Puerto Rico's First BanCorp Ordered To Shape Up

First BanCorp Puerto Rico (FBP) was slapped with an enforcement action from the U.S. Federal Reserve, weeks after three of the island's banks collapsed.

The San Juan bank, Puerto Rico's second largest by assets and deposits after Popular Inc. (BPOP), has been struggling with troubled real estate loans. The Fed barred First BanCorp from paying a dividend and demanded the bank come up with a plan for future capital needs within 30 days.

In late April, regulators closed the three weakest Puerto Rican banks and sold them to stronger competitors, injecting almost $7 billion in capital into the island's banking system in the process. Puerto Rico's Governor Luis Fortuno and Federal Deposit Insurance Corp. Chairman Sheila Bair called the sale a milestone for the nation's troubled banking industry and Puerto Rico's economy. But as the Federal Reserve's recent action shows, the struggle to heal Puerto Rico's banking industry remains a work in progress.

The agreement with First BanCorp, disclosed by the bank on Friday and posted on the Fed's web site Tuesday, comes on the heels of its consent to demands by the FDIC to draw up a contingency plan within 45 days "for the sale, merger, or liquidation of" FirstBank, its banking subsidiary, if fresh capital is not available.

The FDIC wants First Bank to maintain a leverage capital ratio of at least 8% and a Tier 1 capital ratio of at least 10%; such measures are indications of a bank's strength. The bank exceeded all those targets on March 31, according to its earnings filing.

The bank was ordered to submit reviews about its lending business and its reserves for loan losses, and its management was ordered to "restore all aspects of" its banking subsidiary's "safe and sound condition," and its board to increase "participation in the affairs."

The island has been in a recession since 2006, and its government has struggled to reach a fiscal balance and to reshape an economy once heavily dependent on manufacturing.

In 2005, Puerto Rico's banking industry became a vanguard of the financial meltdown when many of its banks, including First BanCorp, were entangled in massive problems related to mortgage derivatives.

On April 30, Westernbank, R-G Premier Bank, and EuroBank were closed and sold to island competitors. The FDIC last year slapped all three with cease and desist orders to improve bad underwriting, management shortcomings and a growing pile of delinquent real estate loans.

Those orders struck a considerably harsher tone than First BanCorp's consent order, particularly about management and board oversight.

Bank of Nova Scotia (BNS, BNS.T) bought R-G Premier Bank. The Toronto bank also holds a 10% stake in First BanCorp that it bought in the aftermath of Puerto Rico's derivative crisis; both parties said it is a passive investor.

First BanCorp had planned to buy a weaker competitor, but wasn't able to raise the necessary capital to participate in the FDIC's auction.

It is still trying to raise $500 million in capital; it is working to convert into common stock $400 million of preferred stock owned by the Treasury Department through the Troubled Asset Relief Program, and exchange non-cumulative preferred shares into common stock.

First BanCorp reported a $107 million first-quarter loss, compared to a $22 million profit a year earlier. Losses from loans the bank cannot collect more than tripled, to $123 million.

Chief Executive Aurelio Aleman told Dow Jones Newswires in an interview last month that losses from construction loans, the bank's worst portfolio, are close to the bottom, though he expects real-estate values to continue to decline.

Aleman expects to grow First BanCorp by luring deposits and customers from competitors busy digesting their acquisitions.

In a press release Friday, Aleman said the bank is "committed to continue to work expeditiously to resolve" the issues raised in the enforcement actions and "strengthen our balance sheet and return FirstBank to its full earnings potential."

Shares of First BanCorp closed down 5% at $1.14 Tuesday.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

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