First BanCorp. Announces Results for the Quarter and Year Ended December 31, 2013

2013 Fourth Quarter Highlights and Comparison with Third Quarter

  • Net income of $14.8 million, compared to $15.9 million for the third quarter of 2013.
  • Adjusted net income of $18.5 million, compared to an adjusted net income of $19.3 million for the third quarter of 2013. Financial results for the fourth quarter of 2013 included a $2.5 million loss contingency for attorneys’ fees awarded to the counterparty on the Lehman Brothers, Inc. (“Lehman”) litigation and $1.4 million of expenses, and related valuation adjustments, in connection with branch consolidations and restructuring efforts.
  • Net interest income, excluding fair value adjustments on derivative instruments of $0.4 million, increased by $1.6 million to $132.3 million, and the related adjusted net interest margin expanded to 4.24% from 4.19% in the third quarter of 2013.
  • Non-interest income of $12.5 million, an increase compared to $10.1 million for the third quarter of 2013, mainly driven by a recovery of $2.1 million on a lower of cost or market adjustment to commercial loans held for sale and higher revenues from the mortgage banking business.
  • Non-interest expenses of $106.5 million, compared to $99.2 million for the third quarter of 2013, driven by an increase of $7.0 million in write-downs to other real estate owned (“OREO”) properties, mainly commercial properties, and the $2.5 million loss contingency for attorneys’ fees awarded to the other party in the Lehman related litigation.
  • Pre-tax, pre-provision income of $47.6 million, compared to $50.9 million for the third quarter of 2013.
  • Credit quality remained stable:
    • Non-performing assets remained relatively flat at $725.4 million, compared to $726.0 million as of September 30, 2013.
    • Non-performing loans, including non-performing loans held for sale, declined by $28.3 million, or 5%, from the third quarter of 2013 to $550.4 million, as the Corporation foreclosed on the collateral underlying $49.2 million of problem loans with corresponding transfers to the OREO portfolio.
    • Inflows of non-performing loans held for investment increased by $10.4 million, or 13%, compared to inflows for the third quarter of 2013 driven by two large commercial loan relationships totaling $14.5 million.
    • No significant sales of non-performing loans held for sale were completed during the fourth quarter.
    • Provision for loan and lease losses of $23.0 million compared to $22.2 million in the third quarter of 2013.
    • Net charge-offs of $26.5 million, a decrease of $7.4 million or 21%, compared to $33.9 million in the third quarter of 2013. The net charge-offs to average loans ratio decreased to 1.10% from 1.41% in the third quarter of 2013, the lowest level since the first quarter of 2009.
  • Total capital, Tier 1 capital, and leverage ratios of 17.06%, 15.78%, and 11.71%, respectively, as of December 31, 2013. Common equity Tier 1 capital ratio of 12.72% and Tangible common equity ratio of 8.71% as of December 31, 2013.
  • Non-brokered deposits, excluding government deposits, continued to increase, increasing by $17.4 million to $6.0 billion as of December 31, 2013.
  • Government deposits decreased by $53.1 million to $705.8 million as of December 31, 2013 from $759.0 million as of September 30, 2013. As of December 31, 2013, the Corporation had $546.5 million of government deposits in Puerto Rico and $159.3 million in the Virgin Islands.
  • Brokered certificates of deposit (CDs) decreased by $38.5 million to $3.1 billion as of December 31, 2013, from $3.2 billion as of September 30, 2013.
  • Total loan originations (excluding credit cards utilization activity) of $885.8 million for the fourth quarter of 2013, compared to $836.6 million for the third quarter of 2013.
  • Total loans held for investment increased by $127.5 million to $9.6 billion mainly related to the commercial and industrial loans portfolio.

SAN JUAN, Puerto Rico--()--First BanCorp. (the “Corporation”) (NYSE: FBP), the bank holding company for FirstBank Puerto Rico (“FirstBank” or “the Bank”), today reported net income of $14.8 million for the fourth quarter of 2013, or $0.07 per diluted share, compared to $15.9 million, or $0.08 per diluted share, for the third quarter of 2013 and net income of $14.5 million, or $0.07 per diluted share, for the fourth quarter of 2012. For the year ended December 31, 2013, the Corporation reported a net loss of $164.5 million, compared to net income of $29.8 million for the year ended December 31, 2012.

Aurelio Alemán, President and Chief Executive Officer of First BanCorp., commented: “Results for 2013 reflect year-over-year improvements in our franchise in a number of key areas, in spite of the challenges still present in our economic environment. We made significant progress in financial metrics achieving pre-tax, pre-provision income of $184 million, up from the prior year; net interest income of $515 million, an increase of $53 million from the prior year; net interest margin of 4.11%, up significantly from 3.64% in the prior year. We grew our total deposits, excluding brokered CDs, by $247.8 million and loan origination activity increased over $600 million to $3.7 billion. Also, our credit-risk profile improved considerably as total non-performing assets decreased 41% from last year, or $513 million, to $725 million.

Our profitability in the fourth quarter was affected by various extraordinary items, such as charges related to the Lehman litigation and additional credit-related expenses associated with managing our legacy portfolio. We also incurred some restructuring charges as we consolidate several branches and operations. Our net interest margin expanded to 4.25%, and loan originations increased to $972 million. Our non-performing assets decreased slightly, as we continue moving our troubled legacy loans into a better disposition state. Our capital levels remain strong.

We are prepared to continue managing the challenging economic environment in our main market. That said we remain encouraged by the proactive steps taken by the Puerto Rico government to address the fiscal situation and look forward to more stable market conditions. We remain focused on improving profitability as we effectively execute our strategic plan.”

The adjusted net income of $18.5 million for the fourth quarter of 2013, compared to $19.3 million for the third quarter of 2013, excludes:

  • A $2.5 million loss contingency for attorneys’ fees awarded to the counterparty on the Lehman litigation recorded in the fourth quarter of 2013.
  • Expenses related to branch consolidations and other restructuring efforts, and related valuation adjustments, amounting to $1.4 million recorded in the fourth quarter of 2013.
  • The net reversal of $0.2 million in expenses and related income tax credit in connection with the national gross receipts tax previously accrued for the Corporation’s trade or business outside of Puerto Rico. The reversal was recorded in the fourth quarter of 2013.
  • Costs associated with the common stock offering by certain of the Corporation’s existing stockholders amounting to $1.7 million recorded in the third quarter of 2013.
  • Costs associated with the conversion of the credit card processing platform amounting to $1.7 million recorded in the third quarter of 2013.

The results for the year ended December 31, 2013 were negatively impacted by two significant items: (i) an aggregate loss of $140.8 million on two separate bulk sales of adversely classified and non-performing assets and valuation adjustments to certain loans transferred to held for sale, and (ii) a $66.6 million loss related to the write-off of assets pledged as collateral to Lehman together with an additional $2.5 million for a loss contingency of attorneys’ fees awarded to the counterparty related to this matter. Excluding these items, net income for the year ended December 31, 2013 was $45.4 million.

The following table shows a reconciliation with respect to the results of operations for the year ended December 31, 2013 excluding the impact of the bulk sales of assets, the transfer of loans to held for sale, and the write-off of the collateral pledged to Lehman and related contingency of attorneys’ fees, with the corresponding measures calculated and presented in accordance with GAAP:

(In thousands, except per share information) Year Ended December 31, 2013 As Reported (GAAP)   Bulk Sales Transaction Impact   Write-off collateral pledged to Lehman and related contingency for attorneys' fees   Year Ended December 31, 2013 Adjusted (Non-GAAP) Year Ended December 31, 2012 As Reported (GAAP)   Variance
 
Net interest income $ 514,945 $ - $ - $ 514,945 $ 461,705 $ 53,240
Provision for loan and lease losses   243,751     (132,002 )   -     111,749     120,499     (8,750 )
Net interest income after provision for loan and lease losses   271,194     132,002     -     403,196     341,206     61,990  
 
Non-interest (loss) income (15,489 ) - 66,574 51,085 49,391 1,694
 
Non-interest expenses   415,028     (8,840 )   (2,500 )   403,688     354,883     48,805  
 
(Loss) Income before income taxes (159,323 ) 140,842 69,074 50,593 35,714 14,879
Income tax expense   (5,164 )   -     -     (5,164 )   (5,932 )   768  
 
Net (loss) income $ (164,487 ) $ 140,842   $ 69,074   $ 45,429   $ 29,782   $ 15,647  
 
Earnings (loss) per common share:
 
Basic $ (0.80 ) $ 0.68   $ 0.34   $ 0.22   $ 0.15   $ 0.07  
Diluted $ (0.80 ) $ 0.68   $ 0.34   $ 0.22   $ 0.14   $ 0.08  

This press release includes certain other non-GAAP financial measures, including adjusted pre-tax, pre-provision income, adjusted net interest income and margin, and certain capital ratios and should be read in conjunction with the accompanying tables (Exhibit A), which are an integral part of this press release.

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 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 this 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 for the last five quarters including adjusted pre-tax, pre-provision income of $47.6 million in the fourth quarter of 2013, down $3.3 million from the prior quarter:

(Dollars in thousands)   Quarter Ended
December 31, September 30,   June 30,   March 31, December 31,
2013 2013 2013 2013 2012  
 
Income (loss) before income taxes $ 15,634 $ 19,616 $ (123,562 ) $ (71,011 ) $ 16,028
Add: Provision for loan and lease losses 22,969 22,195 87,464 111,123 30,466
Add: Net loss on investments and impairments - - 42 117 69
Less: Unrealized gain on derivative instruments and liabilities
measured at fair value (355 ) (232 ) (708 ) (400 ) (432 )
Add: Bulk sales related expenses and
other professional fees related to
the terminated preferred stock exchange offer - - 3,198 5,096 -
Add: Loss on certain OREO properties sold as part of the bulk sale of
non-performing residential mortgage assets - - 1,879 - -
Add: Secondary offering costs (1) - 1,669 - - -
Add: Credit card processing platform conversion costs - 1,715 - - -
Add: National gross receipt tax (2) - - 1,656 - -
Less: National gross receipt tax - outside Puerto Rico (3) (473 ) - - - -
Add: Branch consolidations and other restructuring expenses/valuation adjustments 1,421 - - - -
Add: Write-off collateral pledged to Lehman and related expenses 2,500 - 66,574 - -
Add/Less: Equity in loss (earnings) of unconsolidated entity   5,893     5,908     (648 )   5,538     8,330  
Adjusted pre-tax, pre-provision income (4) $ 47,589   $ 50,871   $ 35,895   $ 50,463   $ 54,461  
 
Change from most recent prior quarter-amount $ (3,282 ) $ 14,976 $ (14,568 ) $ (3,998 ) $ 3,099
Change from most recent prior quarter-percentage -6.5 % 41.7 % -28.9 % -7.3 % 6.0 %
   
(1) Offering of common stock by certain of the Corporation's existing stockholders.
(2) Represents the impact of the national gross receipts tax corresponding to the first quarter of 2013, recorded during the second quarter after enactment of Act No. 40.
(3) Represents the impact of the national gross receipt tax related to the trade or business outside of Puerto Rico that was reversed in the fourth quarter after enactment of Act No. 117, as explained below.
(4) See "Basis of Presentation" for definition.

