First BanCorp. Announces Earnings for the Quarter Ended June 30, 2016

SAN JUAN, Puerto Rico--(BUSINESS WIRE)--First BanCorp. (the “Corporation”) (NYSE: FBP), the bank holding company for FirstBank Puerto Rico (“FirstBank” or “the Bank”), today reported net income of $22.0 million for the second quarter of 2016, or $0.10 per diluted share, compared to $23.3 million, or $0.11 per diluted share, for the first quarter of 2016 and a net loss of $34.1 million, or $0.16 per diluted share, for the second quarter of 2015.

The financial results included the following items that management believes are not reflective of core operating performance or that are not expected to reoccur with any regularity or reoccur at uncertain times and amounts:

• OTTI losses on debt securities, primarily Puerto Rico Government debt securities, of $6.7 million and $13.1 million in the first quarter of 2016 and the second quarter of 2015, respectively. No tax benefit was recognized for the OTTI charges.
• Gain of $4.2 million on the repurchase and cancellation of trust preferred securities in the first quarter of 2016. The gain, realized at the holding company level, has no effect on the income tax expense in 2016.
• Loss of $48.7 million ($29.7 million after-tax) on a bulk sale of assets in the second quarter of 2015, mostly comprised of non-performing and adversely classified commercial loans, including transaction expenses. A $19.0 million tax benefit related to this transaction was recorded in the second quarter of 2015.
• Costs of $2.6 million ($1.6 million after-tax) in the second quarter of 2015 related to the conversion of loan and deposit accounts acquired from Doral Bank to the FirstBank systems. A $1.0 million tax benefit associated with these costs was recorded in the second quarter of 2015.

The following table reconciles for the second and first quarters of 2016, and the second quarter of 2015, the reported net income to adjusted net income, a non-GAAP financial measure that excludes items that management believes are not reflective of core operating performance or that are not expected to reoccur with any regularity or reoccur at uncertain times and amounts:

Aurelio Alemán, President and Chief Executive Officer of First BanCorp., commented: “We posted $22.0 million of net income, or $0.10 per diluted share, compared to $23.3 million in the first quarter. Our adjusted pre-tax pre-provision income was $50.5 million, down slightly from the first quarter. Our tangible book value increased $0.17 to $7.83 per share. The passing of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) late in the second quarter by U.S. Congress is a positive step toward reducing the uncertainty that has clouded our market over a prolonged period. We are optimistic that PROMESA will provide a more stable and constructive framework for dealing with the Puerto Rico debt restructuring and economic challenges still ahead of us.

"The franchise continues to perform strong in spite of macro challenges, with improved loan origination and renewal volume in all loan categories and in all of our regions. Puerto Rico core deposits grew slightly by $11.2 million while overall core deposits remained relatively flat compared to the first quarter, we also reduced our reliance on brokered CDs by $197 million during the quarter. We continue to work hard, in light of tightened credit risk appetite, to sustain our loan portfolio, which closed the quarter at $8.9 billion. Ongoing focus on efficiency efforts has resulted in reduced expenses this quarter, down $3.5 million and below $90 million for the first time since 2012, compensating for the top line revenue reduction. We experienced a $19 million increase in non-performing assets due to a large commercial relationship in Puerto Rico that was moved to nonaccrual status. Despite this migration, early stage delinquencies were down 13% and adversely classified assets declined this quarter. Our team remains focused on sustaining our balance sheet and driving bottom line results as we continue navigating a challenging economic environment.”

This press release includes certain non-GAAP financial measures, including adjusted net income, adjusted non-interest income, adjusted pre-tax, pre-provision income, adjusted net interest income and margin, certain capital ratios, and certain other financial measures that exclude the effect of OTTI charges in debt securities in the first quarter of 2016 and second quarter of 2015, the gain on the repurchase and cancellation of $10 million of trust preferred securities in the first quarter of 2016, the loss on the bulk sale of assets in the second quarter of 2015, and conversion costs in the second quarter of 2015 associated with loans and deposits acquired from Doral Bank, and should be read in conjunction with the discussion below in “Basis of Presentation – Use of Non-GAAP Financial Measures” and the accompanying tables (Exhibit A), which are an integral part of this press release.

