First BanCorp. — Form 10-Q Summary
Business context and reporting period
First BanCorp. is a Puerto Rico-based financial holding company operating FirstBank Puerto Rico and related businesses in Puerto Rico, the U.S. mainland, and the U.S. and British Virgin Islands. This unaudited filing covers the quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. Unless indicated otherwise, financial amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2013 / September 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Total interest income | $162.2 million | $167.0 million in Q3 2012 |
| Net interest income | $130.9 million | $125.5 million in Q3 2012 |
| Net interest margin | 4.20% GAAP; 4.19% excluding fair-value changes | 3.98% excluding fair-value changes in Q3 2012 |
| Net income | $15.9 million; $0.08 per diluted share | $19.1 million; $0.09 per diluted share in Q3 2012 |
| Net income (loss), nine months | $(179.3) million; $(0.87) per diluted share | $15.2 million; $0.07 per diluted share in 2012 |
| Provision for loan losses | $22.2 million in Q3 | $29.0 million in Q3 2012; $220.8 million for nine months versus $90.0 million in 2012 |
| Total assets | $12.79 billion | $13.10 billion at December 31, 2012 |
| Deposits / borrowings | $9.95 billion / $1.49 billion | Deposits were $9.86 billion; borrowings $1.64 billion at December 31, 2012 |
| Cash and cash equivalents | $824.4 million | Down $122.5 million since December 31, 2012 |
| Stockholders’ equity | $1.22 billion | $1.49 billion at December 31, 2012 |
For the first nine months, operating cash flow was $262.5 million, investing cash flow was $(313.2) million, and financing cash flow was $(71.8) million. The loan-loss allowance was $289.4 million, or 3.04% of loans held for investment. Non-performing assets, including loans held for sale, were $726.0 million (5.68% of assets); non-performing loans including held-for-sale loans were $578.6 million. Regulatory capital ratios at September 30 were 16.89% total capital, 15.61% Tier 1, and 11.65% leverage for First BanCorp.; FirstBank’s respective ratios were 16.48%, 15.20%, and 11.35%.
Material changes versus comparable periods
- Q3 net interest income increased $5.4 million year over year, principally from lower funding costs and a larger investment-securities balance. Nine-month net interest income rose to $382.3 million from $336.1 million.
- Q3 earnings declined year over year as non-interest expenses rose $7.3 million and non-interest income fell $5.1 million, partly offset by a $6.8 million lower loan-loss provision.
- The nine-month net loss included a $66.6 million non-cash write-off of collateral pledged in the Lehman litigation, alongside substantial loan-loss provisions and losses on asset dispositions. Other comprehensive loss of $86.9 million, largely reflecting unrealized investment-security losses, also reduced equity.
- Two first-half bulk asset sales and transfers of loans to held for sale accelerated problem-asset reduction. Non-performing assets fell $512.2 million from year-end; however, reported nine-month net charge-offs were $366.8 million, including $232.4 million associated with bulk sales and loans transferred to held for sale. Excluding those items, management reported $134.4 million of net charge-offs.
- Total assets declined 2% from year-end, while available-for-sale securities increased $316.3 million and loans declined. The company purchased approximately $682.9 million of 15–20-year U.S. agency mortgage-backed securities.
Outlook, management commentary, risks and unusual items
- Regulatory restrictions and funding: FirstBank remains subject to an FDIC consent order and First BanCorp. to a Federal Reserve written agreement. These require capital and problem-asset plans and restrict dividends, certain debt payments, and brokered-CD activity. Despite capital ratios above stated thresholds, FirstBank cannot be treated as “well capitalized” while under the order. Brokered CDs were $3.18 billion; continued issuance or renewal requires FDIC approval. Management said it expected approval for Q4 2013 and considered available liquidity and deposit-growth efforts adequate for planned needs, but acknowledged continued waiver uncertainty.
- Liquidity and dividends: Management reported core liquidity of $1.6 billion (12.13% of assets), a basic liquidity ratio of 15.19%, and $390.7 million of additional FHLB capacity. The agreements prevent dividends to shareholders or from FirstBank without regulatory approval. Common and preferred dividends remained suspended; no common dividends were declared in the reported periods.
- Puerto Rico concentration: Approximately 85% of gross loans held for investment were concentrated in Puerto Rico. The company had $326.7 million in credit facilities to the Puerto Rico government, municipalities, and public corporations, $198.9 million of hotel-industry financing guaranteed by the Tourism Development Fund, $71.0 million of Puerto Rico government and agency bonds carried at $49.2 million fair value, and $584.1 million in Puerto Rico public-sector deposits. Management cited recessionary conditions, weak economic activity, fiscal pressure, and negative debt-rating outlooks as risks.
- Credit and asset quality: Management’s asset sales reduced non-performing balances, but loan defaults, foreclosures, collateral values, and the adequacy of reserves remain material uncertainties. Construction loans had elevated reported loss measures, partly reflecting asset-sale and transfer charge-offs. Troubled debt restructurings held for investment totaled $636.9 million; $209.7 million was nonaccrual.
- Tax and operating costs: Puerto Rico’s 1% gross-receipts tax produced $4.9 million of expense for the nine months, partly offset by a $2.5 million income-tax credit. A $519.8 million valuation allowance against deferred tax assets reflects, in part, FirstBank’s cumulative-loss position. Unrecognized tax benefits were $5.5 million, and the IRS audit/appeals process remained unresolved. Management expected to reverse about $0.5 million of gross-receipts-tax accrual after a subsequent Puerto Rico law clarification.
- Unusual and contingent items: The company recorded $66.6 million non-cash impairment relating to Lehman-pledged securities after an adverse bankruptcy-court ruling; its appeal was pending and Barclays sought sanctions. The corporation also reported $140.8 million in aggregate losses on the two bulk asset sales. A secondary offering by existing shareholders generated no proceeds for First BanCorp. and incurred approximately $1.7 million of company costs. A multi-year technology outsourcing agreement and credit-card processing conversion increased expenses.
- Outlook: No specific earnings or revenue guidance was provided. Management anticipated exceeding fully phased-in Basel III capital minimums, while noting future capital adjustments and the phase-out of trust-preferred securities from Tier 1 capital. The company’s interest-rate simulation projected 12-month net interest income increases of 3.17% in a rising-rate scenario and decreases of 1.80% in a falling-rate scenario under its growing-balance-sheet assumptions; these are model estimates, not guidance.
Important facts for investors to verify
- Whether FirstBank continued to obtain FDIC approvals to issue or renew brokered CDs, and how deposits and other funding evolved after quarter-end.
- Progress under the FDIC consent order and Federal Reserve written agreement, including any changes to dividend, debt-payment, or capital restrictions.
- Whether asset-quality improvement persisted after the bulk sales, including subsequent non-performing loan inflows, charge-offs, reserve needs, and TDR performance.
- Developments in Puerto Rico’s economy, government credit ratings, public-sector finances, and the valuation and impairment assessment of the company’s Puerto Rico bond exposure.
- Outcomes of the Lehman collateral appeal and IRS tax proceedings, and any resulting financial, capital, or cash-flow effects.