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FBP > SEC Filings for FBP > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for FIRST BANCORP /PR/

Form 10-Q for FIRST BANCORP /PR/


11-Aug-2014

Quarterly Report


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

SELECTED FINANCIAL DATA
                                                          Quarter ended                         Six-Month Period Ended
(In thousands, except for per share and
financial ratios)                                            June 30,                                June 30,
                                                    2014                   2013                2014            2013
Condensed Income Statements:
     Total interest income                      $        158,423       $     160,670        $   318,994    $    320,895
     Total interest expense                               28,516              33,782             57,767          69,514
     Net interest income                                 129,907             126,888            261,227         251,381
     Provision for loan and lease losses                  26,744              87,464             58,659         198,587
     Non-interest income (loss)                           15,931            (51,663)             27,281        (38,034)
     Non-interest expenses                                98,145             111,323            190,930         209,333
     Income (loss) before income taxes                    20,949           (123,562)             38,919       (194,573)
     Income tax expense                                      276                 979              (611)           (643)
     Net income (loss)                                    21,225           (122,583)             38,308       (195,216)
     Net income (loss) attributable to                    22,505           (122,583)             39,967       (195,216)
     common stockholders
Per Common Share Results:
     Net earnings (loss) per share basic        $           0.11       $      (0.60)        $      0.19    $     (0.95)
     Net earnings (loss) per share diluted      $           0.11       $      (0.60)        $      0.19    $     (0.95)
     Cash dividends declared                    $              -       $           -        $        -     $          -
     Average shares outstanding                          208,202             205,490            206,974         205,477
     Average shares outstanding diluted                  210,144             205,490            208,517         205,477
     Book value per common share                $           5.97       $        5.60        $      5.97    $       5.60
     Tangible book value per common share       $           5.72       $        5.32        $      5.72    $       5.32
     (1)
Selected Financial Ratios (In Percent):
Profitability:
     Return on Average Assets                               0.67              (3.80)               0.61          (3.03)
     Interest Rate Spread (2)                               4.19                3.91               4.22            3.84
     Net Interest Margin (2)                                4.37                4.12               4.40            4.06
     Return on Average Total Equity                         6.66             (35.65)               6.12         (27.51)
     Return on Average Common Equity                        6.95             (37.36)               6.41         (28.78)
     Average Total Equity to Average Total                 10.10               10.66               9.93           11.00
     Assets
     Tangible common equity ratio (1)                       9.76                8.64               9.76            8.64
     Dividend payout ratio                                     -                   -                  -               -
     Efficiency ratio (3)                                  67.30              147.99              66.18           98.12
Asset Quality:
     Allowance for loan and lease losses to                 2.55                3.19               2.55            3.19
     total loans held for investment
     Net charge-offs (annualized) to average                2.19                5.25               2.15            6.69
     loans (4) (5) (6)
     Provision for loan and lease losses to                51.09               67.83              56.76           59.64
     net charge-offs (7) (8)
     Non-performing assets to total assets                  6.05                5.87               6.05            5.87
     (6)
     Non-performing loans held for
     investment to total loans held for                     5.96                5.36               5.96            5.36
     investment (8)
     Allowance to total non-performing loans               42.71               59.47              42.71           59.47
     held for investment
     Allowance to total non-performing loans
     held for investment
       excluding residential real estate                   61.96               80.87              61.96           80.87
     loans
Other Information:
     Common Stock Price: End of period          $           5.44       $        7.08        $      5.44    $       7.08

                                                                       As of December
                                             As of June 30, 2014          31, 2013
Balance Sheet Data:
     Loans, including loans held for sale       $      9,539,206       $   9,712,139
     Allowance for loan and lease losses                 241,177             285,858
     Money market and investment securities            2,043,501           2,208,342
     Intangible assets                                    52,378              54,866
     Deferred tax asset, net                               8,738               7,644
     Total assets                                     12,523,251          12,656,925
     Deposits                                          9,630,788           9,879,924
     Borrowings                                        1,451,959           1,431,959
     Total preferred equity                               36,104              63,047
     Total common equity                               1,298,304           1,231,547
     Accumulated other comprehensive loss,              (28,407)            (78,736)
     net of tax
     Total equity                                      1,306,001           1,215,858