INCOME BEFORE INCOME TAXES AND RECONCILIATION TO ADJUSTED PRE-TAX, PRE-PROVISION INCOME

Income before income taxes for the second quarter of 2016 amounted to $29.5 million compared to $29.1 million for the first quarter of 2016. The following table reconciles income before income taxes to adjusted pre-tax, pre-provision income for the last five quarters. Adjusted pre-tax, pre-provision income for the second quarter of 2016 amounted to $50.5 million, down $2.1 million from the first quarter of 2016:

Adjusted pre-tax, pre-provision income is a non-GAAP financial measure that management believes is useful to investors in analyzing the Corporation’s performance and trends. This metric is income before income taxes adjusted to exclude the provision for loan and lease losses, gains or losses on sales of investment securities and impairments, and fair value adjustments on derivatives. In addition, from time to time, earnings are adjusted also for items that management believes are not reflective of core operating performance or that are not expected to reoccur with any regularity or reoccur at uncertain times and amounts (for additional information about this non-GAAP financial measure, see Basis of Presentation - Adjusted Pre-Tax, Pre-Provision Income).

NET INTEREST INCOME

Net interest income, excluding fair value adjustments on derivatives (“valuations”), and net interest income on a tax-equivalent basis are non-GAAP financial 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 for the last five quarters. 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.

Net interest income for the second quarter of 2016 amounted to $120.2 million, a decrease of $4.4 million when compared to net interest income of $124.6 million for the first quarter of 2016. The decrease in net interest income was mainly due to:

• A $3.0 million decrease in interest income on loans driven by:
  • A $1.9 million decrease in interest income on commercial and construction loans mainly due to a decline of $71.4 million in the average balance of these portfolios that resulted in a decrease of approximately $0.7 million in interest income, lower repayments that resulted in a $0.7 million decrease in prepayment penalties and deferred fees amortization, and the adverse variance of large commercial relationships moved to non-performing status over the last two quarters.
  • A $0.9 million decrease in interest income on consumer loans mainly attributable to a $40.3 million reduction in the average balance, primarily auto loans.
  • A $0.2 million decrease in interest income on residential mortgage loans primarily attributable to a $13.8 million decrease in the average volume of loans.
• A $1.1 million decrease in interest income on investment securities mainly due to accelerated prepayments on U.S. agency MBS that resulted in a $1.4 million increase in the premium amortization expense, partially offset by discount accretions of approximately $0.5 million related to $61.3 million of U.S. agencies debt securities called prior to maturity. The yield on the benchmark 10-year U.S. Treasury note fell as low as 1.44% in the second quarter of 2016 compared to the lowest observed yield in the first quarter of 1.66%
  
• A $0.3 million decrease in net interest income as a result of $200 million in reverse repurchase agreements that were called in April 2016, prior to maturity. The cash proceeds from the prepayment were deposited in the Federal Reserve Bank and were reinvested in lower rate reverse repurchase agreements at the end of May. These agreements are offset in the statement of financial condition against the balance of repurchase agreements.

Net interest margin was 4.01%, down 17 basis points from first quarter of 2016. The decline was primarily driven by higher levels of liquidity maintained during the second quarter of 2016, derived from loan repayments and the timing difference between the early repayment of $200 million of reverse repurchase agreements and its reinvestment, the reduced income on investment securities, the decrease in commercial loan fees, and the adverse impact of large commercial relationships moved to non-performing status over the last two quarters.

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses for the second quarter of 2016 was $21.0 million compared to $21.1 million for the first quarter of 2016, a decrease of $0.1 million driven by the following variances:

• A $4.0 million decrease in the provision for commercial and construction loans mainly due to the upgrade in classification of certain loans as result of an improved financial condition of the borrowers, lower net charge-offs, and the overall decrease in the size of these portfolios, including the effect of financing arrangements with Puerto Rico municipalities issued in bond form, previously classified as loans, that are now accounted as held-to-maturity investment securities. See Statement of Financial Condition – Exposure to Puerto Rico Government below for additional information about this revision.
• A $1.3 million decrease in the provision for consumer loans driven by improvements in historical charge-off trends on auto loans and the decrease in size of this portfolio.

