First BanCorp. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2012. First BanCorp. is a Puerto Rico-based financial holding company operating principally through FirstBank Puerto Rico, with banking activities in Puerto Rico, the U.S. Virgin Islands, British Virgin Islands and Florida. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $152.1 | $180.9 in Q1 2011 |
| Net interest income | $101.9 | $106.3 in Q1 2011 |
| Provision for loan and lease losses | $36.2 | $88.7 in Q1 2011 |
| Non-interest income | $8.5 | $40.5 in Q1 2011 |
| Non-interest expenses | $85.2 | $82.9 in Q1 2011 |
| Net loss | $13.2; diluted loss per share $0.06 | $28.4; diluted loss per share $1.66 in Q1 2011 |
| Net interest margin | 3.25% tax-equivalent, excluding fair-value changes | 2.89% on the same basis in Q1 2011 |
| Net charge-offs | $46.2; 1.78% annualized | $80.1; 2.74% annualized in Q1 2011 |
| Total assets | $13,085.6 | $13,127.3 at December 31, 2011 |
| Total loans, net of allowance | $9,856.2 | $10,081.3 at December 31, 2011 |
| Deposits | $9,908.2 | $9,907.8 at December 31, 2011 |
| Total liabilities / equity | $11,652.6 / $1,433.0 | $11,683.1 / $1,444.1 at December 31, 2011 |
| Cash and cash equivalents | $618.2 at quarter-end | $446.6 at December 31, 2011; $873.3 at March 31, 2011 |
Cash flows in Q1 2012 were $86.4 provided by operating activities, $107.5 provided by investing activities and $22.2 used in financing activities, producing a $171.6 increase in cash and cash equivalents. The allowance for loan and lease losses was $483.9, or 4.70% of loans held for investment.
Borrowings included $1,000.0 of repurchase agreements, $353.4 of FHLB advances, $232.0 of other borrowings and $16.0 of notes payable. FirstBank reported total capital, Tier 1 risk-based capital and leverage ratios of 16.83%, 15.50% and 11.91%, respectively. Despite exceeding the applicable order thresholds and ordinary “well-capitalized” ratio levels, FirstBank could not be treated as well capitalized under regulatory guidance because of its FDIC order.
Material changes versus comparable periods
- Net loss narrowed from $28.4 million to $13.2 million, mainly because the loan-loss provision fell by $52.5 million. Management attributed this to fewer charges to specific reserves, lower net charge-offs and a smaller loan portfolio.
- Net interest income declined $4.4 million year over year as average interest-earning assets fell by about $2.5 billion following prior-year balance-sheet deleveraging. Lower funding costs lifted the tax-equivalent net interest margin, excluding fair-value changes, by 36 basis points to 3.25%.
- Non-interest income fell $32.0 million. Q1 2011 included gains from securities and loan sales and the sale of substantially all Virgin Islands insurance-agency assets; Q1 2012 also included a $6.2 million non-cash loss from an unconsolidated investment and a $1.2 million securities impairment.
- Non-interest expenses rose $2.3 million, including a $2.5 million non-recurring charge related to collectability of certain tax credits and an unfavorable comparison in reserves for off-balance-sheet exposures. Lower FDIC insurance costs and REO losses partly offset the increase.
- Loans, net of allowance, declined $225.1 million from year-end, principally due to repayments, payoffs, foreclosures and charge-offs. Cash rose $171.6 million, while REO increased $21.6 million, mainly from foreclosed construction-commercial projects in the Virgin Islands.
- Non-performing loans were $1.12 billion, down $23.7 million from year-end, but equaled 10.87% of loans held for investment. Non-performing assets totaled $1.33 billion; REO was $135.9 million. Total TDRs were $853.6 million, including $411.9 million classified as nonaccrual.
Outlook, management commentary and key risks
- No formal earnings guidance was provided. Management said further reductions in funding costs could occur as brokered CDs and advances mature and renew at lower rates. Its 12-month interest-rate simulations estimated that a 200-basis-point rise would increase net interest income by $17.9 million under a growing-balance-sheet scenario; a falling-rate scenario estimated a $13.3 million decrease. These are model estimates, not forecasts.
- FirstBank and the holding company remained subject to the FDIC Order and Federal Reserve Written Agreement, including capital, asset-quality, liquidity and planning requirements. The holding company could not pay dividends or receive bank dividends without regulatory approval. Common and preferred dividends had been suspended since 2009.
- Brokered CDs were $3.62 billion, about 36.5% of deposits. FDIC permission to renew or roll over brokered CDs was temporary through June 30, 2012; future approval was not assured. About $2.5 billion of brokered CDs matured within 12 months. Management cited a 10.0% basic liquidity ratio and $539 million of additional FHLB borrowing capacity.
- Credit quality remained a central risk. Approximately 84% of gross loans were concentrated in Puerto Rico; the filing cited continued economic and real-estate weakness, high non-performing assets, construction-loan losses and potential future provision needs. Construction non-performing loans were $231.1 million, or 57.90% of that portfolio.
- The $37.0 million carrying value of the Bank’s 35% subordinated interest in CPG/GS was exposed to uncertain collateral values, sale prices and cash-flow timing; the Bank recorded $6.2 million of equity-method losses in the quarter. The Bank’s related lending exposures also included seller financing and advances.
- A $64.5 million non-performing asset represents securities pledged to Lehman Brothers and not recovered. The Corporation was pursuing litigation involving Barclays and the Lehman bankruptcy; recovery of all or a substantial portion was uncertain, and no additional estimated loss was accrued.
- Other notable exposures include a $1.2 million credit-related impairment on private-label mortgage-backed securities, substantial valuation allowances against deferred tax assets, and possible tax adjustments from an IRS audit of 2007–2009 returns. The filing says management could not estimate a range of possible tax-reserve changes.
- Subsequent event: On May 7, 2012, FirstBank announced a definitive agreement to acquire a FirstBank-branded credit-card portfolio with approximately $400 million in balances and 150,000 active relationships.
Most important facts for investors to verify
- Whether FirstBank continues to meet regulatory capital and asset-quality requirements, and obtains further FDIC approval to renew or issue brokered CDs after June 30, 2012.
- Whether the improvement in provision expense, charge-offs and non-performing loan inflows is sustained, and how TDR performance and REO dispositions affect credit losses.
- The sources and durability of liquidity, including the pace of brokered-CD maturities, core-deposit growth, FHLB capacity and collateral requirements on repurchase agreements.
- The recoverability of the CPG/GS investment and related loans, and the outcome and potential accounting consequences of the Lehman collateral litigation.
- The final terms, closing conditions and expected financial impact of the announced credit-card portfolio acquisition.
- EPS comparisons require context: the share count changed substantially following the 2011 capital raise, and the 2011 common-stockholder loss included preferred dividends and discount accretion.