The decrease in adjusted pre-tax, pre-provision income from the 2013 third quarter primarily reflected:

  • A $7.9 million increase in adjusted non-interest expenses of $103.6 million for the fourth quarter, as compared to adjusted non-interest expenses of $95.8 million for the third quarter, primarily due to a $7.0 million increase in write-downs to OREO properties, mainly commercial properties, and higher marketing and credit card processing expenses. See Non-Interest Expenses section below for additional information.

Adjusted non-interest expenses in the last two quarters exclude: (i) a loss contingency related to attorneys’ fees granted by the court to Barclays Capital in connection with the denial of the Corporation’s Summary Judgment on its claim to recover assets pledged to Lehman, which the Corporation will appeal, (ii) expenses and valuation adjustments recorded in the fourth quarter of 2013 related to branch consolidations and other restructuring efforts, (iii) the impact of the national gross receipts tax related to the trade or business outside of Puerto Rico that was reversed in the fourth quarter of 2013 after enactment of Act No. 117 that introduced amendments to the 2013 Tax Burden Adjustment and Redistribution Act (“Act 40”), and (iv) costs associated with the conversion of the credit card processing platform and expenses related to the common stock offering by certain of the Corporation’s existing stockholders completed in the third quarter of 2013. See Basis of Presentation section below for reconciliation of this non-GAAP financial measure to the corresponding GAAP measure.

Partially offset by:

  • A $1.6 million increase in net interest income, excluding fair value adjustments, mainly due to further reductions in the cost of funding as well as the decrease in mortgage-backed securities (“MBS”) prepayment activity levels that resulted in a higher yield on U.S. agency MBS held by the Corporation. See Net Interest Income discussion below for additional information.
  • A $2.9 million increase in adjusted non-interest income of $18.9 million for the fourth quarter, as compared to $16.0 million for the third quarter, mainly driven by a recovery of $2.1 million on a lower of cost or market adjustment to commercial loans held for sale. Other significant contributors to the increase were higher revenues from the mortgage banking business, increases in fees on certain commercial loans and higher credit card fees earned.

Adjusted non-interest income excludes the equity in earnings (loss) of unconsolidated entity and valuation adjustments on fixed assets as they are no longer being used for operations after the consolidation of certain branches in Florida. 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.

(Dollars in thousands)          
Quarter Ended
December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 December 31, 2012
Net Interest Income
Interest Income - GAAP $ 162,690 $ 162,203 $ 160,670 $ 160,225 $ 165,054
Unrealized gain on
derivative instruments   (355 )   (232 )   (708 )   (400 )   (432 )
Interest income excluding valuations 162,335 161,971 159,962 159,825 164,622
Tax-equivalent adjustment   5,122     4,420     3,038     1,595     1,451  
Interest income on a tax-equivalent basis excluding valuations 167,457 166,391 163,000 161,420 166,073
 
Interest Expense - GAAP   30,031     31,298     33,782     35,732     39,423  
 
Net interest income - GAAP $ 132,659   $ 130,905   $ 126,888   $ 124,493   $ 125,631  
 
Net interest income excluding valuations $ 132,304   $ 130,673   $ 126,180   $ 124,093   $ 125,199  
 
Net interest income on a tax-equivalent basis excluding valuations $ 137,426   $ 135,093   $ 129,218   $ 125,688   $ 126,650  
 
Average Balances
Loans and leases $ 9,665,013 $ 9,639,612 $ 9,820,781 $ 10,077,907 $ 10,199,808
Total securities and other short-term investments   2,719,241     2,719,973     2,768,659     2,675,755     2,576,421  
Average Interest-Earning Assets $ 12,384,254   $ 12,359,585   $ 12,589,440   $ 12,753,662   $ 12,776,229  
 
Average Interest-Bearing Liabilities $ 10,450,671   $ 10,409,792   $ 10,583,702   $ 10,652,144   $ 10,700,868  
 
Average Yield/Rate
Average yield on interest-earning assets - GAAP 5.21 % 5.21 % 5.12 % 5.10 % 5.14 %
Average rate on interest-bearing liabilities - GAAP   1.14 %   1.19 %   1.28 %   1.36 %   1.47 %
Net interest spread - GAAP   4.07 %   4.02 %   3.84 %   3.74 %   3.67 %
Net interest margin - GAAP   4.25 %   4.20 %   4.04 %   3.96 %   3.91 %
 
Average yield on interest-earning assets excluding valuations 5.20 % 5.20 % 5.10 % 5.08 % 5.13 %
Average rate on interest-bearing liabilities excluding valuations   1.14 %   1.19 %   1.28 %   1.36 %   1.47 %
Net interest spread excluding valuations   4.06 %   4.01 %   3.82 %   3.72 %   3.66 %
Net interest margin excluding valuations   4.24 %   4.19 %   4.02 %   3.95 %   3.90 %
 
Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations 5.36 % 5.34 % 5.19 % 5.13 % 5.17 %
Average rate on interest-bearing liabilities excluding valuations   1.14 %   1.19 %   1.28 %   1.36 %   1.47 %
Net interest spread on a tax-equivalent basis and excluding valuations   4.22 %   4.15 %   3.91 %   3.77 %   3.70 %
Net interest margin on a tax-equivalent basis and excluding valuations   4.40 %   4.34 %   4.12 %   4.00 %   3.94 %

Net interest income, excluding valuations, amounted to $132.3 million, an increase of $1.6 million when compared to the third quarter of 2013. Net interest margin, excluding valuations, expanded to 4.24% for the fourth quarter of 2013 from 4.19% for the third quarter of 2013. The increase in net interest income and margin was mainly due to:

  • A decrease of $1.3 million, or 5 basis points, in total interest expense, mainly due to a reduction in the average cost of total deposits and maturities of Federal Home Loan Bank advances. Interest expense on brokered CDs decreased $0.6 million as the average cost of brokered CDs decreased 6 basis points during the fourth quarter of 2013. The Corporation repaid approximately $446.1 million of matured brokered CDs with an all-in cost of 1.00% and new issuances amounted to $407.2 million with an all-in cost of 0.90%. The Corporation's strategic focus remains to grow non-brokered deposits and improve the overall funding mix. Average non-brokered deposits increased by $133.7 million compared to the third quarter of 2013. The remaining decrease in interest expenses of approximately $0.7 million was primarily related to maturities of $53.4 million of FHLB advances that carried an average cost of 4.94%.
  • A $1.4 million increase in interest income on investment securities mainly due to the decrease in MBS prepayment activity levels that resulted in a higher yield on U.S. agency MBS bought at a premium. Higher interest income on investment securities was also attributable, to a lesser extent, to a $31.6 million increase in the average volume of MBS mainly reflecting the full impact of purchases of 15-Year U.S. agency MBS totaling $148.5 million in the latter part of the third quarter.

These increases were partially offset by:

  • A $1.1 million decrease in interest income on loans mainly related to: (i) a $1.6 million decline in interest income on the residential mortgage loan portfolio attributable to both a lower average volume and a lower yield driven by an increase in non-performing residential mortgage loans, and (ii) a $1.1 million decrease in interest income on consumer loans mainly related to a lower average volume and late fees related to the credit card loans portfolio. These variances were partially offset by a $2.0 million increase in interest income on commercial loans mainly attributable to the $98.8 million increase in the average balance of these portfolios.

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses for the fourth quarter of 2013 was $23.0 million, compared to $22.2 million for the third quarter of 2013. The provision for commercial and industrial loans increased by $10.3 million, compared to the provision for the third quarter, mainly related to the migration of two relationships into adversely classified categories, an increase in the general reserve and, to a lesser extent, the overall increase in the volume of this portfolio. The provision for consumer loans increased by $1.9 million, compared to the provision for the third quarter, mainly related to the increase in the general reserve for auto loans based on historical loss experience and higher reserves for adversely classified boat loans. These increases were partially offset by an $11.4 million decrease in the provision for commercial mortgage loans mainly due to improvements in charge-off trends reflected in a lower general reserve, a lower reserve requirement for certain collateral dependent loans, and a significant recovery on a large loan paid off in Florida. See Credit Quality discussion below for additional information regarding the allowance for loan and lease losses.

