First BanCorp. — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016; comparative results are for the quarter ended March 31, 2015, unless otherwise noted. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, the U.S. and British Virgin Islands, and Florida. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable / prior date |
|---|---|---|
| Net interest income | $124.6 | $125.6 in Q1 2015 |
| Provision for loan and lease losses | $21.1 | $33.0 in Q1 2015 |
| Non-interest income | $18.5 | $32.7 in Q1 2015 |
| Non-interest expenses | $93.0 | $91.7 in Q1 2015 |
| Net income; diluted EPS | $23.3; $0.11 | $25.6; $0.12 in Q1 2015 |
| GAAP net interest margin | 4.18% | 4.18% in Q1 2015 |
| Total assets | $12,714.4 | $12,573.0 at Dec. 31, 2015 |
| Total loans, net, including held for sale | $8,931.1 | $9,069.0 at Dec. 31, 2015 |
| Total deposits | $9,434.8 | $9,338.1 at Dec. 31, 2015 |
| Total liabilities; stockholders’ equity | $10,965.2; $1,749.2 | $10,878.9; $1,694.1 at Dec. 31, 2015 |
| Allowance for loan and lease losses | $238.1; 2.61% of loans held for investment | $240.7; 2.60% at Dec. 31, 2015 |
Net cash provided by operating activities was $54.3 million, investing activities provided $131.5 million, and financing activities provided $88.6 million. Cash and cash equivalents increased $274.4 million during the quarter to $1,026.8 million. The filing reports cash flows, rather than a conventional corporate free-cash-flow measure.
Borrowings totaled $1,371.2 million: $700.0 million under repurchase agreements, $455.0 million of FHLB advances, and $216.2 million of other borrowings. Core liquidity was estimated at $1.8 billion, or 14.1% of assets; the basic liquidity ratio was approximately 19.0%. Additional FHLB borrowing capacity was $617.8 million, and unpledged liquid securities were approximately $584.6 million.
At March 31, First BanCorp.’s regulatory capital ratios were 20.17% total capital, 16.60% CET1, 16.60% Tier 1, and 12.20% leverage. FirstBank’s respective ratios were 19.97%, 16.15%, 18.70%, and 13.75%. The company reported a 13.13% tangible common equity ratio and $7.66 tangible book value per common share; these are non-GAAP measures.
Material changes and notable items
- Reported net income fell $2.3 million year over year, but management’s non-GAAP adjusted net income, excluding specified unusual items, was $25.8 million versus $18.9 million in Q1 2015.
- Q1 2016 included $6.7 million of net impairment losses on investment securities, including a $6.3 million credit impairment on Puerto Rico government bonds and $0.4 million on private-label mortgage-backed securities. It also included a $4.2 million gain from repurchasing and cancelling $10 million par value of trust-preferred securities at a discount. In Q1 2015, results included a $13.4 million Doral Bank bargain-purchase gain and $2.1 million of related acquisition and conversion costs.
- Net interest income declined $1.0 million, mainly reflecting lower average consumer and commercial loan balances, partly offset by lower interest expense and increased residential mortgage income. The GAAP net interest margin was unchanged; the tax-equivalent margin excluding derivative fair-value changes was 4.35%, versus 4.31%.
- The loan-loss provision decreased $11.9 million year over year, and annualized net charge-offs declined to 1.03% of average loans from 1.25%. However, the allowance-to-loans ratio rose from 2.38% in Q1 2015 to 2.61% in Q1 2016.
- Loans declined $137.9 million from year-end, while deposits rose $96.7 million. Brokered CDs fell $91.2 million to $2.0 billion; approximately $1.2 billion was due to mature within twelve months. Non-brokered deposits, excluding government deposits, increased $137.1 million.
- Non-performing assets, including loans held for sale, rose to $737.2 million from $609.9 million at year-end, primarily because $128.6 million of Puerto Rico Tourism Development Fund (TDF)-guaranteed hotel loans moved to non-accrual. Non-performing loans held for investment increased to $574.9 million; the allowance-to-NPL ratio decreased to 41.42% from 54.36%, partly due to that inflow.
- Approximately 80% of gross loans held for investment were concentrated in Puerto Rico. The company held $43.4 million amortized cost of Puerto Rico government securities, recorded at $26.4 million fair value after cumulative impairment charges of $22.2 million.
Outlook, management commentary, and risks
The filing provides no specific earnings or revenue guidance. Management said it expected available borrowing capacity and efforts to grow retail deposits to support business plans in the foreseeable future, while cautioning that funding availability and terms are not assured. In the company’s 12-month interest-rate simulations, a gradual 200-basis-point increase was projected to raise net interest income by $13.3 million under a growing-balance-sheet scenario; the modeled falling-rate scenario projected a $10.7 million decrease. These are scenario estimates, not guidance.
- Puerto Rico fiscal and credit risk: The filing describes continuing economic weakness, government payment defaults, debt-restructuring uncertainty, and potential consequences for borrowers, securities values, deposits, and guarantees. After quarter-end, the GDB paid scheduled interest but defaulted on $367 million of principal due May 1, 2016. The company stated that future impairment charges on Puerto Rico securities could be required.
- TDF-guaranteed loans: The $128.6 million exposure was placed on non-accrual in Q1 despite being current on contractual payments at quarter-end. The company questioned the TDF’s ability to honor its guarantee amid Puerto Rico’s fiscal crisis; future collections are to reduce loan balances.
- Regulatory restrictions and distributions: The 2010 Federal Reserve Written Agreement requires the holding company to serve as a source of strength and generally restricts dividends, certain debt payments, and additional debt or capital actions without regulatory consent. Common and preferred dividends remained suspended. Interest payments on junior subordinated debentures had been deferred since March 2012; accrued deferred payments were approximately $29.4 million.
- Funding and other risks: Management cited dependence on brokered CDs, credit-rating and market-access risks, weak regional economies, real-estate and consumer credit quality, interest-rate movements, deferred-tax-asset realization, and regulatory changes. A new FDIC assessment surcharge applicable to FirstBank was scheduled to take effect July 1, 2016.
- The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Management believed pending legal proceedings would not have a material adverse effect.
Most important facts for investors to verify
- Whether Puerto Rico’s fiscal and debt-restructuring developments lead to further securities impairment or affect the company’s direct and indirect government-related exposures.
- Performance and recoverability of the $128.6 million TDF-guaranteed portfolio, including whether the guarantee continues to support cash collections.
- Trends in non-performing assets, charge-offs, allowance coverage, and the effect of the NPL increase on reserve adequacy.
- Brokered-CD renewal and maturity funding, continued growth in core deposits, and availability of FHLB and other liquidity sources.
- Compliance with the Federal Reserve Written Agreement, capital requirements as Basel III phases in, and restrictions on dividends and subordinated-debt payments.
- Assumptions supporting the $307.6 million net deferred tax asset, which is reported net of a $197.0 million valuation allowance.