Ok, I finally got some time to go over this. Here is what I see, starting with the income statement. (all numbers in millions, rounded)
Loans rates have reset lower by about 100 bps (from 2007 1Q) but deposits rates have increased by about 26 bps. This is squeezing net interest income. NIM is only 1.28% down from 1.915% 2007 1Q and down from 1.656% last quarter. Net interest income is down 20 from last quarter. This will likely improve next couple two quarters. We would like to see NIM closer to 2%. Expenses are higher by 10 due mostly to legal/FDIC/advisory expenses. I am glad this isn't higher. We lost 7.7 before the tax benefit of 47 but 39.7 after taxes benefit. Additional loss in comprehensive income (i.e. doesn't flow through income statement) of 9.6 probably due to balance sheet restructuring.
Total equity capital is 1097 versus 1072 or a gain of 25. This is $3.43/share of book value.
Securities were completely restructured. It appears that they simply sold most of them and bought some shorter term securities to match their remaining liabilities. Total is 5342 down from 6542 last Q. In addition, they now have 2135 expiring in 3 months or less and another 1025 expiring in one year or less. They also sold or retired all of their structured notes 170.
This reduces assets and combined with the gain in capital, the capital requirement ratios are much improved. The tightest one is still Tot Risk based cap = Tot_risk_based_capital/Tot_Risk_weighted_assets which is now 11.33%. This is above the 10% Well-capitalized level by 146 and 366 above minimum. If after next quarter they do not replace their retiring securities they will be 189 above Well cap. if there is no change in capital. If they make about 30 next quarter,as I expect, they will be 219 above well capitalized. If so they might actually be able to buy back shares. I think they only need a buffer of about 160-180 above Well cap.
Now, Past due and non-accrual. This is actually not looking good. Non-accruals dropped from 481 to 467 but 30 days late increased to 215 from 31. Thus total NPAs increased to 682 from 512. Now some of these will probably be cured but much of it will go into non-accrual. Part of the reduction of Non-farm non-res non-accrual was El Legado. But what about Pueblo, Syroco and others? I was hoping for a larger reduction. Are these loans still in non-accrual or have they been replaced by others? 55 of C&I loans are 30 days late. That is worrisome because they could be ABL loans and could lead to large losses. Construction loans 30 days late increased from 1 to 11. Provisions for the quarter was 30 which is close to what I expected. Overall, it looks like there could be a second wave of losses coming next few quarters as the US recession affects Puerto Rico. Is this what we are seeing in the 30 day lates?
Overall, the report is mixed. The bad news is non-accruals still being higher and 30 day lates increasing sharply. Also the poor NIM due to loans resetting faster is slowing our recovery.
The good news is that we are much better capitalized and this will only get better next quarter. We are still profitable. This is partly due to the tax benefits from our charge-offs offsetting high provisions. Allowance for loan losses is still 217 which will allow for more tax benefits as some of this is charged off. Interest income should improve as deposit costs come down as long as non-accruals do not increase by a lot. We might actually be able to buy back stock. Given that the stock price is 1/3 of book value, this can greatly increase BV/share.
So to conclude, it is a decent report and bolsters my case for holding this stock. We are on track to make 150 for the year which is what Stipes said he expects to do. That would put BV/share at $4.1 and EPS at $0.91 (or 0.7 after subtracting preferred dividends). If so and we get current with the SEC we should sell at around $5/share.
See my posts on profitability. After reviewing this further I no longer think they will make much in 2008. They are being hit on profitability on all fronts: NIM, expenses and loan losses and I don't see these improving much for a few quarters at least. The tax benefit from first quarter is likely much larger than what they will book in the quarters to come. I think it may take them until 2009 to improve substantially. I think they will probably linger around $1 until they get current with the SEC. After that, they will still probably stay around $2 until profitability improves after which they will return to book value. It may take them a few years to get back to $5. Still, this would make them a good long term investment. I think the chance of them buying back any stock is small. Still, they should consider it as long as they can foresee improvements in the future. Even 30MM of buybacks near $1 would increase shareholder value by a lot and probably not endanger capital ratios.