(Source: Business Wire)
First BanCorp (the "Corporation") (NYSE: FBP) today reported net income for the quarter ended March 31, 2009 of $21.9 million, compared to $33.6 million for the same quarter of 2008, a decrease of 35%. Total assets increased to $19.7 billion as of March 31, 2009 from $19.5 billion as of December 31, 2008. Total stockholders' equity amounted to $2.0 billion as of March 31, 2009, an increase of $429.1 million from December 31, 2008, mainly due to the previously announced $400 million investment by the United States Department of the Treasury (the "U.S. Treasury") in preferred stock of the Corporation. The Corporation's return on average assets (ROA) and return on average common equity (ROACE) for the first quarter of 2009 were 0.45% and 2.65%, respectively, compared to 0.77% and 10.63%, respectively, for the quarter ended March 31, 2008. The Corporation's tangible common equity ratio increased to 5.11% as of March 31, 2009 compared to 4.87% as of December 31, 2008. This press release should be read in conjunction with the accompanying tables (Exhibit A), which are an integral part of this press release.
Mr. Luis M. Beauchamp, Chairman and CEO of First BanCorp commented, "We are pleased to report a profitable first quarter for 2009 with net income of $21.9 million. In the face of adversity we continued focused on our core strategies to enhance the business, manage the quality of our assets and improve efficiency across all business lines and geographies. Opportunities continued to arise in all of our markets and the Corporation was able to increase its loan and deposit portfolios, grow in number of customers and contribute to the communities it serves."
Mr. Beauchamp continued, "The sustained deterioration of the local and mainland economies impacted the financial performance of the Corporation, as seen in the increases in our non-performing assets and credit losses. The Corporation continued to proactively manage the quality of its portfolios and adequacy of reserves as needed. As we confront the challenging economic scenario, First BanCorp has approximately $2 billion in capital, the largest capital position for the Corporation in its 60-year history, and presently enjoys approximately $740 million in capital above the regulatory minimum for total capital."
"Also, the Corporation will continue implementing its profit improvement strategies, which have already began to provide positive results, while taking advantage of market opportunities to strengthen our competitive position and improve our income generating capabilities," concluded Mr. Beauchamp.
First Quarter of 2009 Key Performance Highlights
Total loan portfolio reached $13.5 billion. During the quarter $1.3 billion in new loans were originated, including a $500 million loan facility extended to the Puerto Rico Sales Tax Financing Corp. (COFINA under its Spanish acronym), an instrumentality of the Government of Puerto Rico, compared to $1.0 billion in loan origination for the first quarter of 2008.
Mortgage loan production, including purchases, reached $132.9 million. During the first quarter of 2009, and for the first time in several years, the Corporation completed securitization of approximately $73 million of FHA/VA mortgage loans into GNMA MBS and approximately 52% of the residential mortgage loan originations in Puerto Rico during the first quarter of 2009 consisted of conforming mortgage loans.
Total deposits, excluding brokered certificates of deposit (CDs), increased to $4.7 billion, up $109.0 million or 2% from $4.6 billion as of December 31, 2008. Most of the increase in core deposit growth was achieved in Puerto Rico, the Corporation's main market, where at year end 2008 we had reached the second position in deposit market share (net of brokered CDs). During this quarter the Corporation launched CDARS (Certificate of Deposit Account Registry Service) a highly attractive product that provides FDIC insurance for up to $50 million.
Total stockholders' equity of $2.0 billion, an increase of $429.1 million since December 31, 2008, mainly due to the $400 million investment by the U.S. Treasury in preferred stock of the Corporation under the Capital Purchase Program ("CPP").
Net interest income of $121.6 million, down $2.9 million or 2%, compared to $124.5 million for the first quarter of 2008.