NON-INTEREST INCOME (LOSS)

  Quarter Ended
December 31,   September 30,   June 30,   March 31,   December 31,
(In thousands) 2013   2013   2013   2013   2012  
 
Service charges on deposit accounts $ 3,162 $ 3,157 $ 3,098 $ 3,380 $ 3,228
Mortgage banking activities 3,906 3,521 4,823 4,580 6,700
Net loss on investments and impairments - - (42 ) (117 ) (69 )
Broker-dealer income 97 - - - -
Impairment - collateral pledged to Lehman - - (66,574 ) - -
Branch consolidations - valuation adjustments fixed assets (529 ) - - - -
Other operating income 11,742 9,290 6,384 11,324 10,239
Equity in (loss) earnings of unconsolidated entity   (5,893 )   (5,908 )   648     (5,538 )   (8,330 )
 
Non-interest income (loss) $ 12,485   $ 10,060   $ (51,663 ) $ 13,629   $ 11,768  

Non-interest income for the fourth quarter of 2013 amounted to $12.5 million, compared to $10.1 million for the third quarter of 2013. The increase was primarily due to:

  • The lower of cost or fair value adjustment on commercial loans held for sale that resulted in a recovery of $2.1 million, included as part of “Other operating income” in the table above.
  • A $0.4 million increase in revenues from the mortgage banking business mainly related to a $0.6 million increase in the net realized gain on loan sales and securitization activities, partially offset by a $0.2 million decrease in servicing fees due to the expiration of the interim servicing on residential mortgage loans sold in the second quarter of 2013.
  • A $0.3 million increase in fees on certain commercial loans, including commitments unused fees, agent fees, and other non-deferrable fees, included as part of “Other operating income” in the table above.
  • A $0.2 million increase in credit card fees, included as part of “Other operating income” in the table above.

Partially offset by:

  • A $0.5 million loss related to valuation adjustments on fixed assets as they are no longer being used for operations after the consolidation of certain branches in Florida.
  • A $0.2 million decrease in insurance income, included as part of “Other operating income” in the table above.
    Quarter Ended
December 31,   September 30,   June 30,   March 31,   December 31,
(In thousands) 2013 2013 2013 2013 2012
 
Employees' compensation and benefits $ 31,062 $ 32,823 $ 33,116 $ 33,554 $ 31,840
Occupancy and equipment 15,229 15,134 14,946 15,070 14,972
Deposit insurance premium 10,495 10,479 11,430 11,517 11,897
Other insurance and supervisory fees 957 1,034 1,269 1,289 1,366
Taxes, other than income taxes 4,076 4,693 6,239 2,989 3,013

Professional fees:

Collections, appraisals and other credit related fees 2,198 2,780 2,520 1,924 1,127
Outsourcing technology services 4,202 4,338 4,258 1,346 1,557
Other professional fees 4,845 4,086 3,782 2,903 4,275
Credit and debit card processing expenses 4,869 2,682 2,281 3,077 2,490
Credit card processing platform conversion costs - 1,715 - - -
Branch consolidations and other restructuring expenses 892 - - - -
Business promotion 5,251 3,478 3,831 3,220 4,067
Communications 1,836 1,866 1,885 1,814 1,809
Net loss on OREO operations 13,321 7,052 12,950 7,310 6,201
Secondary offering costs - 1,669 - - -
Terminated preferred stock exchange offer expenses - - 115 1,218 -
Bulk sales expenses - - 4,962 3,878 -
Loss contingency for attorneys' fees - Lehman litigation 2,500 - - - -
Other   4,808   5,325   7,739   6,901   6,291
Total $ 106,541 $ 99,154 $ 111,323 $ 98,010 $ 90,905

Non-interest expenses in the fourth quarter of 2013 amounted to $106.5 million, an increase of $7.4 million from $99.2 million for the third quarter of 2013. Non-interest expenses for the fourth quarter included several unusual items: (i) a $2.5 million loss contingency related to attorneys’ fees granted by the court to Barclays Capital in connection with the denial of the Corporation’s Summary Judgment on its claim to recover assets pledged to Lehman, which the Corporation will appeal, (ii) expenses of $0.9 million related to the branch consolidations and other restructuring efforts, and (iii) the reversal of approximately $0.5 million in expenses related to the portion of the national gross receipts related to the Corporation’s trade or business outside of Puerto Rico that was previously accrued in the second and third quarter of 2013. This amount was reversed in the fourth quarter after enactment of Act 117, which introduced amendments to Act 40, which was enacted on June 30, 2013. The reversal, as well as the accrual, is reflected as part of “Taxes, other than income taxes” in the table above. Results for the third quarter included approximately $1.7 million in costs associated with the secondary offering of the Corporation’s common stock by certain of the Corporation’s existing stockholders and $1.7 million in costs associated with the conversion of the credit card processing platform.

Adjusted non-interest expenses, which exclude the expenses identified in the foregoing paragraph, amounted to $103.6 million for the fourth quarter of 2013, up $7.9 million compared to the third quarter. The main drivers of the increase were:

  • A higher net loss on OREO operations, mainly reflecting a $7.0 million increase in write-downs primarily related to commercial OREO properties in both Puerto Rico and the Virgin Islands. This was partially offset by lower OREO operating expenses, mainly property taxes expense.
  • A $1.8 million increase in business promotion expenses, primarily related to institutional and credit card advertising campaigns.
  • A $2.2 million increase in credit card processing expenses mainly due to servicing and processing fees attributable to, among other things, increased levels in call center calls related to account activations and inquiries after the conversion of the processing platform.

Partially offset by:

  • A $1.8 million reduction in employees’ compensation and benefit expenses mainly related to lower incentive compensation expense.
  • A $0.5 million decrease in attorneys’ loan collection fees.
  • A $0.3 million decrease in the provision for off-balance sheet exposures, mainly related to lower reserve requirements for unfunded loan commitments. This is reflected as part of “Other” in the table above.

INCOME TAXES

The income tax expense for the fourth quarter of 2013 amounted to $0.8 million compared to $3.7 million for the third quarter of 2013. The decrease primarily reflects the impact in the previous quarter of a $3.0 million increase in reserves for uncertain tax positions. Aside from reserves for uncertain tax positions, most of the income tax expense recorded in 2013 relates to profitable subsidiaries. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary. As of December 31, 2013, the deferred tax asset, net of a valuation allowance of $522.7 million, amounted to $7.6 million.

CREDIT QUALITY

Non-Performing Assets

(Dollars in thousands) December 31,   September 30,   June 30,   March 31,   December 31,
  2013 2013 2013 2013 2012
Non-performing loans held for investment:
Residential mortgage $ 161,441 $ 142,002 $ 133,937 $ 311,495 $ 313,626
Commercial mortgage 120,107 127,374 136,737 136,708 214,780
Commercial and Industrial 114,833 127,584 131,906 141,045 230,090
Construction 58,866 64,241 68,204 59,810 178,190
Consumer and Finance leases   40,302     37,184     35,416     33,652     38,875  
Total non-performing loans held for investment   495,549     498,385     506,200     682,710     975,561  
 
REO 160,193 133,284 139,257 181,479 185,764
Other repossessed property 14,865 14,125 11,503 9,913 10,107
Other assets (1)   -     -     -     64,543     64,543  
Total non-performing assets, excluding loans held for sale $ 670,607 $ 645,794 $ 656,960 $ 938,645 $ 1,235,975
 
Non-performing loans held for sale   54,801     80,234     94,951     147,995     2,243  
Total non-performing assets, including loans held for sale (2) $ 725,408   $ 726,028   $ 751,911   $ 1,086,640   $ 1,238,218  
 
Past-due loans 90 days and still accruing $ 120,082 $ 127,735 $ 113,061 $ 125,384 $ 142,012
Non-performing loans held for investment to total loans held for investment 5.14 % 5.24 % 5.36 % 7.14 % 9.70 %
Non-performing loans to total loans 5.67 % 6.01 % 6.21 % 8.45 % 9.64 %
Non-performing assets, excluding non-performing loans held for sale,
to total assets, excluding non-performing loans held for sale 5.32 % 5.08 % 5.17 % 7.30 % 9.44 %
Non-performing assets to total assets 5.73 % 5.68 % 5.87 % 8.35 % 9.45 %
   

(1)

Collateral pledged to Lehman Brothers, Inc.

(2)

 

Amount excludes purchased credit impaired loans with a carrying value as of December 31, 2013 of approximately $4.8 million acquired as part of the credit card portfolio acquired from FIA Card Services ("FIA").

Credit quality metrics remained relatively stable

  • Total non-performing assets remained relatively flat at $725.4 million as of December 31, 2013, compared to $726.0 million as of September 30, 2013. Total non-performing loans, including non-performing loans held for sale, decreased by $28.3 million, or 5%, from the third quarter of 2013. The decrease in non-performing loans was primarily due to foreclosures of approximately $35.0 million in commercial properties that previously collateralized two non-performing commercial mortgage loans, two non-performing commercial loan participations totaling $7.6 million liquidated in the fourth quarter, a $3.2 million troubled debt restructured construction loan restored to accrual status after a sustained performance period, charge-offs and principal repayments. These reductions were partially offset by an increase of $19.4 million in non-performing residential mortgage loans, primarily in Puerto Rico.
  • Inflows of non-performing loans held for investment increased by $10.4 million, or 13%, compared to inflows in the third quarter. This increase was primarily reflected in the residential and commercial mortgage loan portfolios. There were two commercial relationships individually in excess of $5 million that entered into non-performing status during the fourth quarter totaling $14.5 million.
  • Non-performing commercial and construction loans held for sale decreased by $25.4 million driven by foreclosures of properties that previously served as collateral of a commercial mortgage loan.
  • Adversely classified commercial and construction loans held for investment decreased by $9.5 million to $623.0 million, or 1%, from the third quarter of 2013.
  • The OREO balance increased by $26.9 million, driven by additions of $49.2 million, partially offset by sales and fair value adjustments.
  • Total troubled debt restructured loans (“TDRs”) held for investment were $630.3 million at December 31, 2013, down $6.6 million, or 1%, from September 30, 2013. Approximately $425.4 million of total TDRs held for investment were in accrual status as of December 31, 2013.

