First BanCorp. Announces Results for the Quarter Ended June 30, 2013
First BanCorp. Announces Results for the Quarter Ended June 30, 2013
2013 Second Quarter highlights and comparison with First Quarter
Net loss of $122.6 million, or $0.60 per diluted share, including a $72.9 million loss on the bulk sale of non-performing residential assets and a $66.6 million loss related to the write-off of assets pledged as collateral to Lehman Brothers, Inc. ("Lehman").
Adjusted net income of $16.8 million, or $0.08 per diluted share, excluding the effects of the bulk sale of non-performing residential assets and the Lehman collateral write-off, compared to an adjusted net loss of $4.6 million, or $0.02 per diluted share, for the first quarter of 2013, excluding the $68.0 million loss on the bulk sale of adversely classified commercial assets and valuation adjustments for certain loans transferred to held for sale in the first quarter.
Completed bulk sale of non-performing residential mortgage loans with a book value of $203.8 million and other real estate owned properties ("OREO") properties with a book value of $19.2 million, for $128.3 million in a cash transaction.
Significant progress in credit quality metrics:
Non-performing assets decreased for the 13th consecutive quarter, declining by $334.7 million, or 31%, from the first quarter of 2013.
Non-performing loans, including non-performing loans held for sale, declined by $229.6 million, or 28%, from the first quarter of 2013.
Inflows of non-performing loans held for investment declined by $78.3 million, or 44%, compared to inflows for the first quarter of 2013.
OREO decreased by $42.2 million, or 23%, from the first quarter of 2013.
Provision for loan and lease losses of $87.5 million, including $67.9 million associated with the bulk sale of non-performing residential assets.
Adjusted provision for loan and lease losses, excluding the impact of the bulk sales of assets and the transfer of loans to held for sale in the first and second quarters of 2013, decreased to $19.6 million, down from $47.0 million for the first quarter of 2013.
Net charge-offs of $128.9 million, including $98.0 million of net charge-offs related to the bulk sale of non-performing residential assets.
Adjusted net charge-offs, excluding the impact of the bulk sales of assets and the transfer of loans to held for sale in the first and second quarters of 2013, were $31.0 million, or an annualized 1.29% of average loans, down from $69.5 million, or an annualized 2.87% of average loans, for the first quarter of 2013.
Net interest income, excluding fair value adjustments of derivative instruments, increased by $2.1 million to $126.2 million, and the net interest margin expanded to 4.02% from 3.95% in the first quarter of 2013.
Adjusted non-interest income of $14.9 million, excluding the $66.6 million impact of the Lehman collateral write-off, increased by $1.3 million compared to the first quarter of 2013.
Total capital, Tier 1 capital, and leverage ratios of 16.61%, 15.32%, and 11.26%, respectively, as of June 30, 2013. Common equity Tier 1 capital ratio of 12.28% and Tangible common equity ratio of 8.64% as of June 30, 2013.
SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- First BanCorp. (the "Corporation") (NYS: FBP) , the bank holding company for FirstBank Puerto Rico ("FirstBank" or "the Bank"), today reported a net loss of $122.6 million for the second quarter of 2013, or $0.60 per diluted share, compared to a net loss of $72.6 million, or $0.35 per diluted share, for the first quarter of 2013 and net income of $9.4 million, or $0.05 per diluted share for the second quarter of 2012.
The results for the second quarter of 2013 were negatively impacted by two significant items: (i) a $72.9 million loss on the previously announced bulk sale of non-performing residential mortgage loans and OREO properties, and (ii) a $66.6 million loss related to the previously announced write-off of the collateral pledged to Lehman. Financial results for the first quarter of 2013 were similarly adversely impacted by a loss of $68.0 million related to a bulk sale of adversely classified assets, mainly commercial loans, and valuation adjustments to certain loans transferred to held for sale.
