2013 Third Quarter Highlights and Comparison with Second Quarter
SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- First BanCorp. (NYSE: FBP):
First BanCorp. (the “Corporation”) (NYSE: FBP), the bank holding company for FirstBank Puerto Rico (“FirstBank” or “the Bank”), today reported net income of $15.9 million for the third quarter of 2013, or $0.08 per diluted share, compared to a net loss of $122.6 million, or $0.60 per diluted share, for the second quarter of 2013 and net income of $19.1 million, or $0.09 per diluted share, for the third quarter of 2012.
This press release includes certain non-GAAP financial measures, including adjusted pre-tax, pre-provision income, adjusted net interest income and margin, certain capital ratios, non-interest income adjusted to exclude the Lehman collateral write-off and equity in (loss) earnings of unconsolidated entity, and certain other financial measures adjusted to exclude the effects of the secondary offering costs, the credit card processing platform conversion costs, and the bulk sale of non-performing residential assets, and should be read in conjunction with the accompanying tables (Exhibit A), which are an integral part of this press release.
Aurelio Alemán, President and Chief Executive Officer of First BanCorp., commented,“The results for the third quarter continue to show improvements associated with the execution of our business strategies. Net income for the quarter amounted to $15.9 million, including $3.4 million in non-recurring expenses related to the secondary stock offering and the conversion of the credit card processing platform, both completed during the quarter. Excluding these items, net income amounted to $19.3 million. Furthermore, the results were impacted by a $5.9 million loss in the equity of the unconsolidated entity to which we sold loans in 2011 and a $3 million increase in the tax reserve for uncertain tax positions. The quarter showed improvement in pre-tax pre-provision income, which increased to $50 million, expansion of the net interest margin to 4.19% and growth of $78.6 million in non-brokered deposits and $63 million in loans held in portfolio. Loan originations were approximately $836 million for the quarter.
Mr. Alemán continued, “Despite the negative market headwinds, we have stayed the course in the execution of our strategies. We are pleased with the steps taken by the Puerto Rico government with regard to the fiscal situation and their efforts to address investor concerns and remain unwavering in our commitment to the Puerto Rico market. We will continue to focus on enhancing franchise value through the organic reduction of nonperforming loans and earnings generation.”
RECENT EVENTS
Secondary Offering
On August 16, 2013, a secondary offering of the Corporation’s common stock was completed by certain of the Corporation’s existing stockholders. The United States Department of the Treasury (“Treasury”) sold 12 million shares of common stock, funds affiliated with Thomas H. Lee Partners (“THL”) sold 8 million shares of common stock, and funds managed by Oaktree Capital Management, L.P. (“Oaktree”) sold 8 million shares of common stock. On September 11, 2013, the underwriters exercised their option to purchase an additional 2.9 million shares of common stock from the selling stockholders. The Corporation did not receive any proceeds from the offering. Non-interest expenses for the third quarter of 2013 included approximately $1.7 million in costs associated with the secondary offering, including $1.1 million paid by the Corporation for underwriting discounts and commissions. As of September 30, 2013, each of THL and Oaktree owns 20.22% of the Corporation’s outstanding common stock and the U.S. Treasury owns 9.51% of such stock.
ADJUSTED PRE-TAX, PRE-PROVISION INCOME TRENDS
One metric that management believes is useful in analyzing performance is the level of earnings adjusted to exclude tax expense, the provision for loan and lease losses, securities gains or losses, fair value adjustments on derivatives measured at fair value and equity in earnings or loss of unconsolidated entity, which is a non-GAAP financial measure. In addition, from time to time, earnings are adjusted also for items judged by management to be outside of ordinary banking activities and/or for items that, while these may be associated with ordinary banking activities, are so unusually large that management believes that a complete analysis of the Corporation’s performance requires consideration also of results that exclude such amounts (for additional information about these non-GAAP financial measure, see “Adjusted Pre-Tax, Pre-Provision Income” in “Basis of Presentation”).