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:

Quarter Ended
(Dollars in thousands) December 31,   September 30,   June 30, March 31, December 31,
2013 2013 2013 2013 2012
 
Allowance for loan and lease losses, beginning of period $ 289,379   $ 301,047   $ 342,531   $ 435,414   $ 445,531  
Provision for loan and lease losses   22,969     22,195     87,464   (1)   111,123   (5)   30,466  
Net charge-offs of loans:
Residential mortgage (4,544 ) (8,457 ) (103,418 ) (2) (11,580 ) (6) (9,555 )
Commercial mortgage 2,605 (5,918 ) (3,253 ) (56,036 ) (7) (6,101 )
Commercial and Industrial (9,146 ) (5,718 ) (5,520 ) (84,829 ) (8) (12,601 )
Construction (435 ) 71 (2,368 ) (3) (38,515 ) (9) (1,837 )
Consumer and finance leases   (14,970 )   (13,841 )   (14,389 )   (13,046 )   (10,489 )
Net charge-offs   (26,490 )   (33,863 )   (128,948 ) (4)   (204,006 ) (10)   (40,583 )
Allowance for loan and lease losses, end of period $ 285,858   $ 289,379   $ 301,047   $ 342,531   $ 435,414  
 
Allowance for loan and lease losses to period end total loans held for investment 2.97 % 3.04 % 3.19 % 3.58 % 4.23 %
Net charge-offs (annualized) to average loans outstanding during the period 1.10 % 1.41 % 5.25 % 8.10 % 1.59 %
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 1.10 % 1.41 % 1.29 % 2.87 % 1.59 %
Provision for loan and lease losses to net charge-offs during the period 0.87x 0.66x 0.68x 0.54x 0.75x
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 0.87x 0.66x 0.63x 0.68x 0.75x
(1) Includes provision of $67.9 million associated with the bulk sale of non-performing residential assets.
(2) Includes net charge-offs totaling $97.9 million associated with the bulk sale of non-performing residential assets.
(3) Includes net charge-offs totaling $31 thousand associated with the bulk sale of non-performing residential assets.
(4) Includes net charge-offs totaling $98.0 million associated with the bulk sale of non-performing residential assets.
(5) Includes provision of $64.1 million associated with the bulk sale of adversely classified commercial assets and the transfer of loans to held for sale.
(6) Includes net charge-offs totaling $1.0 million associated with the bulk sale of adversely classified commercial assets.
(7) 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.
(8) Includes net charge-offs totaling $44.7 million associated with the bulk sale of adversely classified commercial assets.
(9) 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.
(10) 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.
  • The ratio of the allowance for loan and lease losses to loans held for investment was 2.97% as of December 31, 2013, compared to 3.04% as of September 30, 2013, primarily due to charge-offs of impaired commercial loans with previously established adequate reserves and lower underlying losses on commercial mortgage loans. The ratio of the allowance to non-performing loans held for investment was 57.69% as of December 31, 2013 compared to 58.06% as of September 30, 2013.

The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of December 31, 2013 and September 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:

(Dollars in thousands)

Residential
Mortgage Loans

 

Commercial (including
Commercial Mortgage,
C&I, and Construction
loans)

 

Consumer and
Finance Leases

  Total
 
As of December 31, 2013
Impaired loans:
Principal balance of loans, net of charge-offs $ 410,993 $ 479,194 $ 27,944 $ 918,131
Allowance for loan and lease losses 18,125 81,019 3,457 102,601
Allowance for loan and lease losses to principal balance 4.41 % 16.91 % 12.37 % 11.17 %
 
PCI loans:
Carrying value of PCI loans - - 4,791 4,791
Allowance for PCI loans - - - -
Allowance for PCI loans to carrying value - - - -
 
Loans with general allowance:
Principal balance of loans 2,138,015 4,541,449 2,033,784 8,713,248
Allowance for loan and lease losses 14,985 113,228 55,044 183,257
Allowance for loan and lease losses to principal balance 0.70 % 2.49 % 2.71 % 2.10 %
 
Total loans held for investment:
Principal balance of loans $ 2,549,008 $ 5,020,643 $ 2,066,519 $ 9,636,170
Allowance for loan and lease losses 33,110 194,247 58,501 285,858
Allowance for loan and lease losses to principal balance 1.30 % 3.87 % 2.83 % 2.97 %
 
As of September 30, 2013
 
Impaired loans:
Principal balance of loans, net of charge-offs $ 397,025 $ 479,421 $ 28,063 $ 904,509
Allowance for loan and lease losses 17,982 84,539 3,654 106,175
Allowance for loan and lease losses to principal balance 4.53 % 17.63 % 13.02 % 11.74 %
 
PCI loans:
Carrying value of PCI loans - - 5,963 5,963
Allowance for PCI loans - - - -
Allowance for PCI loans to carrying value - - - -
 
Loans with general allowance:
Principal balance of loans 2,122,432 4,450,330 2,025,400 8,598,162
Allowance for loan and lease losses 13,805 116,649 52,750 183,204
Allowance for loan and lease losses to principal balance 0.65 % 2.62 % 2.60 % 2.13 %
 
Total loans held for investment:
Principal balance of loans $ 2,519,457 $ 4,929,751 $ 2,059,426 $ 9,508,634
Allowance for loan and lease losses 31,787 201,188 56,404 289,379
Allowance for loan and lease losses to principal balance 1.26 % 4.08 % 2.74 % 3.04 %

Net Charge-Offs

The following table presents annualized net charge-offs to average loans held-in-portfolio:

  Quarter Ended
December 31,   September 30,   June 30,   March 31,   December 31,
2013 2013 2013 2013 2012
 
Residential mortgage 0.72 % 1.31 % 14.78

% (1)

1.65

 

% (4)

1.36 %
 
Commercial mortgage -0.57 % 1.23 % 0.79 % 12.06 % (5) 1.70 %
 
Commercial and Industrial 1.21 % 0.81 % 0.72 % 11.16 % (6) 1.40 %
 
Construction 0.81 % -0.11 % 3.43 % (2) 44.66 % (7) 2.06 %
 
Consumer and finance leases 2.91 % 2.71 % 2.83 % 2.59 % 2.10 %
 
Total loans 1.10 % 1.41 % 5.25 % (3) 8.10 % (8) 1.59 %
 

(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.

  • Net charge-offs for the fourth quarter of 2013 were $26.5 million, or an annualized 1.10% of average loans, compared to $33.9 million, or an annualized 1.41%, in the third quarter of 2013. The decrease was primarily related to commercial mortgage loans in Florida, including a $4.5 million recovery related to a single loan paid-off during the fourth quarter, and a decrease in charge-offs of residential mortgage loans in Puerto Rico resulting from the evaluation for impairment purposes of loans considered homogeneous given high delinquency and loan-to-value levels. These decreases were partially offset by an increase of $3.4 million in net charge-offs of commercial and industrial loans driven by a charge-off of $2.2 million on a commercial loan with a previously established reserve and an increase in charge-offs on consumer loans, mainly boat financings.

STATEMENT OF FINANCIAL CONDITION

Total assets were approximately $12.7 billion as of December 31, 2013, down $130.5 million from September 30, 2013.

The decrease was mainly due to:

  • A $168.7 million decrease in cash and cash equivalents, mainly balances maintained at the Federal Reserve, used in part to pay down maturing brokered CDs and FHLB advances.
  • A $69.0 million decrease in available-for-sale securities mainly due to regular MBS repayments and a decrease in the fair value of U.S. agency MBS due to changes in market interest rates.
  • A $13.2 million decrease in residential mortgage loans held for sale driven by sales and securitizations of conforming loans commensurate with a lower volume of residential mortgage loan originations.
  • A $5.9 million decrease in the investment in unconsolidated entity.

These decreases were partially offset by:

  • A $127.5 million increase in loans held for investment mainly reflecting increases in commercial and industrial loans, including a $90.7 million increase in the principal balance of loans outstanding from government entities and a $56.7 million increase in commercial and industrial loans in Florida.

Total loan originations, including refinancings and draws from existing revolving and non-revolving commitments, amounted to approximately $885.8 million, compared to $836.6 million in the third quarter of 2013. These figures exclude the credit cards utilization activity. The increase was mainly related to facilities granted to government entities in both Puerto Rico and the Virgin Islands, partially offset by a decline in residential mortgage and auto loan originations attributable, in part, to a decrease in consumer demand.

Total liabilities were approximately $11.4 billion as of December 31, 2013, down $125.8 million from September 30, 2013.

The decrease was mainly due to:

  • A $38.5 million decrease in brokered CDs.
  • A $53.1 million decrease in government deposits.
  • A $53.4 million decrease in FHLB advances.

These decreases were partially offset by:

  • A $17.4 million increase in non-brokered deposits, excluding government deposits, mainly due to increases in savings and demand deposits.

Total stockholders’ equity amounted to $1.2 billion as of December 31, 2013, a decrease of $4.7 million from September 30, 2013, driven by:

  • A decrease of $20.3 million in other comprehensive income mainly attributable to declines in the value of U.S. agency MBS of approximately $21.5 million. The fair value of Puerto Rico government obligations held by the Corporation as part of its available-for-sale investment securities portfolio increased by $2.1 million during the fourth quarter. See Exposure to Puerto Rico Government section below for additional information.

Partially offset by:

  • The net income of $14.8 million reported in the fourth quarter.

