First BanCorp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. First BanCorp is a Puerto Rico-based financial holding company operating principally through FirstBank Puerto Rico, with businesses in Puerto Rico, the U.S. Virgin Islands, and Florida. Financial statement amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Interest income | $158.5 | $204.0 | $502.9 | $639.9 |
| Net interest income | $94.3 | $113.7 | $295.0 | $349.6 |
| Provision for loan and lease losses | $46.4 | $120.5 | $194.4 | $438.2 |
| Non-interest income | $14.0 | $19.3 | $93.3 | $104.1 |
| Non-interest expenses | $82.9 | $88.7 | $252.2 | $278.7 |
| Net loss | $(24.0) | $(75.2) | $(67.4) | $(272.9) |
| Loss per common share, basic | $(1.46) | $31.30 | $(4.17) | $18.61 |
- Margins: Tax-equivalent net interest margin excluding fair-value valuation effects was 2.86% in Q3, compared with 2.83% a year earlier; it was 2.81% for nine months, versus 2.74%. GAAP net interest margin was 2.75% for Q3 and 2.73% for nine months.
- Cash flow: Nine-month operating cash flow was $128.5 million, investing cash flow provided $2.38 billion, and financing activities used $2.08 billion. Cash and cash equivalents ended at $800.4 million, up $430.1 million from year-end 2010.
- Balance sheet at September 30: Assets were $13.48 billion, down from $15.59 billion at December 31, 2010. Total loans, including loans held for sale, were $10.65 billion versus $11.96 billion; deposits were $10.66 billion versus $12.06 billion; borrowings were $1.66 billion versus $2.31 billion. Stockholders’ equity was $986.8 million versus $1.06 billion.
- Credit quality: Allowance for loan and lease losses was $519.7 million, or 4.89% of loans held for investment. Nine-month net charge-offs were $227.7 million, down from $357.8 million. Non-performing loans held for investment totaled $1.184 billion, or 11.13% of that portfolio; the balance declined from $1.239 billion at year-end, but the ratio rose from 10.63%. Non-performing assets including loans held for sale were $1.377 billion; the reported ratio to assets was 10.22%.
- Liquidity and funding: Brokered CDs totaled $4.49 billion, with approximately $2.8 billion maturing within 12 months. FirstBank had $800.4 million in cash and cash equivalents and approximately $487 million of additional FHLB borrowing capacity. Management said it expected to meet obligations for the foreseeable future, while noting liquidity’s dependence on deposit funding and regulatory approval to renew or roll over brokered CDs.
Material changes and notable items
- Losses narrowed substantially year over year, mainly as the loan-loss provision fell: Q3 provision decreased $74.0 million and nine-month provision decreased $243.9 million. Lower charge-offs and a smaller, deleveraging loan portfolio contributed. Net interest income nevertheless fell as the average volume of earning assets contracted.
- The company reduced assets through loan and securities sales and repayments. Key actions included selling approximately $518 million of performing residential mortgages, $632 million of U.S. Agency MBS, and a $269.3 million book-value pool of troubled loans to CPG/GS. Total assets fell about $2.1 billion from year-end 2010.
- Non-interest income included investment-sale gains and losses on early debt extinguishment. Q3 included a $12.5 million net gain on investment sales, a $9.0 million early-extinguishment loss, a $4.4 million equity-method loss on CPG/GS, and a $0.35 million impairment charge. The 2010 common-stock earnings comparisons were materially affected by one-time preferred-stock exchange accounting; the reported 2010 EPS is therefore not directly comparable with 2011 EPS.
- Construction lending remains a significant credit concern: 57.07% of the construction portfolio was non-performing at September 30, and a $100 million Virgin Islands construction relationship entered non-performing status in 2011. Non-performing construction loans increased overall despite reductions in Puerto Rico and Florida.
Capital, outlook, risks, and contingencies
- Regulatory capital: At September 30, FirstBank’s total risk-based capital, Tier 1 risk-based capital, and leverage ratios were 12.15%, 10.84%, and 8.24%, respectively, above the FDIC Order minimums of 12%, 10%, and 8%. The bank nevertheless could not be treated as “well capitalized” while subject to the order.
- Post-quarter capital raise: On October 7, 2011, First BanCorp completed a $525 million common-stock placement, receiving approximately $490.4 million net of offering costs and contributing $435 million to FirstBank. The Series G Treasury preferred stock converted into 32.9 million common shares; the company paid $26.4 million of past-due cumulative dividends. Management reported approximately $830 million of increased common equity from the capital infusion and conversion. Pro forma FirstBank capital ratios were 16.33%, 15.01%, and 11.06%, respectively. These are pro forma figures, not September 30 actuals. A rights offering for up to 10.65 million additional shares commenced October 25 at $3.50 per share.
- Regulatory restrictions and dividends: FirstBank remained under an FDIC/OCIF Consent Order and the holding company under a Federal Reserve Written Agreement. These impose capital, asset-quality, planning, and other requirements; brokered CDs require FDIC approval. The holding company cannot receive bank dividends without Federal Reserve approval, and dividends on common and preferred stock have been suspended since 2009. Management provided no quantitative earnings guidance in the supplied filing text.
- Credit and economic risks: The filing cites continued weak Puerto Rico economic conditions, real-estate and commercial-credit weakness, high non-performing assets, possible further provisions and charge-offs, and concentration of approximately 83% of loans in Puerto Rico. The allowance depends on management estimates and may not cover future losses.
- CPG/GS exposure: FirstBank’s $41.7 million equity interest is subordinate to the majority investor’s capital recovery and 12% priority return. FirstBank also had approximately $208.1 million of loans to the venture; its investment and loan recovery depend on collateral values, project sales, and cash flows. The company recorded $5.9 million of equity-method losses for the first nine months, including a $1.9 million out-of-period valuation adjustment that management judged immaterial.
- Lehman collateral litigation: The company reported a $64.5 million non-performing receivable relating to securities pledged to Lehman and not recovered. It is pursuing litigation involving Barclays and Lehman; no loss estimate was accrued because recovery and timing could not be determined. Management cautioned that recovery of all or a substantial portion is uncertain.
- Other risks and controls: The filing notes uncertainty around brokered-CD approvals, potential additional regulatory action, funding access and credit ratings, and market and interest-rate risks. Management said disclosure controls were effective as of September 30, 2011 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether FirstBank continues to meet the FDIC Order’s capital targets and obtain required approvals, particularly for brokered-CD renewals and any upstream dividends.
- Post-raise actual capital ratios, use of capital, rights-offering results, and the effect of new shares and the Treasury conversion on per-share ownership and book value.
- Whether non-performing loans, delinquencies, construction exposures, REO balances, and charge-offs continue to improve; review the Virgin Islands construction relationship and the loan-loss allowance assumptions.
- Cash realization and credit performance of the CPG/GS loans and subordinated equity interest, including venture asset sales and the priority return owed to its majority investor.
- Progress and potential recovery in the Lehman collateral litigation, including the $64.5 million non-performing receivable and the possibility of a future reserve.
- Brokered-CD maturity concentrations and the company’s ability to sustain liquidity as it continues to shrink assets and reduce wholesale funding.