Partially offset by:

• A $5.2 million increase in the provision for residential mortgage loans primarily reflecting revisions to the quarterly home price index for Puerto Rico published by the Federal Housing Finance Agency used as the basis for the estimated value of the underlying collateral of the portfolio for purposes of determining the general reserve and higher net charge-offs resulting from updated appraisals for loans evaluated for impairment based on delinquency and loan-to-value levels. In addition, charges to the provision for purchased-credit impaired loans increased by $1.7 million.

See Credit Quality below for additional information regarding the allowance for loan and lease losses, including variances in net charge-offs.

NON-INTEREST INCOME

Non-interest income for the second quarter of 2016 amounted to $19.8 million, compared to $18.5 million for the first quarter of 2016, an increase primarily related to the $2.5 million net impact in the previous quarter of OTTI charges on debt securities of $6.7 million and the $4.2 million gain on the repurchase and cancellation of trust preferred securities.

On a non-GAAP basis, excluding the effect of OTTI losses and the gain on the repurchase and cancellation of trust preferred securities, the non-interest income of $19.8 million for the second quarter of 2016 decreased $1.2 million compared to adjusted non-interest income of $21.0 million for the first quarter of 2016. The $1.2 million decrease in adjusted non-interest income was primarily due to:

• A $1.7 million decrease in insurance commissions’ income, included as part of “Other operating income” in the table above, primarily reflecting seasonal contingent commissions received in the first quarter by the insurance agency based on the prior year’s production of insurance policies.

Partially offset by:

• A $0.6 million net gain on the sale of fixed assets, included as part of “Other operating income” in the table above, primarily related to a real estate property sold in the Virgin Islands.

NON-INTEREST EXPENSES

Non-interest expenses in the second quarter of 2016 amounted to $89.5 million, a decrease of $3.5 million from $93.0 million for the first quarter of 2016. The main drivers of the decrease were:

• A $1.1 million decrease in occupancy and equipment costs, including reductions in repairs, electricity, rental and depreciation expenses.

• A $1.0 million decrease in employees’ compensation and benefits expense reflecting a decrease of approximately $1.0 million in payroll taxes and bonus accruals, which were seasonally elevated in the first quarter, and a $0.9 million decrease in incentive-based compensation based on lower production levels. These reductions were partially offset by salary merit increases that became effective early in the second quarter that resulted in an increase of approximately $0.6 million (including $0.1 million of lump-sum payments), a $0.2 million increase in stock-based compensation, and, to a lesser extent, a higher headcount in the Florida region.
• A $1.6 million decrease in “Other” expenses in the table above, primarily reflecting a $0.5 million decrease in write-downs to the value of repossessed boats and the impact in the previous quarter of a $0.9 million charge to the provision for unfunded loan commitments related to a floor plan revolving line of credit.

Partially offset by:

• A $0.6 million increase in total professional service fees, including a $0.5 million increase in expenses related to troubled loans resolution and collection efforts and mortgage appraisals.

INCOME TAXES

The Corporation recorded an income tax expense for the second quarter of 2016 of $7.5 million compared to $5.7 million for the first quarter of 2016. As of June 30, 2016, the Corporation had a net deferred tax asset of $299.3 million (net of a valuation allowance of $198.2 million, including a valuation allowance of $173.1 million against the deferred tax assets of the Corporation’s banking subsidiary, FirstBank).

CREDIT QUALITY

Non-Performing Assets

Variances in credit quality metrics:

• Total non-performing assets increased by $19.0 million to $756.2 million as of June 30, 2016, compared to $737.2 million as of March 31, 2016. Total non-performing loans, including non-performing loans held for sale, increased by $23.3 million from $583.0 million as of the end of the first quarter of 2016 to $606.3 million as of June 30, 2016. The increase in non-performing assets was primarily attributable to the inflow to non-performing status of a $35.0 million commercial relationship in the Puerto Rico region, consisting of a $14.3 million commercial and industrial loan and a $20.7 million commercial mortgage loan. The increase in the non-performing commercial portfolios was partially offset by an $8.5 million decrease in non-performing residential mortgage loans, primarily in the Puerto Rico region.