The Corporation’s total capital, Tier 1 capital, and leverage ratios as of December 31, 2013 were 17.06%, 15.78%, and 11.71%, respectively, compared to total capital, Tier 1 capital and leverage ratios of 16.89%, 15.61%, and 11.65%, respectively, as of the end of the third quarter of 2013. Meanwhile, the total capital, Tier 1 capital, and leverage ratios as of December 31, 2013 of our banking subsidiary, FirstBank Puerto Rico, were 16.67%, 15.40%, and 11.44%, respectively, compared to total capital, Tier 1 capital, and leverage ratios of 16.48%, 15.20%, and 11.35%, 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, when they are effective, 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 8.71% as of December 31, 2013 from 8.65% as of September 30, 2013, and the Tier 1 common equity to risk-weighted assets ratio increased to 12.72% as of December 31, 2013 from 12.55% as of September 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:

(In thousands, except ratios and per share information)              
December 31,   September 30,   June 30,   March 31,   December 31,
2013 2013 2013 2013 2012
Tangible Equity:
Total equity - GAAP $ 1,215,858 $ 1,220,593 $ 1,222,328 $ 1,403,999 $ 1,485,023
Preferred equity (63,047 ) (63,047 ) (63,047 ) (63,047 ) (63,047 )
Goodwill (28,098 ) (28,098 ) (28,098 ) (28,098 ) (28,098 )
Purchased credit card relationship (19,787 ) (20,718 ) (21,649 ) (22,580 ) (23,511 )
Core deposit intangible   (6,981 )   (7,570 )   (8,158 )   (8,746 )   (9,335 )
 
Tangible common equity $ 1,097,945   $ 1,101,160   $ 1,101,376   $ 1,281,528   $ 1,361,032  
 
Tangible Assets:
Total assets - GAAP $ 12,656,925 $ 12,787,450 $ 12,803,169 $ 13,005,876 $ 13,099,741
Goodwill (28,098 ) (28,098 ) (28,098 ) (28,098 ) (28,098 )
Purchased credit card relationship (19,787 ) (20,718 ) (21,649 ) (22,580 ) (23,511 )
Core deposit intangible   (6,981 )   (7,570 )   (8,158 )   (8,746 )   (9,335 )
 
Tangible assets $ 12,602,059   $ 12,731,064   $ 12,745,264   $ 12,946,452   $ 13,038,797  
 
Common shares outstanding   207,091     207,043     206,982     206,228     206,235  
 
Tangible common equity ratio 8.71 % 8.65 % 8.64 % 9.90 % 10.44 %
Tangible book value per common share $ 5.30 $ 5.32 $ 5.32 $ 6.21 $ 6.60

The following table reconciles stockholders’ equity (GAAP) to Tier 1 common equity based on current applicable bank regulatory requirements (known as “Basel 1”):

(Dollars in thousands) As of
December 31,   September 30,   June 30,   March 31,   December 31,
2013 2013 2013 2013 2012
 
Tier 1 Common Equity:
Total equity - GAAP $ 1,215,858 $ 1,220,593 $ 1,222,328 $ 1,403,999 $ 1,485,023
Qualifying preferred stock (63,047 ) (63,047 ) (63,047 ) (63,047 ) (63,047 )
Unrealized loss (gain) on available-for-sale securities (1) 78,734 58,485 40,142 (19,868 ) (28,476 )
Disallowed deferred tax asset (2) - (43 ) - - -
Goodwill (28,098 ) (28,098 ) (28,098 ) (28,098 ) (28,098 )
Core deposit intangible (6,981 ) (7,570 ) (8,158 ) (8,746 ) (9,335 )
Other disallowed assets   (23 )   (410 )   (569 )   (2,515 )   (4,032 )
Tier 1 common equity $ 1,196,443   $ 1,179,910   $ 1,162,598   $ 1,281,725   $ 1,352,035  
 
Total risk-weighted assets $ 9,405,802   $ 9,402,910   $ 9,467,699   $ 9,721,502   $ 9,933,719  
 
Tier 1 common equity to risk-weighted assets ratio 12.72 % 12.55 % 12.28 % 13.18 % 13.61 %
 

1- Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with readily determinable fair values, in accordance with regulatory risk-based capital guidelines. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax.

2- Approximately $7.9 million of the Corporation's deferred tax assets as of December 31, 2013 (September 30, 2013 - $7.7 million; June 30, 2013 - $10 million; March 31, 2013 - $10 million; December 31, 2012 - $11 million) was included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $0 of such assets as of December 31, 2013 (September 30, 2013 - $43 thousand; June 30, 2013 - $0; March 31, 2013 - $0; December 31, 2012 - $0) exceeded the limitation imposed by these guidelines and, as "disallowed deferred tax assets," was deducted in arriving at Tier 1 capital. According to regulatory capital guidelines, the deferred tax assets that are dependent upon future taxable income are limited for inclusion in Tier 1 capital to the lesser of: (i) the amount of such deferred tax asset that the entity expects to realize within one year of the calendar quarter-end date, based on its projected future taxable income for that year, or (ii) 10% of the amount of the entity's Tier 1 capital. Approximately $0.3 million of the Corporation's other net deferred tax liability as of December 31, 2013 (September 30, 2013 - $0.3 million; June 30, 2013 - $3 million; March 31, 2013 - $6 million; December 31, 2012 - $6 million) represented primarily the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines.

 

 

Exposure to Puerto Rico Government

As of December 31, 2013, the Corporation had $454.6 million of credit facilities granted to the Puerto Rico Government, its municipalities and public corporations, of which $397.8 million was outstanding, compared to $326.7 million as of September 30, 2013. Approximately $200.5 million of the granted credit facilities outstanding 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 $84.6 million consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power, and approximately $112.7 million consists of loans to the central government or units of the central government. In addition, the Corporation had $205.1 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 on its books at a fair value of $51.3 million as of December 31, 2013, compared to $49.2 million as of September 30, 2013.

As of December 31, 2013, the Corporation had $546.5 million of public sector deposits in Puerto Rico, compared to $584.1 million as of September 30, 2013. Approximately 21% come from municipalities in Puerto Rico and 79% 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 Tuesday, February 4, 2014, 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. The Corporation recommends that listeners 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 February 4, 2015. A telephone replay will be available one hour after the end of the conference call through 9:00 a.m. Eastern time March 4, 2014 at (877) 344-7529 or (412) 317-0088 for international callers. The conference number is 10040151.

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 Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by such sections. 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 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 provisions 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; a credit default by the Puerto Rico government or any of its public corporations or other instrumentalities, and recent and/or future downgrades of the long-term debt ratings of the Puerto Rico government, which could adversely affect economic conditions in Puerto Rico; 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. Virgin Islands 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; 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

Adjusted pre-tax, pre-provision income is a non-GAAP performance metric that management believes is useful in analyzing underlying performance trends, particularly in times of economic stress. 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.

In addition, from time to time, adjusted pre-tax, pre-provision income will reflect the omission of revenue or expenses items that management judges to be outside of ordinary banking activities and/or of 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 adjusted pre-tax, pre-provision income that excludes 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, attorneys’ fees related to the Lehman litigation, expenses related to branch consolidations and other restructuring expenses and related valuation adjustments, equity in earnings (loss) of unconsolidated entity, and certain other adjustments.

To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation provides additional measures of adjusted non-interest expenses and adjusted non-interest income. Adjusted non-interest expenses exclude attorneys’ fees related to the Lehman litigation recorded in the fourth quarter of 2013, expenses in the fourth quarter of 2013 related to branch consolidations in Florida and the Virgin Islands and expenses associated with the restructuring of some business units, the costs associated with the conversion of the credit card processing platform recorded in the third quarter of 2013, the impact of the national gross receipts tax related to the trade or business outside of Puerto Rico that was reversed in the fourth quarter of 2013 after enactment of Act No. 117 that introduced amendments to Act 40, which was enacted on June 30, 2013, and 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. Adjusted non-interest income excludes equity in earnings (loss) of unconsolidated entity and a valuation adjustment to fixed assets that are no longer used for operations after branch consolidations in Florida. 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.

(Dollars in thousands)            
 
2013 Fourth Quarter As Reported (GAAP)   Branches consolidation and other restructuring expenses/valuation adjustments   Attorneys' Fees Lehman litigation   National gross receipts tax reversal   Equity in loss of unconsolidated entity   Adjusted (Non-GAAP)
 
 
Non-interest income $ 12,485 $ 528 $ - $ - $ 5,893 $ 18,906
 
Non-interest expenses $ 106,541 $ 893 $ 2,500 $ (473 ) $ - $ 103,621
 
 
 
 
2013 Third Quarter As Reported (GAAP)   Secondary Offering Costs Impact   Credit Cards Processing Platform Conversion Costs   Equity in loss of unconsolidated entity   Adjusted (Non-GAAP)  
 
 
Non-interest income $ 10,060 $ - $ - $ 5,908 $ 15,968
 
Non-interest expenses $ 99,154 $ 1,669 $ 1,715 $ - $ 95,770
FIRST BANCORP
Condensed Consolidated Statements of Financial Condition
     
As of
December 31, September 30, December 31,
(In thousands, except for share information) 2013   2013   2012  
ASSETS
 
Cash and due from banks $ 454,302   $ 623,019   $ 730,016  
 
Money market investments:
Time deposits with other financial institutions 300 300 505
Other short-term investments   201,069     201,065     216,330  
Total money market investments   201,369     201,365     216,835  
 
Investment securities available for sale, at fair value 1,978,282 2,047,330 1,731,077
 
 
Other equity securities   28,691     32,096     38,757  
 
Total investment securities   2,006,973     2,079,426     1,769,834  
 
Investment in unconsolidated entity   7,279     13,172     23,970  
 
Loans, net of allowance for loan and lease losses of $285,858
(September 30, 2013 - $289,379; December 31, 2012 - $435,414) 9,350,312 9,219,255 9,618,700
Loans held for sale, at lower of cost or market   75,969     114,592     85,394  
Total loans, net   9,426,281     9,333,847     9,704,094  
 
Premises and equipment, net 166,946 172,371 181,363
Other real estate owned 160,193 133,284 185,764
Accrued interest receivable on loans and investments 54,012 49,848 51,671
Other assets   179,570     181,118     236,194  
Total assets $ 12,656,925   $ 12,787,450   $ 13,099,741  
 
LIABILITIES
 
Deposits:
Non-interest-bearing deposits $ 851,212 $ 845,917 $ 837,387
Interest-bearing deposits   9,028,712     9,108,280     9,027,159  
Total deposits   9,879,924     9,954,197     9,864,546  
 
Securities sold under agreements to repurchase 900,000 900,000 900,000
Advances from the Federal Home Loan Bank (FHLB) 300,000 353,440 508,440
Other borrowings 231,959 231,959 231,959
Accounts payable and other liabilities   129,184     127,261     109,773  
Total liabilities   11,441,067     11,566,857     11,614,718  
 
STOCKHOLDERS' EQUITY

 

Preferred Stock, authorized 50,000,000 shares: issued 22,828,174 shares; outstanding 2,521,872; aggregate liquidation value $63,047

  63,047     63,047     63,047  
 
Common stock, $0.10 par value, authorized 2,000,000,000 shares; issued 207,657,657 (September 30, 2013 - 207,588,787; December 31, 2012 - 206,730,318 shares issued)
20,766 20,759 20,673
Less: Treasury stock (at par value)   (57 )   (55 )   (49 )
 
