified loans and the overall decrease in the size of the portfolio. These variances were partially offset by an $8.9 million increase in non-interest expenses driven by higher losses on real estate owned (REO) operations and expenses related to the recently acquired credit cards portfolio.

The key drivers of the Corporation's financial results for the quarter ended September 30, 2012 include the following:

Net interest income for the quarter ended September 30, 2012 was $125.5 million, compared to $94.3 million for the same period in 2011 driven by an improvement of 116 basis points in the net interest margin, excluding fair value adjustments (for definition and reconciliation of this non-GAAP measure, refer to "Net Interest Income" discussion below) to 3.98%. The improvement in the net interest margin was primarily due to: (i) a decrease of 51 basis points in the average cost of funding achieved through lower deposit pricing and the maturity of high-cost borrowings, and (ii) the purchase in late May of a $406 million credit cards portfolio from FIA Card Services (FIA). This acquisition increased the average balance of consumer loans by approximately $366.9 million and contributed $18.6 million to interest income, including $3.1 million related to the discount accretion recorded as an adjustment to the yield of the purchased portfolio, and was the main driver for the 64 basis points increase in the yield on total earning assets. Refer to the "Net Interest Income" discussion below for additional information.

For the third quarter of 2012, the Corporation's provision for loan and lease losses amounted to $29.0 million, compared to $46.4 million for the same period in 2011. The decrease in the provision for 2012 was primarily driven by a lower provision for commercial mortgage loans due to improvements in the cumulative charge-off history used for the general reserve determination, the reduction in adversely classified loans and the overall decrease in the size of the portfolio. Refer to the discussions under "Provision for loan and lease losses" and "Risk Management" below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.


Table of Contents
For the quarter ended September 30, 2012, the Corporation's non-interest income amounted to $15.1 million, compared to $14.0 million for the quarter ended September 30, 2011. The increase in non-interest income was mainly due to $3.1 million of interchange and other fees related to the credit cards portfolio acquired and a decrease of $2.2 million in equity in losses of unconsolidated entities. Revenues from mortgage banking activities also showed an increase of $1.1 million. These variances were partially offset by the impact in the prior year of a $3.5 million gain recorded in connection with certain Puerto Rico Housing Finance Authority bonds held by the corporation that were exchanged for cash as part of a tender offer.

Non-interest expenses for the third quarter of 2012 amounted to $91.8 million, compared to $82.9 million for the same period in 2011. The increase of $8.9 million was mainly related to a $3.7 million increase in losses on real estate owned operations, a $3.0 million increase in servicing and processing fees, mainly related to the servicing of the credit cards portfolio, a $1.7 million increase in employee compensation and benefits, and higher marketing expenses including accrued expenses related to the credit cards portfolio rewards program. Partially offsetting this increase was a $1.9 million decrease in the deposit insurance premium expense. Refer to the "Non Interest Expenses" discussion below for additional information.

For the third quarter of 2012, the Corporation recorded an income tax expense of $0.8 million, compared to $2.9 million for the same period in 2011. The variance is mainly due to lower taxable income from profitable subsidiaries. Refer to the "Income Taxes" discussion below for additional information.

Total assets as of September 30, 2012 amounted to $13.1 billion, an increase of $12.5 million compared to total assets as of December 31, 2011. The increase is attributable to a higher liquidity obtained, in part, through Federal Home Loan Bank (FHLB) advances and increases in non-brokered deposits. Cash and cash equivalents increased by $557.2 million, offset by a reduction in loans and investment securities. The available for sale investment securities decreased by $325.4 million driven by matured U.S. Treasury and agency debt securities and Puerto Rico Government Obligations called prior to their contractual maturity, partially offset by purchases of U.S. agency mortgage-backed securities (MBS). Additionally, the loan portfolio decreased by $270.3 million, led by pay-offs and repayments of commercial and industrial ("C&I") loans, as well as foreclosures and charge-offs. The REO portfolio increased by $62.7 million. Refer to the "Financial Condition and Operating Data" discussion below for additional information.

As of September 30, 2012, total liabilities amounted to $11.66 billion, a decrease of approximately $27.5 million, as compared to $11.68 billion as of December 31, 2011. The decline in total liabilities is mainly attributable to a decrease of $323.1 million in brokered CDs. In addition, the Corporation repaid $100 million of maturing repurchase agreements, and all of its $21 million of medium-term notes. These variances were partially offset by a $311.8 million increase in non-brokered deposits and a $151 million increase in FHLB advances. Refer to the "Risk Management - Liquidity and Capital Adequacy" discussion below for additional information about the Corporation's funding sources.

The Corporation's stockholders' equity amounted to $1.5 billion as of September 30, 2012, an increase of $40.0 million from December 31, 2011, driven by a $23.3 million increase in other comprehensive income due to higher unrealized gains on available for sale securities, net income of $15.2 million for the first nine months of 2012, and net proceeds of $1.0 million related to 280,787 shares of common stock sold. Refer to the "Risk Management - Capital" section below for additional information.

Total loan production, including purchases, refinancing and draws from existing revolving and non-revolving commitments, for the quarter ended September 30, 2012 was $660.2 million, excluding the utilization activity on outstanding credit cards, compared to $763 million for the comparable period in 2011. The decrease in loan production is mainly related to government loan originations that decreased $218 million, partially offset by an increased volume of auto and residential mortgage loan originations.

Total non-performing loans as of September 30, 2012 were $1.0 billion, a decrease of $135.1 million compared to December 31, 2011. The decrease was primarily related to foreclosures of construction projects, charge-offs, and a decrease in the inflows of non-performing loans. Total non-performing assets decreased by $78.0 million during the nine-month period ended September 30, 2012. Refer to the "Risk Management - Non-accruing and Non-performing Assets" section below for additional information.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

The accounting principles of the Corporation and the methods of applying these principles conform with generally accepted accounting principles in the United States ("GAAP"). The Corporation's critical accounting policies relate to the
1) allowance for loan and lease losses; 2) other-than-temporary impairments;
3) income taxes; 4) classification and related values of investment securities;
5) valuation of financial instruments; and 6) income recognition on loans. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts recorded for assets and liabilities and for contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, if different assumptions or conditions prevail. Certain determinations inherently require greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than those originally reported.


Table of Contents

The Corporation's critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in First BanCorp's 2011 Annual Report on Form 10-K. There have not been any material changes in the Corporation's critical accounting policies since December 31, 2011. 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 "Financial Condition and Operating Data Analysis-Loan Portfolio-Consumer Loans and Finance Leases" below, and Note 6 to the accompanying unaudited consolidated financial statements for additional information about this transaction, including the accounting and reporting policies related to this portfolio.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the excess of interest earned by First BanCorp. on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp.'s net interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the Corporation's assets and liabilities. Net interest income for the quarter and nine-month period ended September 30, 2012 was $125.5 million and $336.1 million, respectively, compared to $94.3 million and $295.0 million for the comparable periods in 2011. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value, net interest income for the quarter and nine-month period ended September 30, 2012 was $126.8 million and $340.0 million, respectively, compared to $98.3 million and $304.3 million for the comparable periods of 2011.

The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Corporation's net interest income. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period rates), and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their respective percentage of the combined totals.

The net interest income is computed on an adjusted tax-equivalent basis and excluding: (1) the change in the fair value of derivative instruments and
(2) unrealized gains or losses on liabilities measured at fair value. For definition and reconciliation of this non-GAAP measure, refer to discussions below.

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