First BanCorp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. Figures are unaudited. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and FirstBank Insurance Agency in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands.
Financial performance and condition
| Metric | Second quarter 2019 | Prior-year comparison |
|---|---|---|
| Net interest income | $142.5 million | $130.5 million; up 9% |
| Non-interest income | $22.2 million | $20.5 million |
| Net income | $41.3 million | $31.0 million; up 33% |
| Net income attributable to common shareholders; diluted EPS | $40.6 million; $0.19 | $30.4 million; $0.14 |
| Net interest margin | 4.90% | 4.49% |
| Return on average assets; efficiency ratio | 1.33%; 56.40% | 1.01%; 59.77% |
For the six months, net income was $84.6 million versus $64.2 million, diluted EPS was $0.38 versus $0.29, and net interest income was $282.7 million versus $255.2 million. Six-month net interest margin was 4.91% versus 4.45%.
- Balance sheet at June 30: Assets were $12.54 billion; loans, net of allowance, were $8.98 billion; deposits were $9.18 billion; total liabilities were $10.38 billion; and stockholders’ equity was $2.15 billion. Assets rose $293.6 million from year-end 2018, with loan growth partly offset by lower investment securities.
- Funding and debt: Borrowings totaled approximately $1.02 billion, comprising $740 million of FHLB advances, $100 million of repurchase agreements and $184.2 million of other borrowings. Brokered CDs were $515.7 million, down from $555.6 million at year-end. Deposits increased $187.5 million overall from year-end.
- Liquidity and cash flow: Cash and cash equivalents were $740.3 million at June 30, up $154.1 million from year-end. For the six months, operating cash flow was $157.1 million, investing cash flow was negative $132.6 million and financing cash flow was $129.6 million. Estimated core liquidity was $1.8 billion, or 14.5% of assets; basic liquidity was 17.6% of assets. The company reported $381.2 million of available FHLB credit and about $1.0 billion of unpledged liquid securities.
- Credit quality: The allowance for loan and lease losses was $172.0 million, or 1.89% of loans held for investment, versus $196.4 million, or 2.22%, at year-end. Non-performing assets were $384.1 million, or 3.06% of assets, down from $467.1 million, or 3.81%. Net charge-offs were $48.7 million for the first half, an annualized 1.09% of average loans, compared with $49.9 million and 1.14% in 2018.
- Capital: FirstBank’s actual total capital, CET1, Tier 1 and leverage ratios were 23.74%, 19.09%, 22.48% and 16.75%, respectively. First BanCorp.’s corresponding ratios were 24.25%, 20.63%, 21.03% and 15.64%. These exceeded stated regulatory thresholds.
Material changes and notable items
- Loan balances grew $246.3 million from year-end, led by $171.1 million growth in commercial and construction loans and $168.2 million in consumer loans; residential mortgage loans declined $93.1 million. Loan production was $987.9 million in the quarter versus $810.5 million a year earlier.
- Higher consumer and commercial loan balances and yields supported net interest income and margin growth. Higher deposit costs partly offset the benefit. Management also cited growth in non-interest-bearing deposits and a more favorable funding mix.
- Provision expense was $12.5 million in Q2, down from $19.5 million. The first-half 2019 provision included a $6.4 million hurricane-related reserve release, mainly from revised consumer payment patterns and assessments of a commercial borrower. Management said hurricane impacts are now incorporated into normal reserve analysis.
- Non-interest expense was $92.9 million in Q2, up from $90.2 million, including increases in occupancy, technology-related costs, professional fees and compensation. For the first half, expense rose to $182.9 million from $176.2 million, partly due to higher OREO costs and technology investment.
- Reported Q2 and first-half 2019 results included an approximately $0.8 million hurricane-insurance benefit and a $2.3 million employee-retention benefit in Q1; the first-half provision also included the $6.4 million reserve release. The 2018 comparison included hurricane reserve releases and expenses, plus a $2.3 million gain from repurchasing trust-preferred securities. Management’s non-GAAP adjusted net income was $40.8 million for Q2 and $77.8 million for the first half of 2019.
- Accumulated other comprehensive loss narrowed to $2.4 million from $40.4 million at year-end, substantially reflecting a $38.0 million first-half gain in available-for-sale securities valuation.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said loan demand remained strong and that available borrowing capacity and efforts to grow retail deposits should support funding needs in the foreseeable future; this depends on continued access to funding and market conditions.
- Interest-rate simulations showed an asset-sensitive position: under a rising-rate scenario, projected 12-month net interest income increased $18.2 million in the growing-balance-sheet case; under a falling-rate scenario, it decreased $18.0 million. These are model estimates based on assumptions, not forecasts of actual results.
- Puerto Rico remains exposed to recessionary and fiscal uncertainty, PROMESA restructuring actions, disaster-relief funding delays and political instability. The governor’s resignation and subsequent leadership uncertainty occurred after quarter-end and were identified as risks to the local economy, government credibility and recovery funding.
- Direct exposure to Puerto Rico government, municipalities and public corporations was $213.4 million; the company also had $110.0 million of PRHFA-guaranteed residential mortgage exposure and $785.4 million of Puerto Rico public-sector deposits. Its loan portfolio was concentrated approximately 74% in Puerto Rico, 21% in the mainland U.S. and 5% in the Virgin Islands. USVI government loans were $64.0 million and current on payments.
- The company expects to adopt CECL in Q1 2020 and expects an increase in the credit-loss allowance, particularly for longer-duration residential mortgages. The amount of the allowance increase and capital effect could not yet be estimated clearly.
- Regulatory approval remains necessary for dividends, certain debt payments and other capital actions. Approvals for common and preferred dividends and subordinated-debt payments extended through December 2019, subject to conditions. FirstBank cannot pay dividends to the holding company without required approval.
- Commitments to extend credit were approximately $1.3 billion, including $658.2 million of credit-card commitments; standby letters of credit were approximately $52.2 million. Management said commitments do not necessarily represent future cash needs because some may expire undrawn.
- A Puerto Rico class-action case involving alleged insurance “good experience” commissions remained in litigation; a preliminary-injunction hearing was scheduled for September 2019. Management stated that no disclosure of a material loss estimate was required based on its assessment at June 30.
Important facts for investors to verify
- Whether loan growth, especially in consumer and commercial lending, continues without deterioration in delinquencies, charge-offs or underwriting quality.
- Whether the lower allowance reflects sustainable credit improvement, particularly given first-half hurricane-related reserve releases and the $11.4 million Florida commercial-mortgage charge-off.
- Whether core deposits continue to grow and brokered-CD reliance declines, and whether liquidity remains adequate as $243.2 million of brokered CDs mature within twelve months.
- The eventual CECL allowance increase and resulting effect on retained earnings and regulatory capital.
- Regulatory approvals for dividends and debt payments, and developments in Puerto Rico’s political, fiscal and disaster-relief environment.
- Tax-asset realization assumptions: the company reported a $290.3 million net deferred tax asset and relies on future taxable income to realize it.