Common stock outstanding, 207,091,478 shares outstanding
(September 30, 2013 - 207,042,785; December 31, 2012 - 206,235,465 shares outstanding)   20,709     20,704     20,624  
Additional paid-in capital 888,159 887,437 885,754
Retained earnings 322,679 307,890 487,166
Accumulated other comprehensive (loss) income   (78,736 )   (58,485 )   28,432  
Total stockholders' equity   1,215,858     1,220,593     1,485,023  
Total liabilities and stockholders' equity $ 12,656,925   $ 12,787,450   $ 13,099,741  
FIRST BANCORP
Condensed Consolidated Statements of Income (Loss)
         
Quarter Ended Year Ended
December 31, September 30, December 31, December 31, December 31,
(In thousands, except per share information) 2013 2013 2012 2013 2012
 
Net interest income:
Interest income $ 162,690 $ 162,203 $ 165,054 $ 645,788 $ 637,777
Interest expense   30,031     31,298     39,423     130,843     176,072  
Net interest income 132,659 130,905 125,631 514,945 461,705
Provision for loan and lease losses   22,969     22,195     30,466     243,751     120,499  
Net interest income after provision for loan and lease losses   109,690     108,710     95,165     271,194     341,206  
 
Non-interest income (loss):
Service charges on deposit accounts 3,162 3,157 3,228 12,797 12,982
Mortgage banking activities 3,906 3,521 6,700 16,830 19,960
Net loss on investments and impairments - - (69 ) (159 ) (1,966 )
Equity in loss of unconsolidated entity (5,893 ) (5,908 ) (8,330 ) (16,691 ) (19,256 )
Impairment of collateral pledged to Lehman - - - (66,574 ) -
Other non-interest income   11,310     9,290     10,239     38,308     37,671  
Total non-interest income (loss)   12,485     10,060     11,768     (15,489 )   49,391  
 
Non-interest expenses:
Employees' compensation and benefits 31,476 32,823 31,840 130,969 125,610
Occupancy and equipment 15,708 15,134 14,972 60,858 61,037
Business promotion 5,251 3,538 4,067 15,977 14,093
Professional fees 11,245 11,840 6,959 47,952 26,727
Taxes, other than income taxes 4,076 4,693 3,013 17,997 13,363
Insurance and supervisory fees 11,452 11,513 13,263 48,470 52,596
Net loss on other real estate owned operations 13,321 7,052 6,201 42,512 25,116
Other non-interest expenses   14,012     12,561     10,590     50,293     36,341  
Total non-interest expenses   106,541     99,154     90,905     415,028     354,883  
 
Income (loss) before income taxes 15,634 19,616 16,028 (159,323 ) 35,714
Income tax expense   (845 )   (3,676 )   (1,493 )   (5,164 )   (5,932 )
 
Net income (loss) $ 14,789   $ 15,940   $ 14,535   $ (164,487 ) $ 29,782  
 
Net income (loss) attributable to common stockholders $ 14,789   $ 15,940   $ 14,535   $ (164,487 ) $ 29,782  
 
Earnings (loss) per common share:
 
Basic $ 0.07   $ 0.08   $ 0.07   $ (0.80 ) $ 0.15  
Diluted $ 0.07   $ 0.08   $ 0.07   $ (0.80 ) $ 0.14  

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 148 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

Table 1 – Selected Financial Data

(In thousands, except for per share and financial ratios)   Quarter Ended   Year Ended
December 31,   September 30,   December 31, December 31, December 31,
2013 2013 2012 2013 2012
Condensed Income Statements:
Total interest income $ 162,690 $ 162,203 $ 165,054 $ 645,788 $ 637,777
Total interest expense 30,031 31,298 39,423 130,843 176,072
Net interest income 132,659 130,905 125,631 514,945 461,705
Provision for loan and lease losses 22,969 22,195 30,466 243,751 120,499
Non-interest income (loss) 12,485 10,060 11,768 (15,489 ) 49,391
Non-interest expenses 106,541 99,154 90,905 415,028 354,883
Income (loss) before income taxes 15,634 19,616 16,028 (159,323 ) 35,714
Income tax expense (845 ) (3,676 ) (1,493 ) (5,164 ) (5,932 )
Net income (loss) 14,789 15,940 14,535 (164,487 ) 29,782
Net income (loss) attributable to common stockholders 14,789 15,940 14,535 (164,487 ) 29,782
 
 
Per Common Share Results:
Net earnings (loss) per share basic $ 0.07 $ 0.08 $ 0.07 $ (0.80 ) $ 0.15
Net earnings (loss) per share diluted $ 0.07 $ 0.08 $ 0.07 $ (0.80 ) $ 0.14
Cash dividends declared $ - $ - $ - $ - $ -
Average shares outstanding 205,634 205,579 205,416 205,542 205,366
Average shares outstanding diluted 207,235 207,316 206,220 205,542 205,828
Book value per common share $ 5.57 $ 5.59 $ 6.89 $ 5.57 $ 6.89
Tangible book value per common share (1) $ 5.30 $ 5.32 $ 6.60 $ 5.30 $ 6.60
 
Selected Financial Ratios (In Percent):
 
Profitability:
Return on Average Assets 0.46 0.50 0.44 (1.28 ) 0.23
Interest Rate Spread (2) 4.22 4.15 3.70 4.01 3.41
Net Interest Margin (2) 4.40 4.34 3.94 4.21 3.68
Return on Average Total Equity 4.75 5.19 3.89 (12.39 ) 2.04
Return on Average Common Equity 5.01 5.47 4.06 (13.01 ) 2.14
Average Total Equity to Average Total Assets 9.76 9.68 11.35 10.36 11.24
Total capital 17.06 16.89 17.82 17.06 17.82
Tier 1 capital 15.78 15.61 16.51 15.78 16.51
Leverage 11.71 11.65 12.60 11.71 12.60
Tangible common equity ratio (1) 8.71 8.65 10.44 8.71 10.44
Tier 1 common equity to risk-weight assets (1) 12.72 12.55 13.61 12.72 13.61
Dividend payout ratio - - - - -
Efficiency ratio (3) 73.40 70.34 66.16 83.10 69.44
 
Asset Quality:
Allowance for loan and lease losses to loans held for investment 2.97 3.04 4.33 2.97 4.33
Net charge-offs (annualized) to average loans 1.10 1.41 1.59 4.01 (4 ) 1.74
Provision for loan and lease losses to net charge-offs 86.71 65.54 75.07 61.97 (5 ) 67.32
Non-performing assets to total assets 5.73 5.68 9.45 5.73 9.45
Non-performing loans held for investment to total loans held for investment 5.14 5.24 9.70 5.14 9.70
Allowance to total non-performing loans held for investment 57.69 58.06 44.63 57.69 44.63
Allowance to total non-performing loans held for investment excluding residential real estate loans
85.56 81.20 65.78 85.56 65.78
 
Other Information:
Common Stock Price: End of period $ 6.19 $ 5.68 $ 4.58 $ 6.19 $ 4.58
 
 
1- Non-GAAP measure. See pages 14-15 for GAAP to Non-GAAP reconciliations.

2- On a tax-equivalent basis and excluding fair value valuations (Non-GAAP measure). See page 5 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 1.68% for the year ended December 31, 2013.

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 69.47% for the year ended December 31, 2013.

Table 2 – Quarterly Statement of Average Interest-Earning Assets and Average Interest-Bearing Liabilities (On a Tax-Equivalent Basis and Excluding Valuations)

(Dollars in thousands)                
Average volume Interest income (1) / expense Average rate (1)
December 31, September 30, December 31, December 31, September 30, December 31, December 31, September 30, December 31,
Quarter ended 2013 2013 2012 2013 2013 2012 2013 2013 2012
 
Interest-earning assets:
Money market & other short-term investments $ 609,398 $ 639,285 $ 849,350 $ 433 $ 456 $ 607 0.28 % 0.28 % 0.28 %
Government obligations (2) 342,769 342,739 258,456 2,045 2,008 1,601 2.37 % 2.32 % 2.46 %
Mortgage-backed securities 1,737,331 1,705,745 1,429,292 16,908 14,847 10,584 3.86 % 3.45 % 2.95 %
FHLB stock 28,466 30,884 37,946 311 311 355 4.33 % 4.00 % 3.72 %
Equity securities   1,277   1,320   1,377   -   -   6 0.00 % 0.00 % 1.73 %
Total investments (3)   2,719,241   2,719,973   2,576,421   19,697   17,622   13,153 2.87 % 2.57 % 2.03 %
Residential mortgage loans 2,536,086 2,580,758 2,811,954 35,345 37,273 37,395 5.53 % 5.73 % 5.29 %
Construction loans 214,528 257,188 356,617 1,690 2,141 2,662 3.13 % 3.30 % 2.97 %
C&I and commercial mortgage loans 4,854,366 4,755,518 5,035,391 51,443 48,971 51,032 4.20 % 4.09 % 4.03 %
Finance leases 243,659 241,256 237,564 5,195 5,188 5,127 8.46 % 8.53 % 8.59 %
Consumer loans   1,816,374   1,804,892   1,758,282   54,087   55,196   56,705 11.81 % 12.13 % 12.83 %
Total loans (4) (5)   9,665,013   9,639,612   10,199,808   147,760   148,769   152,921 6.07 % 6.12 % 5.96 %
Total interest-earning assets $ 12,384,254 $ 12,359,585 $ 12,776,229 $ 167,457 $ 166,391 $ 166,074 5.36 % 5.34 % 5.17 %
 
Interest-bearing liabilities:
Brokered CDs $ 3,110,888 $ 3,149,417 $ 3,443,661 $ 7,686 $ 8,295 $ 13,883 0.98 % 1.04 % 1.60 %
Other interest-bearing deposits 5,907,094 5,773,400 5,614,308 13,186 13,158 14,202 0.89 % 0.90 % 1.01 %
Other borrowed funds 1,131,959 1,131,959 1,131,959 8,308 8,321 8,419 2.91 % 2.92 % 2.96 %
FHLB advances   300,730   355,016   510,940   851   1,524   2,920 1.12 % 1.70 % 2.27 %
Total interest-bearing liabilities (6) $ 10,450,671 $ 10,409,792 $ 10,700,868 $ 30,031 $ 31,298 $ 39,424 1.14 % 1.19 % 1.47 %
Net interest income $ 137,426 $ 135,093 $ 126,650
Interest rate spread 4.22 % 4.15 % 3.70 %
Net interest margin 4.40 % 4.34 % 3.94 %
 
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.
2- Government obligations include debt issued by government-sponsored agencies.
3- Unrealized gains and losses on available-for-sale securities are excluded from the average volumes.
4- Average loan balances include the average of total non-performing loans.
5- Interest income on loans includes $3.0 million, $3.7 million and $3.7 million for the quarters ended December 31, 2013, September 30, 2013, and December 31, 2012, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio.
6- Unrealized gains and losses on liabilities measured at fair value are excluded from the average volumes.