This press release includes certain non-GAAP financial measures, including adjusted net income (loss), adjusted pre-tax, pre-provision income, adjusted net interest income and margin, adjusted non-interest income, adjusted non-interest expenses, certain capital ratios, and certain other financial measures adjusted to exclude the effects of the bulk sales of assets and the valuation adjustments to certain loans transferred to held for sale, 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: "Our initiatives to accelerate improvement of asset quality led to several extraordinary expenses and charges in the second quarter and created significant variability in our financial results. Excluding the write-down of the collateral pledged to Lehman and the bulk sale of non-performing residential loans, our adjusted net income was $16.8 million compared to an adjusted loss of $4.6 million in the first quarter. Furthermore, OREO adjustments and changes to the Puerto Rico tax code created additional variance in our quarterly results. While our market is still facing headwinds, with the Puerto Rico government's approved budget and steps taken to address fiscal issues, the economic environment should continue to show signs of stabilization."
"We are very pleased with the progress achieved in the de-risking of our balance sheet, our non-performing assets to total assets ratio is at the lowest level since the peak in 2010. Franchise metrics continue to improve, our net interest margin expanded to over 4 percent, we achieved growth on core deposits and strong loan origination activity at over $900 million during the second quarter. Further asset quality improvements through proactive portfolio management and sales of held for sale loans and OREO continues to be our top priority and our team is keenly focused on opportunities for further earnings generation and optimization of our expense base."
RECENT SIGNIFICANT EVENTS:
Impairment of Collateral Pledged to Lehman
Late in the day on May 10, 2013, the Corporation received notice from its counsel that the United States Bankruptcy Court for the Southern District of New York denied the Bank's Motion for Summary Judgment filed in connection with its claim to recover certain assets posted as collateral with Lehman and that the Motion for Summary Judgment submitted by Barclays Capital ("Barclays") was granted.
This matter relates to the claim that the Bank filed against Barclays to recover the securities (or the cash equivalent thereof) that were posted as collateral in connection with certain interest rate swap agreements executed with Lehman. Beginning with the second quarter of 2009, the Corporation classified the pledged securities as a non-performing asset with a book value of $64.5 million. As a result of the Bankruptcy Court's May 10, 2013 decision, the Corporation determined that it is probable that the asset is impaired and, in the 2013 second quarter, recorded a non-cash charge of $66.6 million associated with the write-off of the carrying value of the pledged securities and related accrued interest. The Corporation has filed a Notice of Appeal and will continue with its efforts through the legal process to recover the value of the assets.
Bulk Sales of Assets
On June 21, 2013, the Corporation announced that it had completed a sale of non-performing residential mortgage loans with a book value of $203.8 million and, OREO properties with a book value of $19.2 million in a cash transaction. The sales price of this bulk sale was $128.3 million. Approximately $30.1 million of reserves had already been allocated to the loans. This transaction resulted in total charge-offs of $98.0 million and an incremental loss of $69.8 million. In addition, the Corporation recorded $3.1 million of professional service fees specifically related to this bulk sale of non-performing residential assets. This transaction resulted in a total pre-tax loss of $72.9 million.
As previously reported, on March 28, 2013, the Corporation completed the sale of adversely classified loans with a book value of $211.4 million, mainly commercial loans, and OREO properties with a book value of $6.3 million in a cash transaction. This transaction resulted in total charge-offs of $98.5 million and an incremental loss of $58.9 million, reflected in the first quarter of 2013. In addition, the Corporation recorded $3.9 million of professional service fees in the first quarter of 2013 specifically related to this bulk sale of adversely classified commercial assets. This transaction resulted in a total pre-tax loss of $62.8 million.
In addition, during the first quarter of 2013, the Corporation transferred to held for sale non-performing loans with an aggregate book value of $181.6 million. These transfers resulted in charge-offs of $36.0 million and an incremental loss of $5.2 million reflected in the provision for loan and lease losses for the first quarter of 2013.
During the second quarter of 2013, the Corporation completed the sale of a $40.8 million non-performing commercial mortgage loan related to one of the loans transferred to held for sale in the first quarter without incurring additional losses.