Credit Quality:
Non-performing assets of $773.5 million, up $136.3 million since December 31, 2008 of which $315.4 million are residential mortgage loans;
Provision for loan and lease losses of $59.4 million, up $13.6 million, or 30%, from $45.8 million for the first quarter of 2008;
Net loan and lease charge-offs increased 51% to $38.4 million from $25.5 million for the same period a year ago and total credit losses (equal to net gains and losses on Real Estate Owned (REO) operations plus net charge-offs) increased 52% to $43.8 million from $28.7 million for the first quarter of 2008;
Net loan and lease charge-offs and non-performing assets of the consumer portfolio have begun to show improvements as evidenced by a decrease of 20% and 16% respectively when compared to the previous trailing quarter.
Gain on sale of investments (mainly U.S. sponsored agency mortgage-backed securities (MBS)) of $17.8 million, compared to a gain on sale of investments of $6.9 million for the first quarter of 2008.
Non-interest expenses of $84.5 million, up $2.3 million or 3%, compared to $82.2 million for the first quarter of 2008. Excluding the non-controllable increase of 7 basis points to the deposit insurance assessment rate, or $2.5 million increase, and the increase in losses on REO operations of $2.1 million, non-interest expenses decreased by $2.3 million, or 3%, compared to the first quarter of 2008.
Income tax benefit of $14.2 million, compared to a benefit of $7.7 million for the first quarter of 2008.
FIRST QUARTER FINANCIAL REVIEW
Net Interest Income
First Quarter of 2009 compared to First Quarter of 2008
Net interest income decreased 2% to $121.6 million for the first quarter of 2009, from $124.5 million in the first quarter of 2008. Net interest income was adversely impacted by lower loan yields, resulting from a significant increase in non-accrual loans and from the repricing of variable-rate construction and commercial loans tied to short-term indexes. Net interest margin on a tax-equivalent basis decreased from 3.09% for the first quarter of 2008 to 2.85% for the first quarter of 2009. Lower loan yields more than offset the benefit of lower short-term rates in the average cost of funding and the increase in average interest-earning assets. The weighted-average yield on loans on a tax-equivalent basis decreased from 7.33% to 5.77%. The target for the Federal Funds rate was lowered between 400 and 425 basis points from December 31, 2007 to March 31, 2009 and the Prime Rate dropped to 3.25% from 7.25% as of December 31, 2007. The Corporation's balance sheet moved modestly into an asset sensitive position, exacerbated by the significant increase of over $300 million in non-performing assets since March 2008, (refer to Non-Performing Assets discussion below) and the high level of MBS prepayments. The effect of lower short-term rates on the Corporation's average cost of funds was partially mitigated by interest risk management strategies implemented by the Corporation, in particular during the second half of 2008, to reduce its exposure to high levels of market volatility by, among other things, entering into long-term and structured repurchase agreements, which replaced short-term borrowings. The increase in average earning assets was mainly driven by the increase on the Corporation's commercial and residential mortgage loan portfolio. The Corporation is currently originating loans and renegotiating existing ones at higher credit spreads to account for inherent risks in the current economy. Such actions will positively impact net interest income going forward.