Table 3 – Year-To-Date Statement of Average Interest-Earning Assets and Average Interest-Bearing Liabilities (On a Tax-Equivalent Basis and Excluding Valuations)

(Dollars in thousands)            
Average volume Interest income (1) / expense Average rate (1)
December 31, December 31, December 31, December 31, December 31, December 31,
Year Ended 2013 2012 2013 2012 2013 2012
 
Interest-earning assets:
Money market & other short-term investments $ 684,074 $ 640,644 $ 1,927 $ 1,827 0.28 % 0.29 %
Government obligations (2) 338,571 555,364 7,892 9,839 2.33 % 1.77 %
Mortgage-backed securities 1,666,091 1,182,142 52,841 37,090 3.17 % 3.14 %
Corporate bonds - 1,204 - 76 0.00 % 6.31 %
FHLB stock 30,941 35,035 1,359 1,427 4.39 % 4.07 %
Equity securities   1,330   1,377   -   6 0.00 % 0.44 %
Total investments (3)   2,721,007   2,415,766   64,019   50,265 2.35 % 2.08 %
Residential mortgage loans 2,681,753 2,800,647 148,033 150,854 5.52 % 5.39 %
Construction loans 272,917 388,404 8,722 10,357 3.20 % 2.67 %
C&I and commercial mortgage loans 4,804,608 5,277,593 196,814 214,510 4.10 % 4.06 %
Finance leases 240,479 239,699 20,591 20,887 8.56 % 8.71 %
Consumer loans   1,799,402   1,561,085   220,089   196,293 12.23 % 12.57 %
Total loans (4) (5)   9,799,159   10,267,428   594,249   592,901 6.06 % 5.77 %
Total interest-earning assets $ 12,520,166 $ 12,683,194 $ 658,268 $ 643,166 5.26 % 5.07 %
 
Interest-bearing liabilities:
Brokered CDs $ 3,251,091 $ 3,488,312 $ 38,252 $ 66,854 1.18 % 1.92 %
Other interest-bearing deposits 5,782,501 5,566,240 53,535 61,405 0.93 % 1.10 %
Other borrowed funds 1,131,959 1,171,615 33,025 36,162 2.92 % 3.09 %
FHLB advances   357,661   404,033   6,031   12,142 1.69 % 3.01 %
Total interest-bearing liabilities (6) $ 10,523,212 $ 10,630,200 $ 130,843 $ 176,563 1.24 % 1.66 %
Net interest income $ 527,425 $ 466,603
Interest rate spread 4.01 % 3.41 %
Net interest margin 4.21 % 3.68 %
 
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.
2- Government obligations include debt issued by government-sponsored agencies.
3- Unrealized gains and losses on available-for-sale securities are excluded from the average volumes.
4- Average loan balances include the average of total non-performing loans.
5- Interest income on loans includes $13.8 million, and $12.7 million for the years ended December 31, 2013 and 2012, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio.
6- Unrealized gains and losses on liabilities measured at fair value are excluded from the average volumes.

Table 4 – Non-Interest Income

    Quarter Ended   Year Ended
December 31,   September 30,   December 31, December 31,   December 31,
(In thousands) 2013   2013   2012   2013   2012  
 
Service charges on deposit accounts $ 3,162 $ 3,157 $ 3,228 $ 12,797 $ 12,982
Mortgage banking activities 3,906 3,521 6,700 16,830 19,960
Insurance income 1,124 1,303 1,328 5,955 5,549
Broker-dealer income 97 - - 97 2,630
Branch consolidations - valuation adjustments fixed assets (529 ) - - - -
Other operating income   10,618     7,987     8,911     32,256     29,492  
 
Non-interest income before net loss on investments,
equity in loss of unconsolidated entity, and write-off
of collateral pledged to Lehman   18,378     15,968     20,167     67,935     70,613  
 
Proceeds from securities litigation settlement and other proceeds - - - - 36
OTTI on equity securities - - - (42 ) -
OTTI on debt securities   -     -     (69 )   (117 )   (2,002 )
Net loss on investments   -     -     (69 )   (159 )   (1,966 )
 
 
Impairment - collateral pledged to Lehman - - - (66,574 ) -
Equity in loss of unconsolidated entity   (5,893 )   (5,908 )   (8,330 )   (16,691 )   (19,256 )
$ 12,485   $ 10,060   $ 11,768   $ (15,489 ) $ 49,391  

Table 5 – Non-Interest Expenses

  Quarter Ended   Year Ended
December 31,   September 30,   December 31, December 31,   December 31,
(In thousands) 2013 2013 2012 2013 2012
 
Employees' compensation and benefits $ 31,062 $ 32,823 $ 31,840 $ 130,555 $ 125,610
Occupancy and equipment 15,229 15,134 14,972 60,379 61,037
Deposit insurance premium 10,495 10,479 11,897 43,921 47,523
Other insurance and supervisory fees 957 1,034 1,366 4,549 5,073
Taxes, other than income taxes 4,076 4,693 3,013 17,997 13,363
Professional fees:
Collections, appraisals and other credit related fees 2,198 2,780 1,127 9,422 4,945
Outsourcing technology services 4,202 4,338 1,557 14,144 6,797
Other professional fees 4,845 4,086 4,275 15,616 14,985
Credit and debit card processing expenses 4,869 2,682 2,490 12,909 6,005
Credit card processing platform conversion costs - 1,715 - 1,715 -
Branch consolidations and other restructuring expenses 892 - - 892 -
Business promotion 5,251 3,478 4,067 15,780 14,093
Communications 1,836 1,866 1,809 7,401 7,085
Net loss on REO operations 13,321 7,052 6,201 40,633 25,116
Secondary offering costs - 1,669 - 1,669 -
Terminated preferred stock exchange offer expenses - - - 1,333 -
Bulk sales expenses - - - 8,840 -
Loss contingency for attorneys' fees - Lehman litigation 2,500 - - 2,500 -
Other   4,808   5,325   6,291   24,773   23,251
Total $ 106,541 $ 99,154 $ 90,905 $ 415,028 $ 354,883

Table 6 – Selected Balance Sheet Data

     

(In thousands)

As of
December 31, September 30, December 31,
2013   2013   2012

Balance Sheet Data:

Loans, including loans held for sale $ 9,712,139 $ 9,623,226 $ 10,139,508
Allowance for loan and lease losses 285,858 289,379 435,414
Money market and investment securities 2,208,342 2,280,790 1,986,669
Intangible assets 54,866 56,386 60,944
Deferred tax asset, net 7,644 7,436 4,867
Total assets 12,656,925 12,787,450 13,099,741
Deposits 9,879,924 9,954,197 9,864,546
Borrowings 1,431,959 1,485,399 1,640,399
Total preferred equity 63,047 63,047 63,047
Total common equity 1,231,547 1,216,031 1,393,546
Accumulated other comprehensive income, net of tax (78,736 ) (58,485 ) 28,430
Total equity 1,215,858 1,220,593 1,485,023

Table 7 – Loan Portfolio

Composition of the loan portfolio including loans held for sale at period-end.

(In thousands)   As of
  December 31,   September 30,   December 31,
2013 2013 2012
 
Residential mortgage loans $ 2,549,008 $ 2,519,457 $ 2,747,217
 
Commercial loans:
Construction loans (1) 168,713 163,610 361,875
Commercial mortgage loans (1) 1,823,608 1,857,794 1,883,798
Commercial and Industrial loans (1) 2,788,250 2,663,793 2,793,157
Loans to local financial institutions collateralized by real estate mortgages   240,072   244,554   255,390
Commercial loans   5,020,643   4,929,751   5,294,220
 
Finance leases   245,323   243,553   236,926
 
Consumer loans   1,821,196   1,815,873   1,775,751
Loans held for investment 9,636,170 9,508,634 10,054,114
Loans held for sale   75,969   114,592   85,394
Total loans $ 9,712,139 $ 9,623,226 $ 10,139,508

(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 8 - Loan Portfolio by Geography        
(In thousands) As of December 31, 2013
  Puerto Rico Virgin Islands   United States   Consolidated
 
Residential mortgage loans $ 1,906,982 $ 348,816 $ 293,210 $ 2,549,008
 
Commercial loans:
Construction loans 105,830 33,744 29,139 168,713
Commercial mortgage loans 1,464,085 74,271 285,252 1,823,608
Commercial and Industrial loans 2,436,709 125,757 225,784 2,788,250
Loans to a local financial institution collateralized by real estate mortgages   240,072   -   -   240,072
Commercial loans   4,246,696   233,772   540,175   5,020,643
 
Finance leases   245,323   -   -   245,323
 
Consumer loans   1,739,478   49,689   32,029   1,821,196
Loans held for investment 8,138,479 632,277 865,414 9,636,170
 
Loans held for sale   35,394   40,575   -   75,969
Total loans $ 8,173,873 $ 672,852 $ 865,414 $ 9,712,139
 
(In thousands) As of September 30, 2013
Puerto Rico Virgin Islands   United States   Consolidated
 