In a separate transaction during the second quarter, the Corporation entered into an agreement to receive foreclosed real estate in partial satisfaction of debt related to one of the loans written-off and transferred to held for sale in the first quarter. The remaining balance of such partially satisfied commercial mortgage loan held for sale was restructured, resulting in a lower of cost or market loss of $3.4 million recorded as part of "Other income" in the second quarter of 2013.
The following table shows a reconciliation with respect to the calculation of certain non-GAAP financial measures ("adjusted net charge-offs," "adjusted provision for loan and lease losses," "adjusted non-interest income," "adjusted non-interest expenses," "adjusted net income (loss)," "adjusted earnings (loss) per common share,"), which reflect the exclusion of the impact of the bulk sales, the transfer of loans to held for sale, and the write-off of the collateral pledged to Lehman, with the corresponding measures calculated and presented in accordance with GAAP.
Adjusted, excluding Bulk Sale, | ||||||||||||||||||||
(Dollars in thousands, except per share information) | and Write-Off of collateral | |||||||||||||||||||
As | Bulk Sale | Write-off of collateral | pledged to Lehman, | |||||||||||||||||
2013 Second Quarter | Reported (GAAP) | Transaction Impact | pledged to Lehman | (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 | - | 67,859 | - | (67,859 | ) | |||||||||||||||
Construction | - | 31 | - | (31 | ) | |||||||||||||||
Non-interest (loss) income | $ | (51,663 | ) | $ | - | $ | 66,574 | $ | 14,911 | |||||||||||
Impairment of collateral pledged to Lehman | (66,574 | ) | - | 66,574 | - | |||||||||||||||
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 | ||||||||||||||||
Net (loss) income | $ | (122,583 | ) | $ | (72,852 | ) | $ | (66,574 | ) | $ | 16,843 | |||||||||
Net (loss) income per common share | $ | (0.60 | ) | $ | (0.36 | ) | $ | (0.32 | ) | $ | 0.08 | |||||||||
1 - Charge-off percentages annualized | ||||||||||||||||||||
(Dollars in thousands, except per share information) | Adjusted, excluding | |||||||||||||||||||
As | Bulk Sale | Loans Transferred | Bulk Sale and Loans Transferred | |||||||||||||||||
2013 First Quarter | Reported (GAAP) | Transaction Impact | To Held For Sale Impact | To Held For Sale (Non-GAAP) | ||||||||||||||||
Total net charge-offs (1) | $ | 204,006 | $ | 98,519 | $ | 35,953 | $ | 69,534 | ||||||||||||
Total net charge-offs to average loans | 8.10 | % | 2.87 | % | ||||||||||||||||
Residential mortgage | 11,580 | 1,031 | - | 10,549 | ||||||||||||||||
Residential mortgage loans net charge-offs to average loans | 1.65 | % | 1.50 | % | ||||||||||||||||
Commercial mortgage | 56,036 | 40,057 | 14,553 | 1,426 | ||||||||||||||||
Commercial mortgage loans net charge-offs to average loans | 12.06 | % | 0.34 | % | ||||||||||||||||
Commercial and Industrial | 84,829 | 44,678 | - | 40,151 | ||||||||||||||||
Commercial and Industrial loans net charge-offs to average loans | 11.16 | % | 5.47 | % | ||||||||||||||||
Construction | 38,515 | 12,753 | 21,400 | 4,362 | ||||||||||||||||
Construction loans net charge-offs to average loans | 44.66 | % | 7.74 | % | ||||||||||||||||
Provision for loan and lease losses | $ | 111,123 | $ | 58,890 | $ | 5,222 | $ | 47,011 | ||||||||||||
Residential mortgage | 7,948 | 979 | - | 6,969 | ||||||||||||||||
Commercial mortgage | 36,397 | 29,753 | (1,033 | ) | 7,677 | |||||||||||||||
Commercial and Industrial | 35,292 | 20,766 | - | 14,526 | ||||||||||||||||
Construction | 21,948 | 7,392 | 6,255 | 8,301 | ||||||||||||||||
Non-interest expenses | $ | 98,010 | $ | 3,878 | $ | - | $ | 94,132 | ||||||||||||
Professional fees | 11,132 | 3,878 | - | 7,254 | ||||||||||||||||
Net loss | $ | (72,633 | ) | $ | (62,768 | ) | $ | (5,222 | ) | $ | (4,643 | ) | ||||||||
Net loss per common share | $ | (0.35 | ) | $ | (0.30 | ) | $ | (0.03 | ) | $ | (0.02 | ) | ||||||||
1 - Charge-off percentages annualized | ||||||||||||||||||||
Changes to the Puerto Rico Internal Revenue Code
