FIRST BANCORP quarterly report, Q3 FY2016

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First BanCorp. — Form 10-Q summary

Reporting period: Quarter and nine months ended September 30, 2016. First BanCorp. is a Puerto Rico-based financial holding company operating principally through FirstBank in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands, and Florida. Dollar amounts below are in U.S. dollars; financial-statement figures are generally in millions unless otherwise noted.

Financial performance and position

  • Quarterly earnings: Net income was $24.1 million, or $0.11 per diluted share, versus $14.8 million, or $0.07, in Q3 2015. Management’s adjusted net income, a non-GAAP measure excluding specified unusual items, was $18.3 million versus $15.0 million.
  • Nine-month earnings: Net income was $69.4 million, or $0.32 per diluted share, versus $6.3 million, or $0.03, in the prior-year period. Adjusted net income was $66.1 million versus $44.1 million.
  • Net interest and margins: Q3 net interest income was $118.2 million, down from $124.9 million; nine-month net interest income was $363.1 million, down from $377.1 million. Net interest margin was 4.06% for Q3 and 4.09% for the nine months, compared with 4.19% and 4.18%, respectively, in 2015. Management attributed the pressure mainly to lower loan balances and securities yields and higher funding costs.
  • Credit costs: Provision for loan and lease losses was $21.5 million in Q3 and $63.5 million for nine months, compared with $31.2 million and $138.4 million in 2015. Nine-month 2015 provision included $46.9 million associated with a bulk asset sale. Q3 2016 net charge-offs were $41.9 million, or 1.90% of average loans annualized, versus $23.7 million, or 1.04%, a year earlier.
  • Revenue and expenses: Q3 non-interest income increased to $26.1 million from $18.8 million, including a $6.1 million gain on securities sales. Non-interest expense declined to $88.3 million from $93.3 million. For nine months, non-interest income was $64.4 million versus $58.2 million and expenses were $270.8 million versus $287.8 million.
  • Assets and funding: Total assets were $12.08 billion, down $497.8 million from year-end 2015. Loans held for investment were $8.86 billion before allowance, down $248.7 million; total deposits were $8.98 billion, down $356.8 million. Total borrowings—repurchase agreements, FHLB advances and other borrowings—were $1.17 billion, down from $1.38 billion.
  • Cash flow and liquidity: Nine-month operating cash flow was $119.1 million, investing cash flow $224.2 million, and financing cash flow negative $566.8 million. Cash and cash equivalents fell $223.5 million to $528.9 million. Management reported a $1.5 billion core liquidity reserve, a basic liquidity ratio of 20.8% of assets, $1.1 billion of additional FHLB borrowing capacity and $774 million of unpledged liquid securities. Brokered CDs totaled $1.56 billion, with about $949 million maturing within 12 months.
  • Capital: Stockholders’ equity was $1.80 billion, up $105.8 million from December 2015. At September 30, consolidated CET1, Tier 1, total capital and leverage ratios were 17.64%, 17.64%, 21.27% and 13.04%, respectively. No common dividends were declared.

Material changes and unusual items

  • Reported earnings benefited from a $6.1 million Q3 gain on sales of U.S. agency mortgage-backed securities. Q3 adjusted earnings also exclude $0.3 million of severance costs; the comparable 2015 adjustment removes a $0.2 million securities impairment.
  • Nine-month 2016 results included a $4.2 million gain from repurchasing trust-preferred securities and $6.7 million of net securities impairment losses. Nine-month 2015 results included a $13.4 million Doral Bank bargain-purchase gain and substantial bulk-sale credit costs. These items make reported year-over-year net income comparisons less representative of underlying trends.
  • Loan balances contracted, particularly in commercial, construction and consumer lending; management cited large repayments, charge-offs and subdued Puerto Rico economic conditions. Total non-performing assets rose to $744.0 million from $609.9 million at year-end 2015, principally due to troubled Puerto Rico commercial exposures and defaulted government-related bonds.
  • In Q2 2016, $156.2 million of Puerto Rico municipal financing arrangements were reclassified from loans to held-to-maturity securities for regulatory reporting treatment. The company stated the accounting change did not materially affect previously reported results or financial position.

Outlook, risks and contingencies

  • The filing provides no specific earnings or revenue guidance. Management said available borrowing capacity and efforts to grow customer deposits were expected to support business plans in the foreseeable future, while noting that liquidity remains an ongoing challenge and funding access is not assured.
  • Puerto Rico’s prolonged recession, government fiscal crisis, payment defaults and PROMESA restructuring process are significant uncertainties. At September 30, direct exposure to Puerto Rico government entities, municipalities and public corporations was $325.9 million; related hotel-industry loans supported secondarily by the Tourism Development Fund had a book value of $112.8 million and were non-accrual. The company recorded $13.7 million in Q3 charge-offs on two such facilities and reported it was not receiving collections from the TDF guarantee on those facilities.
  • GDB and Puerto Rico Public Buildings Authority bonds were placed on non-accrual after payment defaults or partial payment. Their $35.6 million amortized cost was carried at $19.5 million fair value. The company stated further impairment charges may be required.
  • A 2010 Federal Reserve Written Agreement remains in effect. It limits dividends, certain debt payments and other capital actions absent regulatory approval. Interest on subordinated debt was current at quarter-end after approved payments, but future payments remain subject to approval. Common and preferred dividends remain suspended.
  • Credit quality remains a key risk: non-performing loans held for investment were $566.7 million; the allowance was $214.1 million, or 2.42% of such loans. The filing also reports $656.3 million of TDR loans and $139.4 million of OREO. Management cautions that economic deterioration, collateral values and borrower conditions could require additional provisions.
  • Other risks include reliance on brokered CDs, interest-rate and securities valuation exposure, deferred tax asset realization, regulatory changes, and credit-rating-related funding constraints. The company reported $290.9 million of net deferred tax assets after a $201.7 million valuation allowance. Management said pending legal proceedings were not expected to have a material adverse effect; disclosure controls were assessed as effective.

Important facts for investors to verify

  • Track Puerto Rico government restructuring outcomes, bond recoveries and any additional impairment on the company’s Puerto Rico securities and loan exposures.
  • Assess performance and collectability of TDF-supported hotel loans, PREPA exposure, and other non-performing commercial credits; monitor charge-offs, delinquencies, TDRs and allowance coverage.
  • Review the maturity and renewal profile of brokered CDs and callable repurchase agreements, and confirm ongoing access to FHLB capacity and regulatory approvals for subordinated-debt interest payments.
  • Compare GAAP results with management’s non-GAAP adjusted earnings and reconcile the impact of securities gains, impairments, debt repurchase gains and prior-year Doral and bulk-sale items.
  • Monitor net interest margin, loan production and balances, capital ratios, liquidity measures, and the ability to realize deferred tax assets. The filing’s interest-rate simulations estimate next-12-month net interest income rising 2.81%–2.85% under a +200-basis-point scenario and declining 1.20%–1.91% under a falling-rate scenario; these are modeled estimates, not guidance.