Residential mortgage loans $ 1,883,682 $ 351,176 $ 284,599 $ 2,519,457
 
Commercial loans:
Construction loans 100,946 35,121 27,543 163,610
Commercial mortgage loans 1,471,657 75,199 310,938 1,857,794
Commercial and Industrial loans 2,388,848 105,847 169,098 2,663,793
Loans to a local financial institution collateralized by real estate mortgages   244,554   -   -   244,554
Commercial loans   4,206,005   216,167   507,579   4,929,751
 
Finance leases   243,553   -   -   243,553
 
Consumer loans   1,736,052   49,616   30,205   1,815,873
Loans held for investment 8,069,292 616,959 822,383 9,508,634
 
Loans held for sale   74,012   40,580   -   114,592
Total loans $ 8,143,304 $ 657,539 $ 822,383 $ 9,623,226

Table 9 – Non-Performing Assets

(Dollars in thousands) December 31,   September 30,   December 31,
  2013 2013 2012
Non-performing loans held for investment:
Residential mortgage $ 161,441 $ 142,002 $ 313,626
Commercial mortgage 120,107 127,374 214,780
Commercial and Industrial 114,833 127,584 230,090
Construction 58,866 64,241 178,190
Consumer and Finance leases   40,302     37,184     38,875  
Total non-performing loans held for investment   495,549     498,385     975,561  
 
REO 160,193 133,284 185,764
Other repossessed property 14,865 14,125 10,107
Other assets (1)   -     -     64,543  
Total non-performing assets, excluding loans held for sale $ 670,607 $ 645,794 $ 1,235,975
 
Non-performing loans held for sale   54,801     80,234     2,243  
Total non-performing assets, including loans held for sale (2) $ 725,408   $ 726,028   $ 1,238,218  
 
Past-due loans 90 days and still accruing $ 120,082 $ 127,735 $ 142,012
Allowance for loan and lease losses $ 285,858 $ 289,379 $ 435,414
Allowance to total non-performing loans held for investment 57.69 % 58.06 % 44.63 %
Allowance to total non-performing loans held for investment, excluding residential real estate loans 85.56 % 81.20 % 65.78 %
   

(1) Collateral pledged to Lehman Brothers, Inc.

(2) Amount excludes purchased credit impaired loans with a carrying value as of December 31, 2013 of approximately $4.8 million acquired as part of the credit card portfolio acquired from FIA.

Table 10 - Non-Performing Assets by Geography    
(In thousands) December 31, September 30, December 31,
  2013 2013 2012
Puerto Rico:
Non-performing loans held for investment:
Residential mortgage $ 139,771 $ 119,763 $ 281,086
Commercial mortgage 101,255 93,593 172,534
Commercial and Industrial 109,224 121,646 215,985
Construction 43,522 45,016 99,383
Finance leases 3,082 2,603 3,182
Consumer   34,660   31,547   32,529
Total non-performing loans held for investment   431,514   414,168   804,699
 
REO 123,851 104,574 145,683
Other repossessed property 14,806 14,037 10,070
Investment securities   -   -   64,543
Total non-performing assets, excluding loans held for sale $ 570,171 $ 532,779 $ 1,024,995
Non-performing loans held for sale   14,796   40,229   2,243
Total non-performing assets, including loans held for sale (1) $ 584,967 $ 573,008 $ 1,027,238
Past-due loans 90 days and still accruing $ 118,097 $ 123,848 $ 137,288
 
Virgin Islands:
Non-performing loans held for investment:
Residential mortgage $ 8,439 $ 8,821 $ 18,054
Commercial mortgage 6,827 8,136 11,232
Commercial and Industrial 5,609 5,938 12,905
Construction 11,214 15,063 72,648
Consumer   514   811   804
Total non-performing loans held for investment   32,603   38,769   115,643
 
REO 14,894 18,166 24,260
Other repossessed property   5   25   17
Total non-performing assets, excluding loans held for sale $ 47,502 $ 56,960 $ 139,920
Non-performing loans held for sale   40,005   40,005   -
Total non-performing assets, including loans held for sale $ 87,507 $ 96,965 $ 139,920
Past-due loans 90 days and still accruing $ 1,985 $ 3,887 $ 4,068
 
United States:
Non-performing loans held for investment:
Residential mortgage $ 13,231 $ 13,418 $ 14,486
Commercial mortgage 12,025 25,645 31,014
Commercial and Industrial - - 1,200
Construction 4,130 4,162 6,159
Consumer   2,046   2,223   2,360
Total non-performing loans held for investment   31,432   45,448   55,219
 
REO 21,448 10,544 15,821
Other repossessed property   54   63   20
Total non-performing assets, excluding loans held for sale $ 52,934 $ 56,055 $ 71,060
Non-performing loans held for sale   -   -   -
Total non-performing assets, including loans held for sale $ 52,934 $ 56,055 $ 71,060
Past-due loans 90 days and still accruing $ - $ - $ 656
 
(1 ) Amount excludes purchased credit impaired loans with a carrying value as of December 31, 2013 of approximately $4.8 million acquired as part of the credit card portfolio acquired from FIA.

Table 11 – Allowance for Loan and Lease Losses

  Quarter Ended   Year Ended
(Dollars in thousands) December 31,   September 30,   December 31, December 31, December 31,
2013 2013 2012 2013 2012
 
Allowance for loan and lease losses, beginning of period $ 289,379   $ 301,047   $ 445,531   $ 435,414 $ 493,917  
Provision for loan and lease losses   22,969     22,195     30,466     243,751 (1 )   120,499  
Net charge-offs of loans:
Residential mortgage (4,544 ) (8,457 ) (9,555 ) (127,999 ) (2 ) (36,855 )
Commercial mortgage 2,605 (5,918 ) (6,101 ) (62,602 ) (3 ) (20,968 )
Commercial and Industrial (9,146 ) (5,718 ) (12,601 ) (105,213 ) (4 ) (45,916 )
Construction (435 ) 71 (1,837 ) (41,247 ) (5 ) (40,741 )
Consumer and finance leases   (14,970 )   (13,841 )   (10,489 )   (56,246 )   (34,522 )
Net charge-offs   (26,490 )   (33,863 )   (40,583 )   (393,307 ) (6 )   (179,002 )
Allowance for loan and lease losses, end of period $ 285,858   $ 289,379   $ 435,414   $ 285,858 $ 435,414  
 
Allowance for loan and lease losses to period end total loans held for investment 2.97 % 3.04 % 4.33 % 2.97 % 4.33 %
Net charge-offs (annualized) to average loans outstanding during the period 1.10 % 1.41 % 1.59 % 4.01 % 1.74 %
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 1.10 % 1.41 % 1.59 % 1.68 % 1.74 %
Provision for loan and lease losses to net charge-offs during the period 0.87x 0.66x 0.75x 0.62x 0.67x
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 0.87x 0.66x 0.75x 0.69x 0.67x
(1) Includes provision of $132.0 million associated with the bulk sales and the transfer of loans to held for sale.
(2) Includes net charge-offs totaling $99.0 million associated with the bulk sales.
(3) 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.
(4) Includes net charge-offs totaling $44.7 million associated with the bulk sale of adversely classified commercial assets.
(5) Includes net charge-offs of $34.2 million associated with the bulk sales and the transfer of loans to held for sale.
(6) Includes net charge-offs of $232.4 million associated with the bulk sales and the transfer of loans to held for sale.

Table 12 – Net Charge-Offs to Average Loans

  Year ended
December 31,   December 31,   December 31,   December 31,   December 31,
2013 2012 2011 2010 2009
 
Residential mortgage 4.77% (1) 1.32% 1.32% 1.80% (6) 0.82%
 
Commercial mortgage 3.44% (2) 1.41% 3.21% 5.02% (7) 1.64%
 
Commercial and Industrial 3.52% (3) 1.21% 1.57% 2.16% (8) 0.72%
 
Construction 15.11% (4) 10.49% 16.33% 23.80% (9) 11.54%
 
Consumer and finance leases 2.76% 1.92% 2.33% 2.98% 3.05%
 
Total loans 4.01% (5) 1.74% 2.68% 4.76% (10) 2.48%
   
(1) Includes net charge-offs totaling $99.0 million associated with the bulk loan sales. The ratio of residential mortgage net charge-offs to average loans, excluding charge-offs associated with the bulk loan sales, was 1.13%.

(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 0.45%.

(3) 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 2.04%.

(4) Includes net charge-offs of $34.2 million associated with the bulk loan sales and the transfer of loans to held for sale. The ratio of construction loans net charge-offs to average loans, excluding charge-offs associated with the bulk loan sales and the transfer of loans to held for sale, was 2.91%.

(5) Includes net charge-offs of $232.4 million associated with the bulk loan sales and the transfer of loans to held for sale. The ratio of total net charge-offs to average loans, excluding charge-offs associated with the bulk loan sales and the transfer of loans to held for sale, was 1.68%.

(6) Includes net charge-offs totaling $7.8 million associated with non-performing residential mortgage loans sold in a bulk sale.
(7) Includes net charge-offs totaling $29.5 million associated with the transfer of loans to held for sale in the fourth quarter of 2010. The ratio of commercial mortgage net charge-offs to average loans, excluding charge-offs associated with the transfer of loans to held for sale, was 3.38%.
(8) Includes net charge-offs totaling $8.6 million associated with the transfer of loans to held for sale in the fourth quarter of 2010. The ratio of commercial and industrial net charge-offs to average loans, excluding charge-offs associated with the transfer of loans to held for sale, was 1.98%.

(9) Includes net charge-offs totaling $127.0 million associated with the transfer of loans to held for sale in the fourth quarter of 2010. The ratio of construction net charge-offs to average loans, excluding charge-offs associated with the transfer of loans to held for sale, was 18.93%.

(10) Includes net charge-offs totaling $165.1 million associated with the transfer of loans to held for sale in the fourth quarter of 2010. The ratio of total net charge-offs to average loans, excluding charge-offs associated with the transfer of loans to held for sale, was 3.60%.

Contacts

First BanCorp.
John B. Pelling III, 305-577-6000 Ext. 162
Investor Relations Officer
john.pelling@firstbankpr.com

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Contacts

First BanCorp.
John B. Pelling III, 305-577-6000 Ext. 162
Investor Relations Officer
john.pelling@firstbankpr.com