First Quarter of 2009 compared to Fourth Quarter of 2008 (Trailing Quarter Comparison)
Net interest income was $121.6 million for the first quarter of 2009, a decrease of $2.6 million compared to the fourth quarter of 2008. Net interest income includes a net unrealized gain of $3.6 million for the first quarter of 2009, compared to a net unrealized loss of $5.3 million for the fourth quarter of 2008, related to the fair value of derivative instruments and financial liabilities elected to be measured at fair value under SFAS No. 159 ("SFAS 159 liabilities"). Compression in net interest margin was observed in the first quarter of 2009, compared to the previous trailing quarter ended on December 31, 2008, in connection with lower yields on the Corporation's interest-earning assets that more than offset the decrease in the average cost of funds. The repricing of floating-rate commercial and construction loans at lower rates, the significant increase in non-accrual loans and the acceleration of mortgage-backed securities prepayments adversely impacted the Corporation's net interest margin. The average yield on the Corporation's loan portfolio on a tax-equivalent basis decreased to 5.77% for the first quarter of 2009 from 6.57% for the previous trailing quarter mainly driven by the repricing of floating-rate loans tied to short-term indexes. The adverse impact of lower loan yields was partially offset by a decrease in the average cost of funding attributable to the refinancing of brokered CDs, that matured or were called during 2009, with alternate sources of funding at a lower cost and, to a lesser extent, the use of available liquidity to pay-down maturing borrowings. Approximately $2.7 billion of brokered CDs matured or were called during the first quarter of 2009, of which approximately $1.4 billion were replaced with advances from the Federal Home Loan Bank (FHLB) and from the Federal Reserve Bank (FED) to decrease interest expense and improve the matching with current loan yields. The volume of swapped-to-floating brokered CDs decreased in 2009 from $1.1 billion at the beginning of the year to $318 million as of March 31, 2009. In the first quarter of 2009, the Corporation received approval to participate in the Borrower-in-Custody Program ("BIC") of the FED. Through the BIC program, a broad range of loans (including commercial, consumer and mortgages) may be pledged as collateral for borrowings through the FED Discount Window and the Corporation has increased its use of this low-cost source of funding. As of March 31, 2009, the Corporation had approximately $1.9 billion on assets pledged at the FED through the BIC program. Also, the current low interest rate levels made available short-term brokered CD rates with lower spreads over LIBOR rates, as reflected in the $1.2 billion of new brokered CDs issued in the latter part of the first quarter of 2009 at an average rate of 0.72%, which contributed to the overall decrease in the cost of funding.
MBS prepayments have accelerated as a result of low interest rates on mortgages, and are expected to continue to occur at high levels for the upcoming months because the U.S. Government's economic recovery plan includes measures designed to facilitate mortgage re-financings. This scenario presents an additional challenge for the Corporation since the current interest rate environment may require the reinvestment of proceeds at lower prevailing rates. In response to high prepayment expectations, during the first quarter of 2009 the Corporation began to restructure its investment portfolio, completing the sale of approximately $423 million in investment securities (mainly U.S. agency MBS), taking advantage of the surge in MBS prices and realizing gains in the process (refer to "Non-interest income" discussion below). Proceeds from the sale and prepayments of MBS, as well as proceeds from the $220 million U.S. agency debentures called during the quarter, were reinvested in part in U.S. agency callable debentures with contractual maturities ranging from two to three years (approximately $490 million) and U.S. agency floating-rate collateral-mortgage obligations (approximately $125 million). Also, during the first quarter of 2009, the Corporation began and completed the securitization of approximately $73 million of FHA/VA mortgage loans into GNMA MBS, of which approximately $25 million were sold before the end of the first quarter with the remaining portion retained as part of the investment portfolio.
Non-Interest Income
Non-interest income increased to $30.1 million for the first quarter of 2009 from $19.4 million for the fourth quarter of 2008, and from $29.4 million for the first quarter of 2008. These variances are mainly related to the sale of investment securities, including a realized gain of $17.8 million on the sale of certain investments (mainly U.S. sponsored agency fixed-rate MBS) during the first quarter of 2009, compared to a realized gain of $11.0 million recorded in the fourth quarter of 2008 and a realized gain of $6.9 million for the first quarter of 2008. During the first quarter of 2009, the Corporation sold approximately $423 million in investment securities (mainly U.S. agency MBS). As the U.S. Government continues to engineer an economic recovery plan, some of the tactics include measures designed to facilitate and spur mortgage re-financings. Part of the objective is to allow homeowners to avoid foreclosures, but, as a result, mortgage-backed bondholders would experience a sharp increase in the prepayment of their securities, albeit at a price of par.
It is widely anticipated that a high prepayment scenario will prevail through the rest of the year. As an example, early in the year such expectations translated to a constant prepayment rate (CPR) of over 40% in 2009 for FNMA 5.50% 30-year residential pass-through securities. Given the outlook, and the fact that certain available-for-sale securities were trading at a substantial premium over par, the Corporation began, and has continued in the second quarter, to re-structure its investment portfolio, which has resulted in the realization of gains on sales in the process rather than getting them pre-paid at par.