______________


(1) Non-GAAP measure. Refer to "Capital" discussion below for additional information about the components and a reconciliation of these measures.
(2) On a tax-equivalent basis and excluding the changes in fair value of derivative instruments (see "Net Interest Income" 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.
(4) The net charge-offs to average loans ratio, excluding the impact associated with the acquisition of mortgage loans from Doral Financial Corporation ("Doral"), was 1.90% and 2.01% for the quarter and six-month period ended June 30, 2014, respectively.
(5) The net charge-offs to average loans ratio, excluding the impact with the bulk sales of assets and the transfer of loans to held for sale in 2013, was 1.29% and 2.11% for the quarter and six-month period ended June 30, 2013, respectively.
(6) Loans used in the denominator in calculating net charge-offs, non-performing loan and non-performing asset rates include purchased credit-impaired ("PCI") loans. However, the Corporation separately tracks and reports PCI loans and excludes these from non-performing loan and non-performing asset statistics.
(7) The provision for loan and lease losses to net charge-offs ratio, excluding the impact associated with the acquisition of mortgage loans from Doral, was 55.72% and 59.35% for the quarter and six-month period ended June 30, 2014, respectively.
(8) The provision for loan and lease losses to net charge-offs ratio, excluding the impact associated with the bulk sales of assets and the transfer of loans to held for sale in 2013, was 63.19% and 66.25% for the quarter and six-month period ended June 30, 2013, respectively.


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 Virgin Islands and British Virgin Islands, and the State of Florida (USA), concentrating in commercial banking, residential mortgage loan originations, finance leases, credit cards, personal loans, small loans, auto loans, insurance agency and broker-dealer activities.

As described in Note 22 to the consolidated unaudited financial statements, Regulatory Matters, Commitment and Contingencies, FirstBank is currently operating under a Consent Order (the "FDIC Order") with the Federal Deposit Insurance Corporation ("FDIC"), and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and First BanCorp. has entered into a Written Agreement (the "Written Agreement" and collectively with the FDIC Order, (the "Regulatory Agreements") with the Federal Reserve Bank of New York (the "New York FED" or "Federal Reserve").

RECENT EVENTS

Acquisition of Mortgage Loans from Doral Financial Corporation

On May 30, 2014, FirstBank purchased from Doral all of its rights, title and interests in first and second mortgage loans having an unpaid principal balance of approximately $241.7 million for an aggregate price of approximately $232.9 million. Doral had pledged the mortgage loans to FirstBank as collateral for secured borrowings pursuant to a series of credit agreements between the parties entered into in 2006. As consideration for the purchase of the mortgage loans, FirstBank credited approximately $232.9 million as full satisfaction of the outstanding balance of the Doral secured borrowing plus interest owed to FirstBank. The estimated fair value of the mortgage loans at acquisition was $226.0 million. This transaction resulted in a loss of $6.9 million derived from the difference between the fair value of the mortgage loans acquired, $226.0 million, and the book value of the secured borrowings of $232.9 million. Approximately $5.5 million of the loss was part of the general allowance for loan losses established for commercial loans in prior periods; thus, an additional charge of $1.4 million to the provision was recorded in the second quarter of 2014. In addition, the Corporation recorded $0.6 million of professional service fees in the second quarter of 2014 specifically related to this transaction.

Acquired loans are recorded at fair value at the date of acquisition. The Corporation concluded that loans with a contractual unpaid principal balance of $119.2 million and an estimated fair value at acquisition of $102.8 million were acquired with evidence of credit quality deterioration and, as purchased credit impaired ("PCI") loans, have been accounted for under ASC 310-30, while loans with a contractual unpaid principal balance of $122.5 million and an estimated fair value at acquisition of $123.2 million are non-credit impaired purchased loans that have been accounted for under ASC 310-20. The following tables reflect the accounting for the acquired mortgage loans:


                                                Non-Credit       Purchased  Credit
                                              Impaired (ASC        Impaired (ASC
         Impact (at acquisition)                 310-20)              310-30)          Total Loans

Mortgage Loans, primarily residential
mortgage loans at Fair Value                 $       123,164    $          102,831    $    225,995


                                                                   Less: Book Value
                                                                   of secured
                                                                   borrowings
                                                                   (Commercial
                                                                   loans to a local
                                                                   financial
                                                                   institution
                                                                   collateralized
                                                                   by real estate
                                                                   mortgages)            (232,903)

                                                                   Loss               $    (6,908)
                                                                   Allowance for
                                                                   Loan Losses
                                                                   previously
                                                                   allocated to
                                                                   commercial
                                                                   secured
                                                                   borrowings                5,480
                                                                   Additional
                                                                   charge to the
                                                                   provision for
                                                                   loan losses
                                                                   (second quarter
                                                                   2014)              $    (1,428)