On June 30, 2013, the Puerto Rico Government approved Act No. 40 ("Act 40"), which amended the Puerto Rico Internal Revenue Code of 2011 (the "2011 PR Code"), and Act No. 46 ("Act 46"), which brings changes to the sales and use tax regime. The main provisions of Act 40 that impact financial institutions include:
(i) | A new national gross receipts tax that, in the case of financial institutions is 1% of gross income, is not deductible for purposes of computing net taxable income and is not part of the alternative minimum tax ("AMT"). This provision is retroactive to January 1, 2013. As a result, an expense of $3.2 million was recorded in the second quarter of 2013 related to the national gross receipts tax which reflects 6 months of expenses. The impact of the gross national receipts tax corresponding to the first quarter of 2013 amounted to $1.7 million. This expense is included as part of "Taxes, other than income taxes" in the Consolidated Statement of (Loss) Income. Subject to certain limitations, a financial institution will be able to claim 0.5% of its gross income as a credit against its regular income tax or the alternative minimum tax. A $1.6 million benefit related to this credit was recorded as a reduction to the provision for income taxes in the second quarter | |||
(ii) | A decrease in the surtax deduction available to corporations to compute the additional surtax from $750,000 to $25,000 and a change in the surtax rate to rates that range from 5% to 19%, resulting in an increase in the maximum statutory tax rate from 30% to 39%. This provision is also retroactive to January 1, 2013. The effect on operating results in the second quarter of 2013 related to these changes was a net benefit of approximately $0.5 million, mainly due to the increase in the deferred tax asset of profitable subsidiaries. The deferred tax valuation allowance increased to $523.4 million as of June 30, 2013 from $384.4 million at the end of the previous quarter as a result of changes in tax rates and operating results for the second quarter. | |||
(iii) | A higher AMT rate (30% of the alternative minimum net income, as compared to 20% previously) and various parallel computations required to be made before determining whether an AMT liability exists. This change did not have an impact on the Corporation's provision for income taxes recorded in the second quarter of 2013. | |||
(iv) | The Net Operating Loss ("NOL") carryover period increased from 10 years to 12 years for losses incurred in taxable years that commenced after December 31, 2004 and ended before January 1, 2013. The carryover period for NOL incurred during taxable years commencing after December 31, 2012 will be 10 years. The NOL deduction is now limited to 90% of taxable income for regular income tax purpose and 80% for AMT purposes. | |||
Significant changes to the sales and use tax regime include adjustments to the Business to Business exclusion. The business to business exclusion applicable to services rendered from one registered business to another registered business remains in effect, except for certain services, which will be taxable including, among others, service charges imposed by financial institutions to other businesses (commercial clients), collection services, repairs and maintenance services of real and personal property, and computer programming including modifications to previously designed systems. The sales and use tax provisions were effective beginning on July 1, 2013.
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 and liabilities measured at fair value and equity in earnings or losses of unconsolidated entities, 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 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 (for additional information about these non-GAAP financial measures, see "Adjusted Pre-Tax, Pre-Provision Income" in "Basis of Presentation").
The following table shows adjusted pre-tax, pre-provision income of $35.9 million in the second quarter of 2013, down from the prior quarter:
(Dollars in thousands) | Quarter Ended | ||||||||||||||||||||
June 30, | March 31, | December 31, | September 30, | June 30, | |||||||||||||||||
2013 | 2013 | 2012 | 2012 | 2012 | |||||||||||||||||