• Inflows to non-performing loans held for investment were $78.0 million, a decrease of $99.3 million, compared to inflows of $177.3 million in the first quarter of 2016 that included the $128.6 million exposure to loans guaranteed by the TDF. Excluding the aforementioned $128.6 million exposure to commercial loans guaranteed by the TDF, total inflows in the second quarter were $29.3 million higher than the first quarter of 2016 driven by the aforementioned $35.0 million commercial relationship partially offset by lower inflows in the residential mortgage loan portfolio.

• Adversely classified commercial and construction loans held for investment decreased by $2.4 million to $566.8 million as of June 30, 2016.
• The OREO balance decreased by $3.7 million, driven by adjustments to the OREO value of $5.6 million and sales of $11.0 million, partially offset by additions of $12.9 million in the second quarter of 2016.
• Total troubled debt restructuring (“TDR”) loans held for investment were $671.1 million as of June 30, 2016, up $12.0 million from March 31, 2016. Approximately $421.0 million of total TDR loans held for investment were in accrual status as of June 30, 2016.

Allowance for Loan and Lease Losses

The following table sets forth information concerning the allowance for loan and lease losses during the periods indicated:

• The ratio of the allowance for loan and lease losses to total loans held for investment remained relatively flat at 2.64% as of June 30, 2016 compared to 2.65% as of March 31, 2016. The ratio of the total allowance to non-performing loans held for investment was 39.19% as of June 30, 2016 compared to 41.42% as of March 31, 2016 reflecting the migration to non-performing of the aforementioned $35.0 million commercial relationship.

The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of June 30, 2016 and March 31, 2016 by loan category and by whether the allowance and related provisions were calculated individually for impairment purposes or through a general valuation allowance:

Net Charge-Offs

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

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 second quarter of 2016 were $24.7 million, or an annualized 1.11% of average loans, compared to $23.6 million, or an annualized 1.05% of average loans, in the first quarter of 2016. The increase of $1.1 million was mainly related to:

• A $3.7 million increase in residential mortgage loan net charge-offs, primarily resulting from updated appraisals for loans evaluated for impairment based on delinquency and loan-to-value levels.

Partially offset by:

• A $1.6 million decrease in consumer loan net charge-offs, primarily related to auto and credit cards.
• A $1.1 million decrease in commercial and construction loan net charge-offs, reflecting a decrease of $2.2 million in the commercial and industrial net charge-offs, partially offset by a $0.9 million increase in commercial mortgage net charge-offs.

STATEMENT OF FINANCIAL CONDITION

Total assets were approximately $12.5 billion as of June 30, 2016, down $205.7 million from March 31, 2016.

The decrease was mainly due to:

• A $198.9 million decrease in cash and cash equivalents primarily related to liquidity used to redeem maturing brokered CDs and to purchase investment securities, as further explained below.
• A $99.2 million decrease in total loans primarily reflecting a $58.0 million decrease in commercial and construction loans and a $34.2 million decrease in consumer loans. The decrease in commercial loans includes reductions of $49.3 million, $7.0 million and $1.7 million in the Puerto Rico, Virgin Islands and Florida regions, respectively. The largest individual commercial loan repayments in the quarter were in the Florida region, including $51.0 million associated with four commercial relationships, partially offset by new loan originations in the second quarter.

Total loan originations, including refinancings, renewals, and draws from existing revolving and non-revolving commitments, amounted to approximately $712.8 million, compared to $645.4 million in the first quarter of 2016. These figures exclude the credit card utilization activity. Commercial and construction loan originations increased by $39.7 million to $388.0 million in the second quarter of 2016 from $348.3 million in the first quarter of 2016. Residential mortgage loan origination and purchases increased by $28.6 million to $192.8 million in the second quarter of 2016 compared to $164.2 million in the first quarter of 2016.

Partially offset by:

• A $98.9 million increase in investment securities driven by:
  • Purchases of approximately $207.5 million of debt securities issued by U.S. agencies with an aggregate average yield of 1.13%, including: (i) $115.8 million of U.S. agencies callable debentures, (ii) $19.9 million of U.S. agencies commercial mortgage-backed securities, (iii) $31.9 million of SBA Guarantee Pool certificates, and (iv) $39.9 million of collateralized mortgage obligations issued by GNMA.
  • A $13.9 million increase in the fair value of investment securities available for sale.