The following table shows adjusted pre-tax, pre-provision income of $50.9 million in the third quarter of 2013, up $15.0 million from the prior quarter:
Less: Unrealized gain on derivative instruments and liabilities measured at fair value
Add: Bulk sales related expenses and other professional fees related to the terminated preferred stock exchange offer
Add: Loss on certain OREO properties sold as part of the bulk sale of non-performing residential mortgage assets
The increase in adjusted pre-tax, pre-provision income from the 2013 second quarter primarily reflected:
Adjusted non-interest expenses exclude costs associated with the secondary offering and the conversion of the credit card processing platform completed in the third quarter as well as expenses related to the bulk sale of non-performing residential assets completed in the second quarter, and the impact of the national gross receipts tax that corresponded to the first quarter of 2013 but was recorded in the second quarter after enactment of the 2013 Tax Burden Adjustment and Redistribution Act (“Act 40”). See Basis of Presentation section below for reconciliation of this non-GAAP financial measure to the corresponding GAAP measure.
Adjusted non-interest income excludes the Lehman collateral write-off recorded in the second quarter and equity in earnings (loss) of unconsolidated entity. See Basis of Presentation section below for reconciliation of this non-GAAP financial measure to the corresponding GAAP measure.
NET INTEREST INCOME
Net interest income, excluding fair value adjustments on derivatives and financial liabilities measured at fair value (“valuations”), and net interest income on a tax-equivalent basis are non-GAAP measures. (See“Basis of Presentation – Net Interest Income, Excluding Valuations and on a Tax-Equivalent Basis” below for additional information.) The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net interest income on a tax-equivalent basis. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations and on a tax-equivalent basis.
Unrealized (gain) loss on derivative instruments
Net interest income, excluding valuations, amounted to $130.7 million, an increase of $4.5 million when compared to the second quarter of 2013. Net interest margin expanded to 4.19% for the third quarter of 2013 from 4.02% for the second quarter of 2013. The increase in net interest income and margin was mainly due to:
These increases were partially offset by:
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the third quarter of 2013 was $22.2 million, compared to $87.5 million for the second quarter of 2013, which includes $67.9 million related to the bulk sale of non-performing residential assets. Excluding the impact of the bulk sale of non-performing residential assets, the provision for loan and lease losses of $22.2 million for the third quarter was $2.6 million higher than the provision recorded for the second quarter of 2013. The increase was mainly related to the construction and consumer loan portfolios. The provision for construction loans in the third quarter amounted to $1.3 million compared to a reserve release of $6.7 million for the second quarter that was driven by updated appraisals for certain collateral dependent loans. The provision for consumer loans increased by $3.1 million, compared to the provision for the second quarter, mainly related to the increase in the general reserve for auto and credit card loans. These increases were partially offset by lower provisions for commercial loans reflecting a lower migration of loans into adversely classified categories and lower underlying losses on these portfolios. See Credit Quality discussion below for additional information regarding the allowance for loan and lease losses.
NON-INTEREST INCOME (LOSS)
Non-interest income for the third quarter of 2013 amounted to $10.1 million, compared to non-interest loss of $51.7 million for the second quarter of 2013. The results for the second quarter included the $66.6 million write-off of the collateral pledged to Lehman. Non-interest income, excluding the Lehman collateral write-off, decreased $4.9 million from the 2013 second quarter primarily due to:
These decreases were partially offset by:
NON-INTEREST EXPENSES
Professional fees:
Non-interest expenses in the third quarter of 2013 amounted to $99.2 million, a decrease of $12.2 million from $111.3 million for the second quarter of 2013. Non-interest expenses for the third quarter included approximately $1.7 million in costs associated with the secondary offering and $1.7 million in costs associated with the conversion of the credit card processing platform. Results for the second quarter included $5.0 million of expenses specifically related to the bulk sale of non-performing residential assets ($3.1 million of professional fees and $1.9 million as part of OREO losses) as well as $1.7 million of the national gross receipts tax that corresponded to the first quarter of 2013 but was recorded in the second quarter after enactment of Act 40 which amended the Puerto Rico Internal Revenue Code of 2011 (the “2011 PR Code”).