  Purchased Credit Impaired Loans (ASC 310-30) at Acquisition


  Contractual cash flows                                      $   275,842
    Less: Nonaccretable difference                               (86,252)
  Cash flows expected to be collected                         $   189,590
    Less: Accretable yield                                       (86,759)
  Fair Value of loans acquired                                $   102,831

The following table shows a reconciliation of certain non-GAAP financial measures ("adjusted net charge-offs," "adjusted provision for loan losses," and "adjusted non-interest expenses"), which reflects the exclusion of the impact of the Doral transaction, at acquisition, with the corresponding measures calculated and presented in accordance with GAAP:

                                                                Loss on
(Dollars in thousands)                                      Acquisition of     Adjusted, excluding
                                                            Mortgage Loans    Loss on Acquisition of
                                                    As      from Doral and     Mortgage Loans from
                                                 Reported       related         Doral and related
             2014 Second Quarter                  (GAAP)       expenses        expenses (Non-GAAP)


Total net charge-offs (1)                     $   52,345    $        6,908    $              45,437
   Total net charge-offs to average loans           2.19%                                      1.90%
Commercial and Industrial                         19,036             6,908                   12,128
   Commercial and Industrial loans net
charge-offs to average loans                        2.69%                                      1.81%

Provision for loan and lease losses           $   26,744    $        1,428    $              25,316

Non-interest expenses                         $   98,145    $          576    $              97,569
   Professional fees                              11,371               565                   10,806
   Other non-interest expenses                    11,061                11                   11,050
______________
1 - Charge-off percentages annualized


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 has significantly affected the results of operations in recent years, non-interest expenses (such as personnel, occupancy, deposit insurance premiums and other costs), non-interest income (mainly service charges and fees on deposits, insurance income and revenues from broker-dealer operations), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.

Net income was $21.2 million, or $0.11 per diluted common share, for the quarter ended June 30, 2014 compared to net loss of $122.6 million, or $0.60 per diluted common share, for the same period in 2013. The Corporation's financial results for the second quarter of 2013 were impacted by two significant items:
(i) an aggregate loss of $72.9 million (pre-tax) on the bulk sale of non-performing residential assets with a book value of $203.8 million and other real estate owned ("OREO") properties with a book value of $19.2 million, and
(ii) a $66.6 million loss related to the write-off of assets pledged as collateral to Lehman Brothers, Inc. ("Lehman").

The key drivers of the Corporation's financial results for the quarter ended June 30, 2014, compared to the same period in 2013, include the following:

Net interest income increased $3.0 million to $129.9 million for the quarter ended June 30, 2014 compared to the same period in 2013. The increase was primarily due to an 18 basis point reduction in the average cost of funding achieved through lower deposit pricing and the maturity of high-cost Federal Home Loan Bank ("FHLB") advances. In addition, net interest income and margin were favorably impacted by a higher volume of U.S. agency mortgage-backed securities ("MBS") and decreases in MBS prepayment activity levels that resulted in lower premium amortization expenses. The net interest margin, excluding fair value adjustments, increased 18 basis points to 4.20% for the second quarter of 2014 compared to the same period in 2013 as it was favorably impacted by the aforementioned items. For a definition and reconciliation of this non-GAAP measure, refer to "Net Interest Income" discussion below.

The provision for loan and lease losses of $26.7 million for the second quarter of 2014, decreased by $60.7 million compared to the same period in 2013. The fair value adjustments related to mortgage loans acquired from Doral added $1.4 million to the provision for loan losses in the second quarter of 2014 and the bulk sale of non-performing residential assets added $67.9 million to the provision for loan losses in the second quarter of 2013. Adjusted provision for loan losses, excluding the impact of the Doral transaction in 2014 and the bulk sale of non-performing residential assets in 2013, increased by $5.7 million in the second quarter of 2014 compared to the same period in 2013, driven by an increase in the provision for commercial and industrial loans related to a higher migration of loans to adverse classification categories and a higher general reserve for auto loans.

