Net interest income
Net interest margin for the third quarter of 2012 increased 4 basis points to 4.37% as compared to the second quarter of 2012. Net interest income reached $343.4 million, an increase of $2.2 million from the second quarter. The main drivers of the improvement in net interest margin are:
- Decrease in interest expense on deposits of approximately $5.5 million, or 9 basis points, reflecting continuing progress in repricing the deposit base and a decrease in the average balance of deposits, mainly in certificates of deposit.
- Decrease in the cost of short-term borrowings of approximately 73 basis points or $3.2 million. This decrease was driven mainly by the early termination of $350 million in repurchase agreements during the second quarter of 2012 that had a cost of 4.36%.
- Interest income on the non-covered portfolio increased by $6.5 million. The increase was driven mainly by consumer loans, which showed the benefit of $225 million of portfolio purchases at the end of the second quarter. Interest income on the covered portfolio decreased by $8.5 million mainly due to the pay-off, during the second quarter of 2012, of a commercial single loan pool accounted for under ASC 310-30, resulting in the remaining discount being accreted into interest income during that period.
- Yields on the investment securities portfolio declined by 28 basis points or $3.2 million mainly due to prepayments and reinvestment under a lower interest rate environment.
- The BPPR segment’s net interest margin for the third quarter increased 4 basis points from 5.07% in the second quarter to 5.11% in the third quarter of 2012. Net interest income amounted to $300.9 million for the quarter ended September 30, 2012, compared with $298.5 million for the previous quarter. The improvement was mainly related to lower cost of borrowings and interest bearing deposits and higher interest income related to acquired consumer loans, partially offset by lower interest income from covered loans as mentioned above.
- The BPNA segment earned $69.6 million in net interest income for the quarter ended September 30, 2012 in line with the previous quarter. Net interest margin increased by 2 basis points to 3.57% due to a 13 basis point reduction in cost of interest bearing deposits partially offset by an 8 basis point decline in yield on earning assets mainly in investment securities.
Provision for Loan Losses
|Provision for loan losses - non-covered loans|
|BPPR||$ 69,738||$ 66,443||$ 131,058|
|Provision for loan losses - covered loans||22,619||37,456||25,573|
The provision for loan losses for the third quarter of 2012 amounted to $106.2 million, a decrease of $13.0 million versus the previous quarter, mainly driven by lower provision for the covered loan portfolio.
- The provision for loan losses for the non-covered loan portfolio increased by $1.8 million from second quarter 2012.
- The provision for loan losses for non-covered loans in the BPPR reportable segment increased by $3.3 million from the second quarter of 2012, primarily reflecting higher net charge-offs in the commercial loan portfolio resulting from the ongoing portfolio review.
- The provision for loan losses in the BPNA reportable segment decreased by $1.4 million from the second quarter of 2012, primarily due to the effect of lower net charge-offs in all loan portfolios except the mortgage loan portfolio.
- The provision for loan losses on the covered loan portfolio decreased by $14.8 million from second quarter 2012, driven primarily by loans accounted for pursuant to ASC 310-30.
- The provision for loan losses for loans accounted under ASC 310-30 was $17.9 million for the third quarter of 2012, compared with $28.2 million for the previous quarter. The $10.3 million decrease was mostly due to certain commercial and construction loan pools which reflected higher increases in expected loss estimates for the second quarter of 2012. Overall expected losses on the covered portfolio continue to be lower than originally estimated.
- The provision for loan losses on covered loans accounted under ASC 310-20 was $4.7 million for the quarter ended September 30, 2012, compared with $9.2 million for the second quarter of 2012.
- Net gain on sale of loans, including unfavorable valuation adjustments on loans held-for-sale, totaled $18.5 million for the third quarter of 2012, compared with a net loss of $15.4 million for the second quarter of 2012. The favorable variance of $33.9 million was principally due to $27.3 million in valuation adjustments recorded during the second quarter on commercial and construction loans held-for-sale in the BPPR segment as a result of the impact of revised appraisals and market indicators.
- Also, trading activities reflected an increase of $5.8 million in realized and unrealized gains on mortgage-backed securities, which were partially offset by an increase of $1.1 million in hedging costs.
- FDIC loss share expense of $6.7 million recognized in the third quarter of 2012, compared with FDIC loss share income of $2.6 million for the second quarter of 2012 (further detailed in Exhibit O). This variance was principally associated with the decrease of $14.8 million in the provision for loan losses and of reimbursable loan-related expenses on the covered loans which reduced the mirror offset, and higher unfavorable fair value adjustments in the true-up payment obligation, partially offset by a lower amortization of the loss share asset.
- The other operating income decrease of $7.2 million was driven mainly by a $2.5 million gain from the sale of the wholesale indirect general agency property and casualty business during the second quarter, a $2.0 million decline in investment banking fees from the institutional securities business and a $1.5 million consulting fee received from EVERTEC during the second quarter.
- The recognition in the second quarter of a $25.0 million loss on early extinguishment of debt primarily related to the cancellation of certain high-cost repurchase agreements.
- A $12.6 million decline in other operating expenses mainly due to lower costs associated with the collection efforts of the covered loan portfolio.
- Personnel costs declined by approximately $4.8 million, driven mainly by reduced medical costs and lower salaries expense and by the absence in the third quarter of branch staff uniform and rebranding expenses that were recorded in the second quarter.
- Higher other real estate owned (OREO) expenses of approximately $3.5 million, driven mainly by lower gain on sales, particularly for the commercial properties at BPNA. Gain on sale of commercial properties declined by approximately $11 million. This decline was partially offset by a decline in fair value adjustments of approximately $7 million, driven mainly by the impact of revised appraisals for construction properties in BPPR during the second quarter.