Adjusted non-interest expenses, which exclude the aforementioned items, amounted to $95.8 million for the third quarter of 2013, down $8.9 million compared to the second quarter. The main drivers of the decrease were:
INCOME TAXES
The income tax expense for the third quarter of 2013 amounted to $3.7 million compared to an income tax benefit of $1.0 million for the second quarter of 2013, primarily reflecting an increase in reserves for uncertain tax positions and the impact in the previous quarter of amendments to the 2011 PR Code enacted on June 30, 2013. The increase in the reserve for uncertain tax positions was mainly related to changes in management judgment given the lengthy administrative appeals process and expectations as to resolution resulting in an increase of $3.0 million to current Unrecognized Tax Positions.
Some of the amendments of Act 40 were retroactive to January 1, 2013, including the new national gross receipt tax. In the case of financial institutions, the national gross receipts tax was imposed as an additional tax at a flat rate of 1%. This charge was recorded as part of non-interest expenses in the Corporation’s Statement of Income. However, financial institutions may claim a credit equal to 50% of the national gross receipts tax against their regular tax liabilities or AMT liabilities. During the second quarter of 2013, after enactment of Act 40, the Corporation recorded $1.6 million as a credit against its provision for income taxes, of which $0.8 million corresponded to the first quarter of 2013.
In addition, Act 40 effectively increased the maximum statutory tax rate of corporations from 30% to 39%. This provision was also retroactive to January 1, 2013, and resulted in a net benefit of approximately $0.5 million recorded in the second quarter mainly due to the increase in the deferred tax asset of profitable subsidiaries. As of September 30, 2013, the deferred tax asset, net of a valuation allowance of $519.8 million, amounted to $7.4 million.
CREDIT QUALITY
Non-Performing Assets
Non-performing assets, excluding non-performing loans held for sale, to total assets, excluding non-performing loans held for sale
(2)Amount excludes purchased credit impaired loans with a carrying value as of September 30, 2013, of approximately $6.0 million acquired as part of the credit card portfolio acquired from FIA Card Services ("FIA").
Credit quality metrics remained relatively stable:
Allowance for Loan and Lease Losses
The following table sets forth an analysis of the allowance for loan and lease losses during the periods indicated:
Net charge-offs (annualized), excluding charge-offs related to loans sold and loans transferred to held for sale, to average loans outstanding during the period
0.66x
0.68x
0.54x
0.75x
0.71x
Provision for loan and lease losses to net charge-offs during the period, excluding impact of loans sold and loans transferred to held for sale
0.63x
The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of September 30, 2013 and June 30, 2013 by loan category and by whether the allowance and related provisions were calculated individually for impairment purposes or through a general valuation allowance:
Net Charge-Offs
The following table presents annualized net charge-offs to average loans held-in-portfolio:
(1) Includes net charge-offs totaling $97.9 million associated with the bulk sale of non-performing residential assets. The ratio of residential mortgage net charge-offs to average loans, excluding charge-offs associated with the bulk sale of non-performing residential assets, was 0.84%.
(2) Includes net charge-offs totaling $31 thousand associated with the bulk sale of non-performing residential assets. The ratio of construction net charge-offs to average loans, excluding charge-offs associated with the bulk sale of non-performing residential assets, was 3.39%.
(3) Includes net charge-offs totaling $98.0 million associated with the bulk sale of non-performing residential assets. The ratio of total net charge-offs to average loans, excluding charge-offs associated with the bulk sale of non-performing residential assets, was 1.29%.
(4) Includes net charge-offs totaling $1.0 million associated with the bulk sale of adversely classified commercial assets. The ratio of residential mortgage net charge-offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets, was 1.50%.
(5) Includes net charge-offs of $54.6 million associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale in the first quarter of 2013. The ratio of commercial mortgage net charge-offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale, was 0.34%.
(6) Includes net charge-offs totaling $44.7 million associated with the bulk sale of adversely classified commercial assets. The ratio of commercial and industrial net charge-offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets, was 5.47%.