The Corporation completed two bulk sales of assets in the first half of 2013, including: (i) a bulk sale of non-performing residential mortgage loans with a book value of $203.8 million and OREO properties with a book value of $19.2 million, completed in the second quarter of 2013, and (ii) a bulk sale of adversely classified assets, mainly commercial and construction loans, with a book value of $211.4 million and OREO properties with a book value of $6.3 million, completed in the first quarter of 2013. In addition, during the first quarter of 2013, the Corporation transferred to held for sale non-performing loans with an aggregate book value of $181.6 million. The following tables summarize the impact of the bulk sales of assets and the transfer of loans to held for sale completed in 2013 on net charge-offs, provision for loan and lease losses, and non-interest expenses for the quarter and six-month period ended June 30, 2013:


                                                                                            Adjusted,
(Dollars in thousands)                                                                      excluding
                                                              As          Bulk Sale         Bulk Sale
                                                           Reported      Transaction          Impact
              Quarter Ended June 30, 2013                   (GAAP)         Impact           (Non-GAAP)


Total net charge-offs (1)                               $   128,948    $     97,972      $      30,976
        Total net charge-offs to average loans                 5.25%                              1.29%
   Residential mortgage                                     103,418          97,941              5,477
        Residential mortgage loans net charge-offs to
average loans                                                 14.78%                              0.84%
   Construction                                               2,368              31              2,337
        Construction loans net charge-offs to average
loans                                                          3.43%                              3.39%

Provision for loan and lease losses                     $    87,464    $     67,890      $      19,574
   Residential mortgage                                      74,277          67,859              6,418
   Construction                                             (7,937)              31            (7,968)

Non-interest expenses                                   $   111,323    $      4,962      $     106,361
   Professional fees                                         13,735           3,060             10,675
   Net loss on OREO operations                               14,829           1,879             12,950
   Other expenses                                            11,928              23             11,905
______________
1 - Charge-off percentages annualized

                                                                                                    Excluding
(Dollars in thousands)                                                                             Bulk Sales
                                                                                                    and Loans
                                                                                      Loans        Transferred
                                                        As         Bulk Sales      Transferred     To Held For
                                                     Reported      Transaction     To Held For     Sale Impact
       Six-Month Period Ended June 30, 2013           (GAAP)         Impact        Sale Impact     (Non-GAAP)


Total net charge-offs (1)                          $  332,954    $    196,491    $     35,953    $    100,510
        Total net charge-offs to average loans           6.69%                                           2.11%
   Residential mortgage                               114,998          98,972              -           16,026
        Residential mortgage loans net charge-offs
to average loans                                         8.19%                                           1.23%
   Commercial mortgage                                 59,289          40,057          14,553           4,679
        Commercial mortgage loans net charge-offs
to average loans                                         6.75%                                           0.56%
   Commercial and Industrial                           90,349          44,678              -           45,671
        Commercial and Industrial loans net
charge-offs to average loans                             5.93%                                           3.05%
   Construction                                        40,883          12,784          21,400           6,699
        Construction loans net charge-offs to
average loans                                           26.33%                                           5.34%

Provision for loan and lease losses                $  198,587    $    126,780    $      5,222    $     66,585
   Residential mortgage                                82,225          68,838              -           13,387
   Commercial Mortgage                                 49,610          29,753          (1,033)         20,890
   Commercial & Industrial                             31,126          20,766              -           10,360
   Construction                                        14,011           7,423           6,255             333

Non-interest expenses                              $  209,333    $      8,840    $         -     $    200,493
   Professional fees                                   24,867           6,938              -           17,929
   Net loss on OREO operations                         22,139           1,879              -           20,260
   Other expenses                                      14,663              23              -           14,640
1 - Charge-off percentages annualized


Net charge-offs totaled $52.3 million for the second quarter of 2014, or 2.19% of average loans on an annualized basis, compared to $128.9 million, or 5.25% of average loans for the same period in 2013. The fair value adjustments related to mortgage loans acquired from Doral and the bulk sale of non-performing residential assets added $6.9 million and $98.0 million in charge-offs in the second quarter of 2014 and 2013, respectively. Adjusted net charge-offs, excluding the impact of charge-offs resulting from the Doral transaction and the bulk sale of non-performing residential assets, amounted to $45.4 million, or an annualized 1.90% of average loans, an increase of $14.5 million compared to the second quarter of 2013 mainly related to collateral dependent commercial loans in Puerto Rico. The provision for loan and lease losses and net charge-offs excluding the impact of fair value adjustments related to mortgage loans acquired from Doral in the second quarter of 2014 and the bulk sales of adversely classified and non-performing assets in the first half of 2013 are non-GAAP measures, refer to "Basis of Presentation" discussion below for additional information. Also refer to the discussions under "Provision for loan and lease losses" and "Risk Management" below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.

. . .

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