First BanCorp. — Q2 2016 Form 10-Q
Business context and reporting period. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and FirstBank Insurance Agency, with businesses in Puerto Rico, the U.S. and British Virgin Islands, and Florida. This unaudited quarterly report covers the quarter and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Comparable period / change |
|---|---|---|
| Net interest income | $120.2 million | Down $6.3 million from Q2 2015 |
| Provision for loan and lease losses | $21.0 million | Down from $74.3 million in Q2 2015; prior-year provision included $46.9 million related to a bulk asset sale |
| Non-interest income | $19.8 million | Up from $6.7 million, mainly because Q2 2015 included $13.1 million of net securities impairment losses |
| Non-interest expenses | $89.5 million | Down from $102.8 million; adjusted for specified unusual 2015 costs, expenses fell $9.5 million |
| Income before tax | $29.5 million | Compared with a $43.9 million loss in Q2 2015 |
| Net income and diluted EPS | $22.0 million; $0.10 | Compared with a $34.1 million loss; $(0.16) per diluted share |
| Net interest margin | 4.01% | Down 17 basis points year over year |
For the six months ended June 30, 2016, net interest income was $244.9 million, provision expense $42.0 million, non-interest income $38.2 million, non-interest expense $182.5 million, and net income $45.3 million, or $0.21 per diluted share. The comparable 2015 period reported a net loss of $8.4 million, with results materially affected by the bulk sale, securities impairments, and the Doral acquisition. The six-month net interest margin was 4.09%, down 9 basis points year over year. No common dividends were declared.
| Balance-sheet / credit metric | June 30, 2016 | Comparison |
|---|---|---|
| Total assets | $12.51 billion | Down $64.3 million from year-end |
| Total loans, net | $8.67 billion | Down $233.3 million from year-end |
| Total deposits | $9.23 billion | Down $113.1 million from year-end |
| Borrowings | $1.37 billion | Down $10.3 million from year-end; includes $700 million net repurchase agreements, $455 million FHLB advances, and $216.2 million other borrowings |
| Stockholders’ equity | $1.79 billion | Up $92.3 million from year-end |
| Allowance for loan and lease losses | $234.5 million; 2.64% of loans held for investment | Allowance was $240.7 million at year-end; coverage of non-performing loans fell to 39.19% from 54.36% |
| Non-performing assets | $756.2 million; 6.05% of assets | Up $146.3 million from year-end |
| Liquidity | $827.9 million cash and cash equivalents | Up $75.5 million from year-end; estimated core liquidity reserve was $1.7 billion, or 13.8% of assets |
FirstBank had $652.6 million of additional FHLB borrowing capacity against pledged collateral and approximately $705.1 million of unpledged liquid securities. Brokered CDs were $1.81 billion, down $288.4 million from year-end; approximately $1.13 billion mature within twelve months. Management reported that deposits excluding brokered CDs and government deposits rose $99.7 million, while total deposits declined.
For the first half, operating cash flow was $82.2 million, investing cash flow provided $115.5 million, and financing activities used $122.2 million. Cash and cash equivalents increased by $75.5 million.
Regulatory capital ratios remained well above stated minimums: First BanCorp.’s total capital ratio was 20.72%, CET1 ratio 17.12%, Tier 1 ratio 17.12%, and leverage ratio 12.34%. FirstBank’s corresponding ratios were 20.19%, 16.32%, 18.92%, and 13.65%. The tangible common equity ratio was 13.65%.
Material changes and notable items
- Loan balances fell, principally following repayments of large commercial relationships and a decline in consumer lending. Available-for-sale securities increased $116.7 million, and cash rose $75.5 million.
- Non-performing loans held for investment increased to $598.2 million from $442.8 million at year-end. The principal driver was $127.3 million of Puerto Rico hotel-industry loans guaranteed by the Tourism Development Fund (TDF) moving to non-accrual and impaired status; a separate $35 million commercial relationship also became non-performing in Q2.
- The company recorded a $6.3 million first-half credit impairment on Puerto Rico government securities. At June 30, Puerto Rico government obligations in the available-for-sale portfolio had $43.4 million amortized cost and $28.5 million fair value. The company assumed a 100% probability of default for three affected bonds in its impairment analysis. The GDB subsequently missed an August 1, 2016 interest payment, including interest on bonds held by First BanCorp.
- The company repurchased and cancelled $10 million par value of trust-preferred securities for 70% of par, recording a $4.2 million gain and reducing related subordinated debt. With Federal Reserve approval, it also paid $31.2 million of deferred and current interest on subordinated debentures; future payments remain subject to approval.
- First BanCorp. reclassified $161.3 million of Puerto Rico municipal financing arrangements from loans to held-to-maturity securities for regulatory and accounting presentation. Management stated the change did not materially affect previously reported results, financial condition, or cash flows.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said results for the interim period are not necessarily indicative of full-year results and described continued loan demand alongside a strategy to reduce brokered-CD reliance and grow customer deposits.
- Puerto Rico’s fiscal crisis, debt defaults, payment moratoriums, and the uncertain implementation of PROMESA expose the company to economic, credit, securities-valuation, deposit, and liquidity risks. About 80% of gross loans held for investment were concentrated in Puerto Rico.
- Direct exposure to the Puerto Rico government, municipalities, and public corporations was $336.5 million at June 30, including $131.7 million of loans and $204.8 million of investment securities at amortized cost. Separately, $127.3 million of TDF-guaranteed hotel loans were on non-accrual; the filing notes uncertainty about the TDF’s ability to honor its guarantee. A $68.3 million PREPA exposure was also on non-accrual and accounted for on a cost-recovery basis.
- Funding risks include reliance on brokered CDs and the possibility that wholesale funding becomes unavailable or more costly. Repurchase agreements totaled $700 million net on the balance sheet; lenders could call $600 million before contractual maturities beginning July 19, 2016. The filing also describes $500 million of repurchase funding tied to variable rates.
- A June 2010 Written Agreement with the Federal Reserve restricts holding-company dividends, debt actions, and capital-security repurchases without regulatory consent. FirstBank dividends to the parent and payments on subordinated debt therefore remain approval-dependent; common dividends remain suspended.
- Credit quality remains a key risk: $671.0 million of TDRs were outstanding, and $250.0 million were in non-accrual status. The allowance and future provisions depend on judgments about borrower conditions, collateral values, and economic assumptions.
- Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting. Management did not expect the ordinary-course legal proceedings to have a material adverse effect; no material subsequent event requiring adjustment or disclosure was identified in the subsequent-events note, although the later GDB default is discussed elsewhere in the filing.
Investor verification priorities
- Track the status and recovery prospects of the TDF-guaranteed hotel loans, PREPA exposure, Puerto Rico government securities, and municipal bonds; verify any further defaults, restructurings, impairments, or reserve changes.
- Reconcile the increase in non-performing assets and the decline in allowance coverage with subsequent charge-offs, collections, collateral valuations, and credit-loss provisions.
- Monitor brokered-CD maturities, renewal costs and availability, repurchase-agreement call and repricing terms, and whether reported liquidity reserves remain accessible under stress.
- Confirm continued Federal Reserve consent for FirstBank dividends and subordinated-debt interest payments, and assess implications of the Written Agreement and dividend restrictions.
- Assess whether net interest income and margin can stabilize given shrinking loan balances, higher funding costs, non-accrual commercial loans, and the company’s elevated liquidity balances.
- Review the assumptions supporting realization of the $299.3 million net deferred tax asset, which is reported after a $198.2 million valuation allowance.