(7) Includes net charge-offs of $34.2 million associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale in the first quarter of 2013. The ratio of construction loans net charge-offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale, was 7.74%.
(8) Includes net charge-offs of $134.5 million associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale in the first quarter of 2013. The ratio of total net charge-offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale, was 2.87%.
The ratios above are based on annualized net charge-offs and are not necessarily indicative of the results expected in subsequent periods.
STATEMENT OF FINANCIAL CONDITION
Total assets were approximately $12.8 billion as of September 30, 2013, down $15.8 million from June 30, 2013.
The decrease was mainly due to:
Total loan originations, including refinancings and draws from existing revolving and non-revolving commitments, amounted to approximately $836.6 million, compared to $924.7 million in the second quarter of 2013. The decrease was mainly related to the decline in residential mortgage loan originations attributed, in part, to the increase in market interest rates, partially offset by disbursements on facilities granted to government entities in both Puerto Rico and the Virgin Islands, and commercial loan originations in the Florida region.
Total liabilities were approximately $11.6 billion as of September 30, 2013, down $14.0 million from June 30, 2013.
Total stockholders’ equity amounted to $1.2 billion as of September 30, 2013, a decrease of $1.7 million from June 30, 2013, driven by:
The Corporation’s total capital, Tier 1 capital, and leverage ratios as of September 30, 2013 were 16.89%, 15.61%, and 11.65%, respectively, compared to total capital, Tier 1 capital and leverage ratios of 16.61%, 15.32%, and 11.26%, respectively, as of the end of the second quarter of 2013. Meanwhile, the total capital, Tier 1 capital, and leverage ratios as of September 30, 2013 of our banking subsidiary, FirstBank Puerto Rico, were 16.48%, 15.20%, and 11.35%, respectively, compared to total capital, Tier 1 capital, and leverage ratios of 16.16%, 14.87%, and 10.94%, respectively, as of the end of the prior quarter. All of the regulatory capital ratios for the Bank are well above the minimum required under the consent order entered into with the FDIC and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico. Given such consent order, however, the Bank cannot be considered to be a well-capitalized institution.
Based on our current interpretation of the international regulatory capital requirements adopted by the Basel Committee on Banking Supervision (known as “Basel 3”), we anticipate that we will exceed the fully phased-in minimum capital ratios these rules establish.
Tangible Common Equity
The Corporation’s tangible common equity ratio increased to 8.65% as of September 30, 2013, from 8.64% as of June 30, 2013, and the Tier 1 common equity to risk-weighted assets ratio increased to 12.55% as of September 30, 2013, from 12.28% as of June 30, 2013.
The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets over the last five quarters to the comparable GAAP items:
The following table reconciles stockholders’ equity (GAAP) to Tier 1 common equity based on current applicable bank regulatory requirements (known as “Basel 1”):
Exposure to Puerto Rico Government
As of September 30, 2013, the Corporation had $326.7 million outstanding in credit facilities granted to the Puerto Rico Government, its municipalities and public corporations, compared to $250.4 million as of June 30, 2013. Approximately $199.0 million of the granted credit facilities consists of loans to municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. Approximately $79.6 million consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power, and approximately $48.1 million consists of loans to units of the central government. Furthermore, the Corporation had $198.9 million outstanding in financings to the hotel industry in Puerto Rico guaranteed by the Puerto Rico Tourism Development Fund.
In addition, the Corporation had outstanding $71.0 million in obligations of the Puerto Rico government as part of its available for sale investment securities portfolio carried in books at its fair value of $49.2 million as of September 30, 2013, compared to $67.4 million as of June 30, 2013.
As of September 30, 2013, the Corporation had $584.1 million of public sector deposits in Puerto Rico. Approximately 25% come from municipalities in Puerto Rico and 75% come from public corporations and the central government.
