First BanCorp. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Filed November 9, 2015. First BanCorp. is a Puerto Rico-based financial holding company operating primarily through FirstBank in Puerto Rico, the U.S. and British Virgin Islands, and Florida. Unless noted, amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and position
| Metric | Q3 / September 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $124.9 million | $127.7 million in Q3 2014 |
| Net income; diluted EPS | $14.8 million; $0.07 | $23.2 million; $0.11 in Q3 2014 |
| Nine-month net income; diluted EPS | $6.3 million; $0.03 | $61.5 million; $0.30 in 2014 |
| Net interest margin | 4.33% tax-equivalent, excluding derivative fair-value changes | 4.25% in Q3 2014; nine-month 2015 was 4.32% versus 4.35% |
| Total assets; stockholders’ equity | $12.82 billion; $1.70 billion | $12.73 billion; $1.67 billion at December 31, 2014 |
| Loans held for investment, gross; allowance | $9.30 billion; $229.0 million | $9.26 billion; $222.4 million at December 31, 2014 |
| Deposits; borrowings | $9.72 billion; $1.25 billion | $9.48 billion; $1.46 billion at December 31, 2014 |
| Cash and cash equivalents | $961.7 million | $796.1 million at December 31, 2014; $970.0 million at September 30, 2014 |
| Operating cash flow, nine months | $199.1 million | $236.9 million in 2014 |
Q3 provision for loan and lease losses was $31.2 million, up from $27.0 million a year earlier; nine-month provision rose to $138.4 million from $85.7 million. Non-interest income was $18.8 million for the quarter and $58.2 million for nine months; non-interest expense was $93.3 million and $287.8 million, respectively. The company declared no common dividends.
At September 30, the allowance was 2.46% of loans held for investment. Non-performing loans held for investment were $472.6 million, or 5.08% of that portfolio, versus $523.9 million and 5.66% at year-end 2014. Non-performing assets, including loans held for sale, totaled $617.2 million, down $99.6 million from year-end; the filing reports this as 4.81% of assets.
Material changes and unusual items
- In February, FirstBank acquired 10 Doral Bank branches, assumed about $522.7 million of deposits, acquired loans with approximately $324.8 million principal balance, and received $217.7 million cash. The transaction generated a $13.4 million bargain-purchase gain. The company also incurred $4.6 million in acquisition and conversion costs and $3.6 million in interim servicing costs during the first nine months.
- A June bulk sale of mostly non-performing commercial and construction loans and OREO generated $87.3 million proceeds on assets with $150.4 million book value. It resulted in $61.4 million of charge-offs and an incremental pre-tax loss of $48.7 million. Nine-month net charge-offs were $131.8 million; excluding the bulk sale, management reported a 1.01% annualized net charge-off ratio versus 1.94% for the comparable 2014 measure.
- Q3 earnings declined year over year as lower commercial and consumer loan balances and lower mortgage-backed securities income outweighed Doral-related residential mortgage income and lower funding costs. Nine-month earnings were also affected by the bulk-sale loss, higher credit provision, and a $12.9 million Puerto Rico government securities credit impairment. The 2014 comparison included a $7.3 million loss on an unconsolidated investment and a preferred-stock exchange effect in income attributable to common shareholders; consequently, 2014 common-attributable income differed from reported net income.
- The company held Puerto Rico government debt with $52.7 million aggregate amount after impairment, carried at $34.1 million fair value. It recorded a $12.9 million credit-related impairment in Q2, based on its cash-flow analysis; management said further charges remained possible. About 97% of the available-for-sale securities portfolio consisted of U.S. government and agency securities.
Liquidity, capital, outlook and risks
Management reported core liquidity of $1.8 billion, or 14.0% of assets, and a basic liquidity ratio of 20.2%. The company had $797.1 million of additional FHLB borrowing capacity and approximately $842.6 million of unpledged liquid securities. Brokered CDs stood at $2.27 billion, with approximately $1.5 billion due within 12 months. Management said available borrowing capacity and deposit-growth efforts should provide adequate funding in the foreseeable future, while warning that brokered-CD availability and other funding sources are not assured. In October 2015, a counterparty exercised a call option on a $200 million reverse repurchase agreement.
At September 30, First BanCorp.’s Basel III ratios were 19.71% total capital, 16.63% CET1, 16.63% Tier 1, and 12.41% leverage; FirstBank’s corresponding ratios were 19.42%, 16.08%, 18.14%, and 13.54%. FirstBank’s FDIC Consent Order was terminated effective April 29, 2015, but the holding company remained subject to a Federal Reserve Written Agreement. That agreement restricts dividends, certain debt payments and additional debt or capital-security actions without regulatory consent. No specific earnings guidance was provided.
Puerto Rico’s prolonged recession, fiscal stress, public-debt downgrades and a public-corporation payment default remain material risks. Approximately 81% of gross loans were concentrated in Puerto Rico. FirstBank had $320.6 million outstanding in credit facilities to the Puerto Rico government, municipalities and public corporations, including a $72.6 million PREPA exposure on non-accrual and accounted for on a cost-recovery basis. A further $130.1 million of Puerto Rico hotel-industry loans was adversely classified in Q3 due to government liquidity uncertainty, although current and accruing at period-end. Puerto Rico public-sector deposits were $524.5 million. Other key risks include credit quality, collateral values, deferred tax asset realization, interest-rate sensitivity, and dependence on brokered CDs.
After quarter-end, FirstBank entered a marketing alliance with Evertec and sold its merchant-contract portfolio. The company expected to recognize part of the consideration as a gain at closing and the remainder over the alliance term; the filing does not provide a clear transaction amount.
Important facts for investors to verify
- How much of the elevated nine-month provision and charge-offs reflects recurring credit deterioration versus the bulk sale, and whether subsequent loan-quality trends support the reserve methodology.
- Developments in Puerto Rico public finances and PREPA restructuring, including recoveries on the company’s government-security and public-sector credit exposures.
- Brokered-CD renewal and funding costs, maturities, government deposit stability, and the effect of the reverse-repurchase call.
- Compliance with the Federal Reserve Written Agreement, regulatory capital requirements, and restrictions on dividends and debt payments.
- Realization of the $311.4 million net deferred tax asset and the ultimate accounting proceeds and earnings impact of the Evertec alliance.