First BanCorp. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. First BanCorp. is a Puerto Rico-based financial holding company operating primarily through FirstBank in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $123.9 | $120.2 | $246.5 | $244.9 |
| Net interest margin | 4.44% | 4.01% | 4.43% | 4.09% |
| Provision for loan losses | $18.1 | $21.0 | $43.5 | $42.0 |
| Non-interest income | $20.5 | $19.8 | $28.8 | $38.2 |
| Non-interest expense | $89.1 | $89.5 | $177.0 | $182.5 |
| Income before tax | $37.3 | $29.5 | $54.8 | $58.5 |
| Net income | $28.0 | $22.0 | $53.5 | $45.3 |
| Net income attributable to common shareholders | $27.3 | $22.0 | $52.2 | $45.3 |
| Diluted earnings per common share | $0.13 | $0.10 | $0.24 | $0.21 |
- Cash flow: Six-month operating cash flow was $131.6, investing cash flow $64.3 and financing cash flow negative $63.0. Cash and cash equivalents ended June at $432.6, up $132.9 from year-end 2016.
- Balance sheet at June 30: Total assets were $11.914 billion; gross loans held for investment were $8.861 billion and net loans, including loans held for sale, were $8.725 billion. Deposits were $8.743 billion, total liabilities $10.054 billion and stockholders’ equity $1.860 billion.
- Funding and debt: Borrowings totaled $1.191 billion, including $675 million of FHLB advances, $300 million of repurchase agreements and $216.2 million of junior subordinated debentures. Brokered CDs were $1.254 billion. $200 million of repurchase agreements could be called beginning July 19, 2017.
- Liquidity: Management reported a $1.5 billion core liquidity reserve (12.64% of assets), a 19.14% basic liquidity ratio and $772.7 million of additional FHLB capacity. Approximately $708.9 million of brokered CDs mature within 12 months.
- Capital: First BanCorp.’s regulatory total capital, CET1, Tier 1 and leverage ratios were 22.24%, 18.61%, 18.61% and 14.14%. FirstBank’s corresponding ratios were 21.70%, 17.37%, 20.43% and 15.53%. Tangible common equity ratio was 14.99%; tangible book value per common share was $8.24.
Material changes versus comparable periods
- Q2 net income rose to $28.0 million from $22.0 million. Higher net interest income, lower provision and slightly lower expenses contributed; the period also included a $0.4 million recovery of prior investment impairment charges.
- For the first half, reported net income increased to $53.5 million from $45.3 million, but included a $13.2 million tax benefit from changing the tax status of two subsidiaries. Management’s adjusted net income was $52.9 million versus $47.8 million in 2016; these are non-GAAP measures.
- Net interest margin improved year over year, helped by lower funding costs after repayment of higher-cost repurchase agreements, reduced brokered-CD balances, a greater loan share of earning assets, and lower non-performing loans.
- Six-month non-interest income declined, largely because 2017 included $12.2 million of Puerto Rico bond impairment charges, versus $6.7 million in 2016, and 2016 included a $4.2 million gain on debt extinguishment. Mortgage banking income also decreased.
- Non-performing assets fell to $575.1 million from $734.5 million at year-end 2016, while non-performing loans held for investment fell to $411.4 million from $560.1 million. The reported NPA-to-assets ratio was 4.83% at June 30.
- Credit costs nevertheless worsened: Q2 net charge-offs were $47.8 million, or 2.16% annualized, versus $24.7 million, or 1.11%, a year earlier. The increase included $29.7 million of charge-offs on hotel-related loans guaranteed by Puerto Rico’s Tourism Development Fund (TDF). First-half net charge-offs were $75.7 million, including $10.7 million related to the PREPA credit-line sale; excluding that item, management reported $64.9 million.
- Deposits declined $88.3 million from year-end, as brokered CDs fell $185.9 million and non-interest-bearing deposits increased. The loan portfolio declined modestly overall, with $166.3 million of growth in Florida offset by contraction in Puerto Rico.
Outlook, commentary, risks and unusual items
- No formal earnings or balance-sheet guidance is provided. Management said available borrowing capacity and efforts to grow retail deposits should fund business plans in the foreseeable future. Its interest-rate simulations estimated next-12-month net interest income would increase $17.5 million in a rising-rate scenario of +200 basis points and decrease $17.7 million in the modeled falling-rate scenario, using a growing-balance-sheet assumption; results depend on model assumptions.
- First BanCorp. remains subject to a 2010 Federal Reserve Written Agreement. Dividends, certain debt payments, new debt and capital repurchases generally require regulatory consent. The company had approval for preferred-stock dividends through September 2017 and intended to seek further approvals. No common dividends were declared.
- Puerto Rico’s fiscal crisis and Title III restructuring proceedings create material uncertainty for borrowers, public entities, deposits and collateral values. Direct exposure to Puerto Rico government, municipalities and public corporations was $221.5 million, down from $323.3 million at year-end; $190.9 million was municipal exposure. The company also retained $8.0 million of Puerto Rico Housing Finance Authority bonds at $5.6 million fair value. It sold the PREPA credit-line participation and non-performing GDB/Public Buildings Authority bonds during the first half.
- The TDF-guaranteed hotel loans had $127.6 million unpaid principal and $80.5 million book value. They are non-performing; after $29.7 million of Q2 charge-offs, their carrying value was 56% of unpaid principal. A proposed TDF guarantee settlement would leave the properties as the only collateral after completion, making further impairment possible if collateral values fall.
- Credit risk remains concentrated: approximately 76% of gross loans held for investment were in Puerto Rico, 17% in the mainland U.S. and 7% in the Virgin Islands. Total TDR loans were $568.5 million, including $184.4 million in nonaccrual status. OREO increased to $150.0 million.
- Management cited uncertainty in brokered-CD availability, continued Puerto Rico recession, asset quality, interest rates, regulatory requirements and deferred-tax-asset realization as key risks. FirstBank’s net deferred tax asset was $280.7 million, net of a $149.8 million valuation allowance.
- The company reported that its disclosure controls and procedures were effective and that no material change in internal control over financial reporting occurred during the quarter. Management said pending legal proceedings were not expected to have a material adverse effect based on information available, while noting outcomes remain uncertain.
- The U.S. Treasury sold its remaining First BanCorp. shares on May 10, ending TARP-related compensation restrictions; 2.37 million employee restricted shares were forfeited. An August 2, 2017 secondary offering by THL and Oaktree was disclosed after quarter-end; the company would receive no proceeds from such selling-stockholder offerings.
Most important facts for investors to verify
- Whether Puerto Rico and PREPA restructuring developments change the recoverability of municipal, public-corporation, TDF-guaranteed and housing-finance exposures.
- Subsequent performance and collateral valuations for the TDF hotel loans, including completion and actual value of the proposed guarantee settlement.
- Whether elevated charge-offs persist and whether the $173.5 million allowance remains adequate given loan performance, TDRs and OREO.
- Liquidity and funding developments, particularly brokered-CD renewals and maturities, callable repurchase agreements, and continued regulatory access to dividends and debt payments.
- Whether the $13.2 million tax benefit and deferred-tax-asset assumptions are sustainable, including any limitation on U.S. or U.S. Virgin Islands NOL use.
- Reconcile the filing’s differing comparative asset-quality ratios: the detailed NPA table gives 6.16% at December 31, 2016, while selected financial data reports 6.05%; confirm the definitions used.