Conference Call / Webcast Information
First BanCorp’s senior management will host an earnings conference call and live webcast on Wednesday, October 23, 2013, at 11:00 a.m. (Eastern Time). The call may be accessed via a live Internet webcast through the investor relations section of the Corporation’s web site: www.firstbankpr.com or through a dial-in telephone number at (888) 317-6016 or (412) 317–6016 for international callers. Listeners are recommended to go to the web site at least 15 minutes prior to the call to download and install any necessary software. Following the webcast presentation, a question and answer session will be made available to research analysts and institutional investors. A replay of the webcast will be archived in the investor relations section of First BanCorp’s web site, www.firstbankpr.com, until October 23, 2014. A telephone replay will be available one hour after the end of the conference call through 9:00 a.m. Eastern timeNovember 25, 2013, at (877) 344-7529 or (412) 317-0088 for international callers. The conference number is 10035905.
Safe Harbor
This press release may contain “forward-looking statements” concerning the Corporation’s future economic performance. The words or phrases “expect,” “anticipate,” “look forward,” “should,” “believes” and similar expressions are meant to identify “forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995, and are subject to the safe harbor created by such section. The Corporation 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 will be able to fully comply with the written agreement dated June 3, 2010 that the Corporation entered into with the Federal Reserve Bank of New York (the “New York Fed”) and the consent order dated June 2, 2010 that FirstBank entered into with the FDIC and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the “FDIC Order”) that, among other things, require FirstBank 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 CDs; the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the FDIC Order; the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders in the future due to the Corporation’s inability to receive approval from the New York Fed or the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) to receive dividends from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation; the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and their impact on the credit quality of the Corporation’s loans and other assets, which has contributed and may continue to contribute to, among other things, the high levels of non-performing assets, charge-offs, and the provision expense and may subject the Corporation to further risk from loan defaults and foreclosures; the ability of FirstBank to realize the benefit of the deferred tax asset; adverse changes in general economic conditions in Puerto Rico, the U.S., and the U.S. Virgin Islands and British Virgin Islands, 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; the risk that any portion of the unrealized losses in the Corporation’s investment portfolio is determined to be other-than-temporary, including unrealized losses on Puerto Rico government obligations; uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., and the U.S. and British Virgin Islands, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results; uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. financial markets, and the impact such actions may have on the Corporation's business, financial condition and results of operations; changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the Federal Reserve Board, the New York Fed, the FDIC, government-sponsored housing agencies, and regulators in Puerto Rico and the U.S. and British Virgin Islands; the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management policies may not be adequate; the risk that the FDIC may further increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an additional increase in the Corporation’s non-interest expenses; the impact on the Corporation’s results of operations and financial condition of acquisitions and dispositions; a need to recognize additional impairments on financial instruments, goodwill, or other intangible assets relating to acquisitions; the 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 on the Corporation’s businesses, business practices, and cost of operations; the risk of losses in the value of investments in unconsolidated entities that the Corporation does not control; and general competitive factors and industry consolidation. The Corporation does not undertake, and specifically disclaims any obligation, to update any “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.
Basis of Presentation
Use of Non-GAAP Financial Measures
This press release contains non-GAAP financial measures. Non-GAAP financial measures are set forth when management believes they will be helpful to an understanding of the Corporation’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the text or in the attached tables to this earnings release.
Tangible Common Equity Ratio and Tangible Book Value per Common Share
The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible. Tangible assets are total assets less goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase method of accounting for mergers and acquisitions. Neither tangible common equity nor tangible assets, or the related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets, and any other related measures may differ from that of other companies reporting measures with similar names.
Tier 1 Common Equity to Risk-Weighted Assets Ratio
The Tier 1 common equity to risk-weighted assets ratio is calculated by dividing (a) Tier 1 capital less non-common elements including qualifying perpetual preferred stock and qualifying trust preferred securities by (b) risk-weighted assets, which assets are calculated in accordance with current applicable bank regulatory requirements (Basel 1). The Tier 1 common equity ratio is not required by GAAP or on a recurring basis by applicable bank regulatory requirements. Management is currently monitoring this ratio, along with the other ratios discussed above, in evaluating the Corporation’s capital levels and believes that, at this time, the ratio may be of interest to investors.