Partially offset by:

• U.S. agencies debt securities called prior to its scheduled maturity amounting to $61.3 million.
• U.S. agencies MBS prepayments of approximately $58.1 million.

Total liabilities were approximately $10.7 billion as of June 30, 2016, down $243.0 million from March 31, 2016.

The decrease was mainly due to:

• A $197.2 million decrease in brokered CDs. The Corporation redeemed in the second quarter approximately $280.0 million of maturing brokered CDs with an all-in cost of 0.97%, partially offset by issuances of approximately $82.2 million with an all-in cost of 1.01%.
• A $37.4 million decrease in deposits, excluding government deposits and brokered CDs, including reductions of $29.4 million and $19.2 million in the regions of Virgin Islands and Florida, respectively, partially offset by an $11.2 million increase in the Puerto Rico region.
• A $33.2 million decrease in accounts payable and other liabilities primarily reflecting the payment of interest on trust preferred securities amounting to $31.2 million that represents the aggregate amount of quarterly payments deferred and accrued since March 2012 through March 31, 2016 plus the interest for the second quarter of 2016.

Partially offset by:

• A $24.8 million increase in government deposits, including an increase of $40.9 million in Puerto Rico, partially offset by a $16.1 million decrease in the Virgin Islands.

Total stockholders’ equity amounted to $1.8 billion as of June 30, 2016, an increase of $37.3 million from March 31, 2016, mainly driven by:

• An increase of $13.9 million in the fair value of available-for-sale securities recorded as part of other comprehensive income primarily reflecting an $11.3 million increase in the fair value of U.S. agency MBS and debt securities and a $2.1 million increase in the fair value of Puerto Rico government obligations.
• The net income of $22.0 million reported in the second quarter.

The Corporation’s common equity tier 1 capital, tier 1 capital, total capital and leverage ratios under the Basel III rules as of June 30, 2016 were 17.12%, 17.12%, 20.72% and 12.34%, respectively, compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 16.60%, 16.60%, 20.17%, and 12.20%, respectively, as of the end of the first quarter of 2016.

Meanwhile, the common equity tier 1 capital, tier 1 capital, total capital and leverage ratios as of June 30, 2016 of our banking subsidiary, FirstBank Puerto Rico, were 16.32%, 18.91%, 20.19%, and 13.65%, respectively, compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 16.15%, 18.70%, 19.97% and 13.75%, respectively, as of the end of the first quarter of 2016. The increase in the capital ratios of the bank subsidiary reflects the effect of a lower level of risk-weighted assets, driven by reductions in commercial and consumer loans, and earnings generated in the second quarter, partially offset by a dividend payment of $31.2 million made to the holding company for the aforementioned payment of interest on trust preferred securities.

Tangible Common Equity

The Corporation’s tangible common equity ratio increased to 13.65% as of June 30, 2016 from 13.13% as of March 31, 2016.

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:

Exposure to Puerto Rico Government

As of June 30, 2016, the Corporation had $336.5 million of direct exposure to the Puerto Rico Government, its municipalities and public corporations, compared to $340.5 million as of March 31, 2016. Approximately $197.8 million of the exposure consisted of loans and obligations of municipalities in Puerto Rico which are supported by assigned property tax revenues and for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Approximately $9.7 million consisted of loans to units of the central government, and approximately $92.3 million ($85.6 million book value) consisted of loans to public corporations, including the direct exposure to the Puerto Rico Electric Power Authority (“PREPA”) with a book value of $68.3 million as of June 30, 2016. The Corporation’s total direct exposure also includes obligations of the Puerto Rico Government with an amortized cost of $43.4 million as part of its available-for-sale investment securities portfolio, net of $22.2 million in cumulative other-than-temporary credit impairment charges, and recorded on its books at a fair value of $28.5 million as of June 30, 2016 (fair value of $26.4 million as of March 31, 2016).

In addition, the Corporation had financings to the hotel industry in Puerto Rico guaranteed by the TDF with a book value of $127.3 million as of June 30, 2016, down $1.2 million, compared to $128.6 million as of March 31, 2016. As previously reported the Corporation’s exposure to commercial loans guaranteed by the TDF was placed in non-accrual status in the first quarter of 2016 and interest payments collected are now applied against principal. Approximately $1.0 million of interest payments received on loan guaranteed by the TDF since late March 2016 have been applied against principal. As of June 30, 2016, the total reserve coverage ratio related to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 19.5%.

