First BanCorp. — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands and Florida. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable / December 31, 2019 |
|---|---|---|
| Interest income | $165.3 | $166.5 in Q1 2019 |
| Net interest income | $138.6 | $140.2 in Q1 2019 |
| Net interest margin | 4.63% | 4.92% in Q1 2019 |
| Provision for credit losses | $77.4 | $11.4 in Q1 2019 |
| Non-interest income | $30.2 | $22.5 in Q1 2019 |
| Non-interest expenses | $92.2 | $90.4 in Q1 2019 |
| Pre-tax income (loss) | $(0.7) | $60.9 in Q1 2019 |
| Income tax benefit (expense) | $3.0 benefit | $17.6 expense in Q1 2019 |
| Net income | $2.3; $0.01 per diluted common share | $43.3; $0.20 per diluted share in Q1 2019 |
| Operating cash flow | $91.5 | $83.0 in Q1 2019 |
| Cash and cash equivalents | $1,087.7 | $644.1 at December 31, 2019 |
| Total assets | $13,048.0 | $12,611.3 at December 31, 2019 |
| Total deposits | $9,562.3 | $9,348.4 at December 31, 2019 |
| Total borrowings | $1,109.2 | $854.2 at December 31, 2019 |
| Stockholders’ equity | $2,199.8 | $2,228.1 at December 31, 2019 |
Cash flow from investing activities was $(105.6) million and financing activities provided $457.7 million. Financing cash inflows included deposit growth, $60 million of Federal Reserve discount-window borrowings and proceeds associated with the cancellation of previously offset reverse repurchase agreements.
Regulatory capital remained well above minimums. At March 31, First BanCorp.’s CET1, Tier 1, total capital and leverage ratios were 21.79%, 22.19%, 25.42% and 15.98%, respectively; FirstBank’s corresponding ratios were 20.26%, 23.65%, 24.91% and 17.05%. The reported ratios reflect temporary regulatory relief for CECL adoption.
Liquidity was substantial: management reported core liquidity of $2.3 billion, or 17.6% of assets, and a basic liquidity ratio of 21.6%. As of May 7, unused FHLB lines were approximately $383.7 million in one COVID-19 disclosure and $529.4 million in the MD&A liquidity discussion; the filing text does not provide a clear reconciliation of these figures. The discount window had approximately $973.2 million available as of May 7.
Material changes versus comparable periods
- Net income fell to $2.3 million from $43.3 million, primarily reflecting the sharp increase in credit-loss provisions, lower net interest income and slightly higher expenses.
- The $77.4 million provision included a $59.8 million reserve build above net charge-offs, driven primarily by COVID-19 economic forecasts. Net charge-offs were $17.6 million, or 0.78% annualized of average loans, versus $24.5 million, or 1.10%, in Q1 2019.
- CECL adoption on January 1, 2020 increased total allowances by approximately $93.2 million and reduced retained earnings by $62.3 million after tax. The loan and finance-lease allowance stood at $292.8 million, or 3.24% of loans held for investment, versus $155.1 million, or 1.72%, at year-end.
- Non-interest income increased by $7.7 million, principally from an $8.2 million gain on sales of U.S. agency mortgage-backed securities. The gain partly offset reduced transaction-fee activity.
- Net interest margin declined 29 basis points year over year, as lower rates and repricing of variable-rate commercial loans reduced yields; consumer-loan growth partly offset the pressure.
- Loans held for investment grew modestly to $9.04 billion from $9.00 billion. Non-performing assets were $317.8 million, broadly unchanged from $317.4 million at year-end; nonaccrual loans were $212.3 million.
- Available-for-sale securities were $1.93 billion, down from $2.12 billion at year-end. Accumulated other comprehensive income increased to $49.1 million from $6.8 million, mainly reflecting market-value gains on securities.
Outlook, management commentary and risks
- COVID-19 and credit: Management said the pandemic, lockdowns and reduced economic activity adversely affected operations, loan closings, transaction-fee income and forecast credit quality. The duration and severity of effects were uncertain. Greater reserve increases were recorded for accommodation, retail real estate and transportation exposures, together about 28% of commercial and construction loans.
- Borrower relief and PPP: As of May 7, payment deferrals covered about 7,064 residential mortgages totaling $931.5 million, 93,629 consumer loans totaling $1.0 billion, and 741 commercial and construction loans totaling $1.8 billion. The company reported SBA approval of 3,792 PPP applications totaling about $350.6 million, with $313.2 million funded. These figures are subsequent-to-quarter-end updates.
- Acquisition: FirstBank’s proposed all-cash acquisition of Banco Santander Puerto Rico remained subject to regulatory approval and other closing conditions. The company said COVID-19 made it unlikely that approvals would arrive by mid-2020 as previously expected. It gave no updated closing date or purchase-price estimate in this filing.
- Puerto Rico and other geographic exposure: About 74% of gross loans were in Puerto Rico. Direct exposure to Puerto Rico government entities and obligations was $203.3 million, including $138.5 million of municipal bonds held to maturity; the allowance on those bonds was $9.3 million. USVI government-entity loans were $62.5 million and reported current. Economic, fiscal and restructuring developments remain risks.
- Other notable items: The filing identified an $8.2 million securities-sale gain, $0.8 million of merger and restructuring costs, $1.2 million of hurricane-related insurance benefits, and $0.4 million of COVID-19 response expenses. Management’s non-GAAP adjusted net loss was $5.9 million, versus adjusted net income of $37.0 million in Q1 2019; this measure excludes specified special items.
- Taxes and dividends: The $307.8 million net deferred tax asset included an $88.5 million valuation allowance. Management judged realization more likely than not, while noting pandemic uncertainty. The company declared a $0.05 common dividend per share for Q1 and stated its intention to continue quarterly common dividends and monthly preferred dividends.
- Additional risks: Risks include worsening loan performance and collateral values, Puerto Rico fiscal uncertainty, reliance on brokered funding, interest-rate and LIBOR transition effects, acquisition integration and approval risks, and the uncertain impact of participation in government relief programs. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How subsequent-quarter credit performance, charge-offs and allowance levels compare with the Q1 CECL reserve build and the economic assumptions used.
- Repayment performance after the reported deferral periods, including the credit quality of modified borrowers and the extent of further deferrals.
- Whether liquidity capacity and deposit funding remain adequate, and the reason for the differing unused FHLB-line disclosures in the filing.
- Regulatory approval, closing timing, final purchase price, integration costs and expected benefits of the Santander Puerto Rico acquisition.
- Whether the deferred tax asset remains realizable under updated taxable-income forecasts and whether dividends remain supportable by earnings, capital and bank-level cash generation.