Adjusted Pre-Tax, Pre-Provision Income
A non-GAAP performance metric that management believes is useful in analyzing underlying performance trends, particularly in times of economic stress, is adjusted pre-tax, pre-provision income. Adjusted pre-tax, pre-provision income, as defined by management, represents net (loss) income excluding income tax expense (benefit), the provision for loan and lease losses, gains on sale and other than temporary impairment (OTTI) of investment securities, fair value adjustments on derivatives, and liabilities measured at fair value, equity in earnings or loss of unconsolidated entity as well as certain items identified as unusual, non-recurring or non-operating.
From time to time, revenue and expenses are impacted by items judged by management to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that management believes that a complete analysis of the Corporation’s performance requires consideration also of results that exclude such amounts.
Net Interest Income, Excluding Valuations and on a Tax-Equivalent Basis
Net interest income, interest rate spread, and net interest margin are reported excluding the changes in the fair value of derivative instruments and financial liabilities elected to be measured at fair value and on a tax-equivalent basis. The presentation of net interest income excluding valuations provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread, and net interest margin on a fully tax-equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and certain loans, on a common basis that facilitates comparison of results to results of peers.
Financial measures adjusted to exclude the effect of the secondary offering costs, the credit card processing platform conversion costs, the bulk sales of assets and loans transferred to held for sale and the write-off of the collateral pledged to Lehman
To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation provides additional measures of adjusted provision for loan and lease losses, adjusted non-interest income, adjusted non-interest expenses, adjusted provision for loan and lease losses to net charge-offs, adjusted net charge-offs, and adjusted net charge-offs to average loans to exclude the impact of the bulk sales of assets completed in each of the first two quarters of 2013, and the transfer of non-performing loans to held for sale in the first quarter of 2013. In addition, the Corporation discloses adjusted non-interest income excluding the write-off of the collateral pledged to Lehman recorded in the second quarter of 2013 and the loss related to the Corporation’s investment in unconsolidated entity, adjusted non-interest expenses excluding the costs associated with the secondary offering of the Corporation’s common stock by certain of the Corporation’s existing stockholders recorded in the third quarter of 2013, the costs associated with the conversion of the credit card processing platform, the expenses specifically related to the bulk sale of residential non-performing assets completed in the second quarter of 2013 and the impact of the national gross receipts tax that corresponded to the first quarter of 2013 but was recorded in the second quarter after enactment of Act 40. A measure of adjusted net income is also presented excluding the aforementioned adjustments related to the secondary offering and credit card processing platform conversion costs incurred in the third quarter as well as expenses specifically related to the bulk sale of assets in the second quarter and the Lehman collateral write-off recorded in the second quarter. Management believes that these non-GAAP measures enhance the ability of analysts and investors to analyze trends in the Corporation’s business and to better understand the performance of the Corporation. In addition, the Corporation may utilize these non-GAAP financial measures as a guide in its budgeting and long-term planning process. Any analysis of these non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. The following table shows reconciliations of these non-GAAP financial measures to the corresponding measures calculated and presented in accordance with GAAP.
As Reported (GAAP)
Bulk Sale Transaction Impact
Write-off of collateral pledged to Lehman
Equity in Earnings of Unconsolidated Entity
National gross receipts tax (2)
Adjusted (Non-GAAP)
Loans, net of allowance for loan and lease losses of $289,379 (June 30, 2013 - $301,047; December 31, 2012 - $435,414)
Preferred Stock, authorized 50,000,000 shares: issued 22,828,174 shares; outstanding 2,521,872; aggregate liquidation value $63,047
Common stock, $0.10 par value, authorized 2,000,000,000 shares; issued 207,588,787 (June 30, 2013 - 207,514,167; December 31, 2012 - 206,730,318 shares issued)
Common stock outstanding, 207,042,785 shares outstanding (June 30, 2013 - 206,982,105; December 31, 2012 - 206,235,465 shares outstanding)
About First BanCorp.
