FIRST BANCORP quarterly report, Q1 FY2019

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First BanCorp. — Q1 2019 Form 10-Q

Reporting period: Quarter ended March 31, 2019. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, the U.S. and British Virgin Islands, and Florida. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise.

Financial performance

  • Revenue: Net interest income was $140.2 million, up 12.4% from $124.7 million in Q1 2018. Non-interest income was $22.5 million versus $22.8 million; combined net interest and non-interest income was $162.7 million versus $147.5 million.
  • Profit: Net income was $43.3 million, up from $33.1 million; net income attributable to common stockholders was $42.6 million. Basic and diluted EPS were $0.20, versus $0.15.
  • Margins and returns: Net interest margin was 4.92%, compared with 4.40%; net interest spread was 4.45%, compared with 4.05%. Return on average assets was 1.43%, versus 1.10%.
  • Credit costs: Provision for loan and lease losses fell to $11.8 million from $20.5 million. Net charge-offs were $24.5 million, or 1.10% annualized, versus $26.5 million, or 1.21%. The allowance was $183.7 million, equal to 2.04% of loans held for investment, down from 2.22% at year-end.
  • Expenses and tax: Non-interest expenses rose to $90.0 million from $86.0 million, including OREO losses and expenses of $3.7 million versus $0.2 million. Income tax expense increased to $17.6 million from $7.8 million.
  • Cash flow: Operating activities provided $83.0 million, compared with $95.4 million. Investing activities used $104.9 million, while financing activities provided $25.3 million. Cash and cash equivalents ended the quarter at $589.6 million, up $3.4 million from year-end.

Financial position, funding and capital

  • Total assets were $12.38 billion, up $133.2 million from December 31, 2018. Gross loans, including loans held for sale, were $9.03 billion; deposits were $9.07 billion.
  • Stockholders’ equity was $2.10 billion, up $55.8 million from year-end, supported by quarterly earnings and a $20.5 million improvement in available-for-sale securities’ fair value, partly offset by dividends.
  • Reported borrowings totaled $1.02 billion, including $740 million of FHLB advances, $100 million of repurchase agreements presented net, and $184.2 million of other borrowings. FHLB borrowing capacity available was $461.8 million.
  • Brokered CDs declined to $509.7 million from $555.6 million; approximately $234.9 million mature within 12 months. Non-brokered deposits, excluding government deposits, increased $124.4 million during the quarter.
  • Management estimated core liquidity of $1.9 billion, or 15.2% of assets; the basic liquidity ratio was 18.9%. Unpledged liquid securities were approximately $1.2 billion.
  • First BanCorp.’s regulatory capital ratios were 24.10% total capital, 20.44% CET1, 20.84% Tier 1 and 15.46% leverage. The filing reports these above applicable minimums.

Material changes and management commentary

  • Higher net interest income reflected growth and repricing in commercial, construction and consumer lending, investment of liquidity in higher-yielding securities, and a larger share of non-interest-bearing deposits. These gains more than offset higher deposit and borrowing costs and lower residential mortgage balances.
  • Total loans grew $128.7 million from year-end, led by commercial and construction loans and consumer lending; residential mortgage loans declined. Loan production was $970.7 million, compared with $683.4 million in Q1 2018.
  • Non-performing assets declined to $414.9 million from $467.1 million at year-end. Nonaccrual loans held for investment were $272.8 million, down from $316.0 million. Total TDR loans held for investment were $589.8 million, including $103.9 million in nonaccrual status.
  • Management said hurricane-related credit uncertainties had largely been addressed and would be reflected in normal allowance assessments going forward. A separate hurricane-related qualitative reserve was $12.6 million, down from $19.2 million at year-end.
  • Q1 2019 included a $6.4 million hurricane-related reserve release and a $2.3 million employee-retention benefit. Management’s non-GAAP adjusted net income, excluding specified unusual items, was $37.0 million versus $27.9 million in Q1 2018. Q1 2018 included a $2.3 million gain on early extinguishment of debt and $1.6 million of hurricane-related expenses.
  • No specific earnings guidance was provided. The company’s interest-rate simulation estimated that a 200-basis-point gradual increase would raise next-12-month net interest income by $18.3 million under a growing-balance-sheet scenario; a falling-rate scenario estimated a $15.2 million decrease. Management cautioned that simulations depend on assumptions and are not forecasts of actual results.

Risks, contingencies and notable items

  • Puerto Rico concentration remains material: approximately 74% of gross loans were in Puerto Rico. Results remain exposed to local economic conditions, disaster recovery, the PROMESA fiscal and debt-restructuring process, and government policy changes. The filing notes uncertainty around the timing and amount of expected disaster-recovery funding.
  • Direct Puerto Rico government exposure was $213.5 million, including $190.9 million to municipalities and $14.3 million to an affiliate of PREPA; the portfolio also included $8.2 million amortized cost of Puerto Rico Housing Finance Authority bonds. Separately, USVI government-entity loans were $61.6 million and were current at quarter-end.
  • Regulatory approvals remain necessary for dividends, certain debt payments and other capital actions. Approvals for common and preferred dividends and subordinated-debt interest payments were in place through December 2019, subject to conditions; future payments require continued approvals.
  • Management identifies dependence on brokered CDs, deposit competition, asset quality, real estate values, interest-rate changes, deferred-tax-asset realization and regulatory compliance as risks. A $306.0 million net deferred tax asset was recorded, including valuation allowances.
  • The company adopted lease accounting in Q1, recognizing operating-lease right-of-use assets of $57.2 million and liabilities of $59.8 million. Legal proceedings were described as ordinary-course matters; management said no material-loss disclosure was required based on its assessment at quarter-end.

Important facts for investors to verify

  • Whether net interest margin and loan growth remain durable as deposit and wholesale funding costs change.
  • Whether credit quality continues improving, particularly nonaccrual loans, TDRs, OREO valuations and residential mortgage delinquencies.
  • How much reported earnings depended on hurricane-related reserve releases and the employee-retention benefit, and how future credit provisions compare with net charge-offs.
  • Liquidity and refinancing exposure from brokered CDs maturing within 12 months, and continued access to deposits and FHLB funding.
  • Continued regulatory approval for dividends and subordinated-debt payments, and the realizability of deferred tax assets amid Puerto Rico tax and economic developments.