The exposure to municipalities in Puerto Rico includes $161.3 million of financing arrangements with Puerto Rico municipalities issued in bond form, but underwritten as loans with features that are typically found in commercial loans. The Puerto Rico Municipal Finance Act (the “Act”) requires that with respect to financing arrangements obtained by the municipalities with maturities greater than 8 years be designated as “special obligation bonds” subject to specific provisions under the Act. The Corporation has reviewed its historical accounting treatment for the financing transactions as loans as a result of the recent determination of the Federal Reserve Board that the transactions must be treated for regulatory reporting purposes as investment securities. The Corporation has concluded that the impact of accounting for the transactions as investment securities rather than loans is not material to the financial statements of any of the affected periods and, accordingly, these financing arrangements are now accounted for as held-to-maturity investment securities and not as loans. For purposes of comparability, prior period amounts have been revised to conform to the 2016 presentation. This revision had no impact on previously reported results of operations, financial condition, or cash flows.

As of June 30, 2016, the Corporation had $457.4 million of public sector deposits in Puerto Rico, compared to $416.5 million as of March 31, 2016. Approximately 39% is from municipalities and municipal agencies in Puerto Rico and 61% is from public corporations and the central government and agencies in Puerto Rico.

Conference Call / Webcast Information

First BanCorp’s senior management will host an earnings conference call and live webcast on Tuesday, July 26, 2016, at 10:00 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.1firstbank.com or through a dial-in telephone number at (877) 506-6537 or (412) 380–2001 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.1firstbank.com, until July 26, 2017. A telephone replay will be available one hour after the end of the conference call through August 26, 2016 at (877) 344-7529 or (412) 317-0088 for international callers. The replay access code is 10090079.

Safe Harbor

This press release may contain “forward-looking statements” concerning the Corporation’s future economic and financial performance. The words or phrases “expect,” “anticipate,” “intend,” “look forward,” “should,” “would,” “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 cautions readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and advises 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: the ability of the Puerto Rico government or any of its public corporations or other instrumentalities to repay its respective debt obligations, including the effect of the recent payment defaults on the Puerto Rico government general obligations, bonds of the Government Development Bank for Puerto Rico and certain bonds of government public corporations, recent and any future downgrades of the long-term and short-term debt ratings of the Puerto Rico government, which could exacerbate Puerto Rico’s adverse economic conditions and, in turn, further adversely impact the Corporation; uncertainties as to the ultimate outcomes of actions resulting from the enactment by the U.S. government of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to address Puerto Rico’s financial problems; uncertainty about whether the Corporation will be able to continue 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”) that, among other things, requires the Corporation to serve as a source of strength to FirstBank and that, except with the consent generally of the New York Fed and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), prohibits the Corporation from paying dividends to stockholders or receiving dividends from FirstBank, making payments on trust preferred securities or subordinated debt and incurring, increasing or guaranteeing debt or repurchasing any capital securities; a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico; uncertainty as to the availability of certain funding sources, such as brokered CDs; the Corporation’s reliance on brokered CDs to fund operations and provide liquidity; 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 need to receive approval from the New York Fed and the Federal Reserve Board to declare or pay any dividends and to take dividends or any other form of payment representing a reduction in capital from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation; the weakness of the real estate markets and of the consumer and commercial 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, high levels of non-performing assets, charge-offs and provisions for loan and lease losses and may subject the Corporation to further risk from loan defaults and foreclosures; the ability of FirstBank to realize the benefits of its deferred tax assets subject to the remaining valuation allowance; adverse changes in general economic conditions in Puerto Rico, the U.S., and the U.S. 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 reduced interest margins and affected funding sources, and has affected demand for all of the Corporation’s products and services and reduced the Corporation’s revenues and earnings, and the value of the Corporation’s assets, and may continue to have these effects; an adverse change in the Corporation’s ability to attract new clients and retain existing ones; the risk that additional portions of the unrealized losses in the Corporation’s investment portfolio are determined to be other-than-temporary, including additional impairments on the Puerto Rico government’s obligations; uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., and the U.S. and British Virgin Islands, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results; changes in the fiscal and monetary policies and regulations of the U.S. federal government and the Puerto Rico and other governments, 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 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 impairments on the Corporation’s financial instruments, goodwill, or other intangible assets relating to acquisitions; the risk 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 on the Corporation’s business, business practices and results of operations of a potential higher interest rate environment; 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 used 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 of the non-GAAP financial measure to the comparable GAAP financial measure, can be found in the text or in the attached tables to this earnings release. Any analysis of these non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP.