First BanCorp. is the parent corporation of FirstBank Puerto Rico, a state-chartered commercial bank with operations in Puerto Rico, the Virgin Islands and Florida, and of FirstBank Insurance Agency. First BanCorp. and FirstBank Puerto Rico operate within U.S. banking laws and regulations. The Corporation operates a total of 152 branches, stand-alone offices, and in-branch service centers throughout Puerto Rico, the U.S. and British Virgin Islands, and Florida. Among the subsidiaries of FirstBank Puerto Rico are First Federal Finance Corp., a small loan company; FirstBank Puerto Rico Securities, a broker-dealer subsidiary; First Management of Puerto Rico; and FirstMortgage, Inc., a mortgage origination company. In the U.S. Virgin Islands, FirstBank operates First Express, a small loan company. First BanCorp’s shares of common stock trade on the New York Stock Exchange under the symbol FBP. Additional information about First BanCorp. may be found at www.firstbankpr.com.
EXHIBIT A
Allowance to total non-performing loans held for investment excluding residential real estate loans
2- On a tax-equivalent basis and excluding fair value valuations (Non-GAAP measure). See page 4 for GAAP to Non-GAAP reconciliations and refer to discussions in Tables 2 and 3 below.
3- Non-interest expenses 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 liabilities measured at fair value.
4- The net charge-offs to average loans ratio, excluding the impact associated with the bulk sales and the transfer of loans to held for sale, was 1.29% and 1.87% for the quarter ended June 30, 2013 and nine-month period ended September 30, 2013, respectively.
5- The provision for loan and lease losses to net charge-offs ratio, excluding the impact associated with the bulk sales and the transfer of loans to held for sale, was 63.19% and 66.07% for the quarter ended June 30, 2013 and nine-month period ended September 30, 2013, respectively.
1- On a tax-equivalent basis. The tax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate (39% for 2013; 30% for 2012) and adding to it the cost of interest-bearing liabilities. When adjusted to a tax-equivalent basis, yields on taxable and exempt assets are comparable. Changes in the fair value of derivative instruments and unrealized gains or losses on liabilities measured at fair value are excluded from interest income and interest expense because the changes in valuation do not affect interest paid or received.
5- Interest income on loans includes $3.7 million, $3.5 million and $3.7 million for the quarters ended September 30, 2013, June 30, 2013, and September 30, 2012, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio.
5- Interest income on loans includes $10.8 million, and $9.0 million for the nine-month periods ended September 30, 2013 and 2012, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio.
Table 4 - Non-Interest Income
Non-interest income before net loss on investments, equity in (loss) earnings of unconsolidated entity, and write-off of collateral pledged to Lehman
Table 5 - Non-Interest Expenses
(1) During the second quarter of 2013, after a comprehensive review of substantially all of the loans in our commercial portfolios, the classification of certain loans was revised to more accurately depict the nature of the underlying loans. This reclassification resulted in a net increase of $269.0 million in commercial mortgage loans, since the principal source of repayment for such loans is derived primarily from the operation of the underlying real estate, with a corresponding decrease of $246.8 million in commercial and industrial loans and a $22.2 million decrease in construction loans. The Corporation evaluated the impact of this reclassification on the provision for loan losses and determined that the effect of this adjustment was not material to any previously reported results.
Table 9 - Non-Performing Assets
(2)Amount excludes purchased credit impaired loans with a carrying value as of September 30, 2013 of approximately $6.0 million acquired as part of the credit card portfolio acquired from FIA.
Table 11 – Allowance for Loan and Lease Losses
0.60x
0.65x
Provision for loan and lease losses to net charge-offs during the period, excluding impact of loans sold and the transfer of loans to held for sale
Table 12 – Net Charge-Offs to Average Loans
(2) Includes net charge-offs of $54.6 million associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale in the first quarter of 2013. The ratio of commercial mortgage net charge-offs to average loans, excluding charge-offs associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale, was 0.81%.
First BanCorp.John B. Pelling III, 305-577-6000, ext. 162Investor Relations Officerjohn.pelling@firstbankpr.com
Source: First BanCorp.