First BanCorp. — Q1 2017 Form 10-Q
Reporting period: Quarter ended March 31, 2017. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and other subsidiaries in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands, and Florida. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net interest income | $122.5 | $124.6 |
| Net interest margin | 4.42% | 4.18% |
| Provision for loan and lease losses | $25.4 | $21.1 |
| Non-interest income | $8.2 | $18.5 |
| Non-interest expenses | $87.9 | $93.0 |
| Income before taxes | $17.5 | $29.1 |
| Income tax benefit (expense) | $8.1 benefit | $5.7 expense |
| Net income | $25.5 | $23.3 |
| Net income attributable to common stockholders | $24.9 | $23.3 |
| Diluted earnings per common share | $0.11 | $0.11 |
- Management’s adjusted net income, a non-GAAP measure excluding specified unusual items, was $25.2 million versus $25.8 million.
- Return on average assets was 0.87% versus 0.74%; the efficiency ratio was 67.19% versus 64.98%.
- Net cash provided by operating activities was $84.8 million, versus $54.3 million. Investing activities provided $82.1 million; financing activities used $42.5 million. Cash and cash equivalents ended the quarter at $424.1 million, up $124.4 million from year-end.
Financial position, asset quality, and liquidity
- Total assets were $11.89 billion, down $32.1 million from December 31, 2016. Gross loans held for investment were $8.82 billion, down $64.5 million; total deposits were $8.86 billion, up $26.8 million.
- Borrowings totaled $1.09 billion, down $100 million from year-end: $300 million in repurchase agreements, $570 million in FHLB advances, and $216.2 million in other borrowings. Stockholders’ equity was $1.82 billion, up $36.8 million.
- The allowance for loan and lease losses was $203.2 million, or 2.30% of loans held for investment. Q1 net charge-offs were $27.8 million, including $10.7 million related to the PREPA credit-line sale; excluding that item, management reported adjusted net charge-offs of $17.1 million, or 0.78% of average loans.
- Non-performing assets, including loans held for sale, were $647.2 million, or 5.44% of total assets, versus $734.5 million at year-end. Non-performing loans held for investment were $477.6 million versus $560.1 million.
- Management estimated core liquidity of $1.6 billion, or 13.82% of assets, and a basic liquidity ratio of approximately 21.0%. The company reported $852.2 million of additional FHLB borrowing capacity and approximately $1.1 billion of unpledged liquid securities.
- Brokered CDs totaled $1.36 billion; approximately $740 million were due within 12 months. Management said the company was reducing reliance on brokered CDs and building customer deposits.
- At March 31, consolidated regulatory ratios were 21.85% total capital, 18.22% CET1, 18.22% Tier 1, and 13.83% leverage. FirstBank’s respective ratios were 21.29%, 16.98%, 20.03%, and 15.22%.
Material changes and unusual items
- Net interest income fell $2.1 million year over year as lower average balances in consumer and residential mortgage loans and reduced investment income outweighed lower funding costs. Net interest margin improved, helped by repayment of higher-cost repurchase funding and a shift toward non-interest-bearing deposits.
- Non-interest income declined $10.2 million, principally reflecting a $12.2 million OTTI charge on Puerto Rico government securities and the absence of a $4.2 million debt-extinguishment gain recorded in Q1 2016. Mortgage banking income also declined. Excluding specified items, non-interest income was $20.5 million versus $20.9 million.
- Net income included a $13.2 million tax benefit from changing the Puerto Rico tax status of two subsidiaries. The company’s reported tax benefit was $8.1 million; results excluding unusual items were lower year over year on management’s adjusted basis.
- The company sold its PREPA line-of-credit participation, with a $75 million principal balance and $64 million book value, for $53.2 million. The sale reduced direct Puerto Rico government exposure and resulted in a $10.7 million charge-off and a further $0.6 million provision charge.
- The company increased reserves by $10.8 million for commercial hotel loans guaranteed by Puerto Rico’s Tourism Development Fund (TDF). These loans had $127.6 million principal outstanding and $110.9 million book value; they were classified as non-performing and impaired.
- Available-for-sale Puerto Rico government bonds incurred a $12.2 million credit impairment. The company reported $34.4 million in cumulative credit impairment charges on these securities. Their future recoveries remain uncertain.
Outlook, risks, and contingencies
- The filing provides no formal earnings or revenue guidance. Management stated that available borrowing capacity and efforts to grow retail deposits were expected to provide necessary funding for business plans in the foreseeable future.
- Interest-rate simulations estimated that, over the next 12 months, a gradual 200-basis-point rate increase could raise net interest income by $14.6 million under a growing-balance-sheet scenario; a modeled falling-rate scenario could reduce it by $13.5 million. These are model estimates, not guidance, and depend on assumptions.
- First BanCorp. remains subject to a 2010 Federal Reserve Written Agreement. Among other restrictions, dividends and specified debt or capital actions generally require regulatory consent. Common dividends were not declared. Preferred-stock dividends and subordinated-debt interest payments were being made under approvals that extended through June 2017; future payments remained subject to approval.
- Puerto Rico’s fiscal and economic situation is a central risk. The government and PROMESA oversight board filed a Title III debt restructuring proceeding on May 3, 2017, after quarter-end. The filing notes uncertainty about the process and its effects on the company, borrowers, government guarantees, deposits, and asset values.
- Credit risk includes the company’s Puerto Rico loan concentration: approximately 77% of gross loans held for investment had Puerto Rico credit exposure. Direct exposure to Puerto Rico government entities and municipalities was $245.0 million; this is distinct from the $110.9 million book value of TDF-guaranteed hotel loans. Management warned that further impairment charges may be required.
- Other key risks include dependence on brokered CDs, economic weakness and real-estate conditions, potential loan losses and foreclosures, government debt-related investment impairments, interest-rate and market risk, and regulatory requirements. The company reported no material legal-loss estimate requiring disclosure at quarter-end, while noting litigation outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings depends on the $13.2 million tax benefit, and how adjusted results reconcile to GAAP results.
- Updated recoveries, impairment assumptions, and any further losses on Puerto Rico government securities and TDF-guaranteed loans following the Title III filing.
- Trends in non-performing assets, charge-offs, foreclosures, loan-loss reserves, and reserve coverage, including the effect of the PREPA sale on comparisons.
- Brokered-CD renewals and maturities, deposit growth, available liquidity, and any changes to regulatory permissions for preferred dividends or subordinated-debt interest.
- Whether management’s interest-rate sensitivity assumptions and liquidity outlook remain applicable as market conditions and Puerto Rico’s fiscal restructuring evolve.