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 financial 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 and the insurance customer relationship intangible. Tangible assets are total assets less goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible and the insurance customer 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. Accordingly, the Corporation believes that disclosures of these financial measures may be useful also to investors. 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.

Adjusted Pre-Tax, Pre-Provision Income

Adjusted pre-tax, pre-provision income is a non-GAAP performance metric that management uses and believes that investors may find useful in analyzing underlying performance trends, particularly in times of economic stress. Adjusted pre-tax, pre-provision income, as defined by management, represents net income (loss) excluding income tax expense (benefit), the provision for loan and lease losses, as well as certain items that management believes are not reflective of core operating performance or that are not expected to reoccur with any regularity or reoccur at uncertain times and 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 on a tax-equivalent basis, in order to provide to investors additional information about the Corporation’s net interest income that management uses and believes should facilitate comparability and analysis. The changes in the fair value of derivative instruments 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 the results of peers.

Financial measures adjusted to exclude the effect of the OTTI charges on debt securities, the gain on the repurchase and cancellation of trust preferred securities, the loss on the bulk sale of assets, and conversion costs related to assets acquired and deposits assumed from Doral Bank.

To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation uses, and believes that investors would benefit from disclosure of adjustments to non-interest income and net income to exclude items that management believes are not reflective of core operating performance or that are not expected to reoccur with any regularity or reoccur at uncertain times and amounts. During the first and second quarters of 2016 and 2015, the following items were excluded for one of those reasons:

• Adjusted non-interest income excludes OTTI charges on debt securities of $6.7 million, and $13.1 million recorded in the first quarter of 2016 and the second quarter of 2015, respectively, and the $4.2 million gain on the repurchase and cancellation of trust preferred securities recorded in the first quarter of 2016.
• Adjusted net income excludes the effect of all the items mentioned in the above caption for the first quarter of 2016 and second quarter of 2015 and also excludes for the second quarter of 2015 the $48.7 million loss on the bulk sale of assets, including transaction costs, and $2.6 million in conversion costs associated with the Doral Bank transaction incurred in the second quarter of 2015. The income tax benefit of $19.0 million related to the bulk sale on assets and the tax benefit of $1.0 million related to the conversion costs associated with the Doral transaction were also excluded for the computation of adjusted net income for the second quarter of 2015. No tax benefit or expense was recognized for OTTI charges on debt securities and the gain on the repurchase and cancellation of trust preferred securities.

Management believes that adjusted non-interest income and adjusted net income enhance the ability of analysts and investors to analyze trends in the Corporation’s business and 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.

The following table reconciles these non-GAAP financial measures to the corresponding measures presented in accordance with GAAP.

About First BanCorp.

First BanCorp. is the parent corporation of FirstBank Puerto Rico, a state-chartered commercial bank with operations in Puerto Rico, the U.S. and the British Virgin Islands and Florida, and of FirstBank Insurance Agency. Among the subsidiaries of FirstBank Puerto Rico are First Federal Finance Corp. and First Express, both small loan companies, and FirstBank Puerto Rico Securities, a broker-dealer subsidiary. 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.1firstbank.com.

EXHIBIT A

Table 1 – Selected Financial Data

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

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

Table 4 – Non-Interest Income

Table 5 – Non-Interest Expenses

Table 6 – Selected Balance Sheet Data

Table 7 – Loan Portfolio

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

Table 8 – Loan Portfolio by Geography

Table 9 – Non-Performing Assets

Table 10– Non-Performing Assets by Geography

Table 11 – Allowance for Loan and Lease Losses

Table 12 – Net Charge-Offs to Average Loans