First BanCorp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Unless noted, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $122.8 | $118.2 | $369.3 | $363.1 |
| Provision for loan losses | $75.0 | $21.5 | $118.6 | $63.5 |
| Non-interest income | $18.6 | $26.1 | $47.4 | $64.4 |
| Non-interest expenses | $85.6 | $88.3 | $262.6 | $270.8 |
| Net income (loss) | $(10.8) | $24.1 | $42.8 | $69.4 |
| Net income (loss) per diluted common share | $(0.05) | $0.11 | $0.19 | $0.32 |
- Q3 net interest margin was 4.33%, up from 4.06%; nine-month margin was 4.40%, versus 4.09%. The reported Q3 return on average assets was (0.36%), compared with 0.78% a year earlier.
- Management’s non-GAAP adjusted net income, excluding specified special items, was $27.4 million for Q3 and $80.2 million for the first nine months, versus $18.3 million and $66.1 million, respectively, in 2016. These adjusted figures are not GAAP results.
- For the first nine months, operating cash flow was $194.6 million, investing cash flow $42.7 million, and financing cash flow $200.1 million. Cash and cash equivalents ended the period at $737.2 million, up $437.5 million from year-end 2016.
- At September 30, assets were $12.17 billion and stockholders’ equity $1.85 billion. Deposits were $8.77 billion; borrowings totaled $1.42 billion, comprising $300 million of repurchase agreements, $915 million of FHLB advances and $208.6 million of other borrowings.
- Gross loans held for investment were $8.88 billion; the allowance was $230.9 million, or 2.60% of those loans. Total non-performing assets were $640.7 million (5.26% of assets); non-performing loans held for investment were $473.1 million (5.33% of that portfolio). Net charge-offs were $17.6 million in Q3 and $93.3 million for the nine months.
- Capital ratios were strong against stated minimums: First BanCorp. CET1 was 18.62%, total capital 22.18% and leverage 13.96%; FirstBank’s corresponding ratios were 17.36%, 21.71% and 15.34%.
Material changes versus comparable periods
- Q3 moved from $24.1 million of net income to a $10.8 million net loss, chiefly reflecting a $66.5 million hurricane-related loan-loss provision. The company reported $41.0 million of nine-month storm-related charges after tax as a special item.
- Nine-month GAAP net income fell to $42.8 million from $69.4 million. Net interest income rose, but the higher loan-loss provision and lower non-interest income more than offset that improvement.
- Non-interest income declined year over year, in part because Q3 2016 included a $6.1 million gain on securities sales. Mortgage banking income also fell, with lower loan-sale volumes and hurricane-related disruption.
- Compared with December 31, 2016, total assets increased $251 million. Cash rose materially as the company drew short-term FHLB funding in anticipation of customer liquidity needs; FHLB advances increased $245 million. Deposits decreased $65 million overall, while brokered CDs declined $184 million.
- Gross loans declined $32 million overall, including a reduction in Puerto Rico, partly offset by $226.8 million of growth in Florida. Non-performing assets declined $93.8 million, largely due to loan sales, charge-offs, collections and resolutions, although hurricane-related interruptions increased residential and consumer problem-loan measures.
Outlook, commentary, risks and unusual items
- Hurricanes Irma and Maria: Management established a $66.5 million initial storm-related allowance estimate ($59.2 million for Puerto Rico and $7.3 million for the Virgin Islands). The company cautioned that estimates may change materially as borrower reviews and economic information develop; assessments were expected to be substantially completed in Q4 2017. Management noted uncertainty around rebuilding, employment, migration, infrastructure restoration and government or private aid.
- The company provided three-month payment deferrals to eligible consumer borrowers and offered them to qualifying residential mortgage borrowers. Deferrals covered 10,160 mortgages totaling $1.3 billion; $86.3 million of residential loans in early delinquency were subject to the programs at quarter-end. Management did not classify these deferrals as troubled debt restructurings.
- Storm response, idle-time payroll and rental costs, and identified asset impairments totaled $3.5 million. Management recorded a $2.9 million insurance receivable, judging recovery of that amount probable; further costs or impairments and additional insurance recoveries remained possible.
- Puerto Rico economic and sovereign-credit conditions, PROMESA Title III restructuring proceedings, and potential effects on borrowers and public entities remain significant risks. Direct exposure to the Puerto Rico government, municipalities and public corporations was $214.8 million; separate hotel loans guaranteed by the Tourism Development Fund had $120.2 million principal outstanding and $72.4 million book value after charge-offs. The company also held $150.6 million of Puerto Rico municipal bonds at amortized cost, with $130.1 million fair value.
- Liquidity measures included a $1.8 billion core liquidity reserve (14.69% of assets), $502.7 million of additional FHLB capacity and $920.1 million of unpledged liquid securities. Brokered CDs were $1.26 billion; approximately $679.9 million were due within 12 months. Management said funding capacity and deposit-growth efforts should meet foreseeable needs, while warning that brokered funding availability and market access are risks.
- On October 3, 2017, the Federal Reserve terminated its 2010 Written Agreement, but the company agreed to continue seeking approval before specified dividends, debt payments, borrowing and capital actions. Preferred dividends had approvals through December 2017; common dividends were not declared in the periods shown.
- Other notable items included a $12.2 million first-quarter impairment charge on Puerto Rico government debt securities, a $0.4 million recovery on securities sold, a $1.4 million gain from repurchasing trust-preferred securities, and a $13.2 million tax benefit from changing certain subsidiaries’ tax status. The company reported a Section 382 ownership change that may limit use of certain U.S. and USVI tax losses.
- No specific earnings guidance was provided. Management emphasized the uncertainty of post-hurricane economic conditions and stated that actual results may differ materially from forward-looking estimates. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track subsequent hurricane-related delinquencies, borrower assessments, allowance revisions and the adequacy and timing of insurance recoveries.
- Assess liquidity and funding concentration, including brokered-CD maturities, FHLB borrowing, collateral availability and the filing’s differing repurchase-agreement presentations: $300 million on the balance sheet versus $500 million stated in one MD&A passage, which refers to $200 million of reverse repos presented net.
- Review credit quality beyond headline non-performing assets, including storm-related deferrals, TDRs, construction exposures and the Tourism Development Fund-guaranteed hotel loans.
- Monitor Puerto Rico municipal and public-sector exposures, PROMESA restructuring developments, and the status and value of the TDF’s promised fixed-income instrument.
- Confirm ongoing regulatory approvals for preferred dividends and debt payments, capital-rule phase-in effects, and whether deferred tax assets remain realizable under the Section 382 limitation.