In addition, lower other-than-temporary impairment charges were recorded during the first quarter of 2009 ($0.4 million for certain equity securities), as compared to other-than-temporary impairment charges of $4.8 million for the fourth quarter of 2008 that were mainly related to auto industry corporate bonds and certain equity securities. No other-than-temporary impairment charges were recorded in the first quarter of 2008. The Corporation's remaining exposure to auto industry corporate bonds as of March 31, 2009 amounted to $1.5 million, while the exposure to equity securities (other than FHLB stock) was approximately $1.8 million.
The impact of realized gains on sale of MBS securities was partially offset, when compared to the first quarter of 2008, by the $9.3 million gain on the mandatory redemption of a portion of the Corporation's investment in VISA as part of VISA's Initial Public Offering (IPO) in March 2008. Also, there was a decrease of $0.2 million, as compared to the first quarter of 2008, in service charges on deposit accounts mainly due to a lower volume of transactions in response to the current economic environment that influence customers' behavior.
Non-Interest Expenses
First Quarter of 2009 compared to First Quarter of 2008
Non-interest expenses increased to $84.5 million from $82.2 million for the first quarter of 2008. The increase was driven primarily by a 7 basis points increase in the FDIC deposit insurance premium, which is a non-controllable expense, and by higher losses in REO operations, driven by a higher inventory and declining real estate prices, that have caused write-downs of the value of repossessed properties. However, the Corporation had decreases in its ordinary operating expenses, including a $1.9 million decrease in professional service fees, a decrease of $1.1 million in business promotion expenses and a decrease of $2.1 million in employees' compensation and benefit expenses, as the Corporation continues with cost reduction efforts.
The increase in the regular assessment rate imposed by the FDIC for the first quarter of 2009 resulted in approximately a $2.5 million increase in the deposit insurance premium expense. An emergency special assessment of 20 cents per $100 insured deposits was approved by the FDIC during the first quarter of 2009, for collection by the FDIC in the third quarter of 2009, based on applicable deposits balance as of June 30, 2009. The Corporation's estimated charge of $24.8 million for this special assessment will be accrued during the second quarter of 2009 when the assessment becomes effective. The FDIC is considering halving the emergency fee to 10 cents per $100 insured deposits, from the 20 cents per $100 insured deposits approved in February 2009.
Also contributing to higher non-interest expenses was a $3.7 million impairment of the core deposit intangible of FirstBank Florida. The core deposit intangible represents the value of the premium paid to acquire core deposits of an institution. Upon the acquisition of FirstBank Florida in 2005, the Corporation recorded a core deposit intangible of $17.3 million. The amortized book value of $11.7 million was evaluated and, the evaluation calculated an estimated value of $8.0 million, under SFAS No. 144. This non-cash impairment charge, attributed to decreases in the base of core deposits acquired, does not affect the Corporation's cash balances, liquidity or operations. Moreover, the charge will not have a negative impact on the Corporation's tangible capital and regulatory capital ratios.
First Quarter of 2009 compared to Fourth Quarter of 2008 (Trailing Quarter Comparison)
Non-interest expenses decreased to $84.5 million for the first quarter of 2009 from $87.0 million for the previous trailing quarter. The decrease was driven by a lower loss in REO operations for the first quarter of 2009, as compared to the previous trailing quarter, reflecting the impact in the previous quarter of a $5.3 million write-down in the value of the last remaining foreclosed condo-conversion project in the U.S. mainland. The Corporation expects to complete the sale of this property during the second quarter of 2009. A decrease was also observed in electricity and occupancy-related expenses, as well as in business promotion expenses. The Corporation has been able to continue the growth of its operations without incurring substantial additional operating expenses. Partially offsetting these factors was the non-controllable increase in the deposit insurance premium expense and the core deposit intangible impairment recorded in the first quarter of 2009, as discussed above. The Corporation is committed to its business rationalization program that includes cost-cutting initiatives, which are being reflected in lower expenses and an efficiency ratio of 56%, down from 61% for the fourth quarter of 2008. Refer to Table 4 of accompanying Exhibit A for additional details.
