FIRST BANCORP quarterly report, Q2 FY2015

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First BanCorp. — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015. First BanCorp. is a Puerto Rico-based financial holding company whose FirstBank subsidiary operates in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands and Florida. Unless stated otherwise, amounts below are in U.S. dollars.

Financial performance and position

  • Q2 results: Net loss was $34.1 million, or $0.16 per diluted share, compared with net income of $21.2 million, or $0.11 per diluted share, in Q2 2014. Six-month net loss was $8.4 million, versus net income of $38.3 million in the first half of 2014.
  • Interest income and margin: Q2 interest income was $151.6 million and net interest income (NII) was $126.5 million, down $6.8 million and $3.4 million, respectively, year over year. First-half NII was $252.1 million, down $9.1 million. Q2 net interest margin was 4.18% on a GAAP basis (4.33% tax-equivalent, excluding derivative fair-value changes), versus 4.21% and 4.37%, respectively, a year earlier.
  • Credit costs and other income: Q2 provision for loan and lease losses rose to $74.3 million from $26.7 million; first-half provision was $107.2 million versus $58.7 million. Q2 non-interest income was $6.7 million versus $15.9 million, including a $13.1 million net impairment loss on available-for-sale debt securities. First-half non-interest income was $39.4 million, including a $13.4 million Doral bargain-purchase gain.
  • Expenses and taxes: Q2 non-interest expenses were $102.8 million, up $4.7 million year over year; first-half expenses were $194.5 million, up $3.6 million. Q2 tax benefit was $9.8 million. The filing reports a first-half effective tax rate of 18% including all entities and 30% excluding entities where a tax benefit on ordinary losses could not be recognized.
  • Balance sheet at June 30: Assets were $12.58 billion, down $149.0 million from year-end 2014. Gross loans held for investment were $9.22 billion; net loans, including loans held for sale, were $9.08 billion. Deposits totaled $9.50 billion, compared with $9.48 billion at year-end. Stockholders’ equity was $1.67 billion.
  • Funding and debt: Borrowings were approximately $1.25 billion, comprising $700 million of repurchase agreements, $325 million of FHLB advances and $226.5 million of other borrowings. Brokered CDs declined to $2.33 billion from $2.89 billion at year-end; approximately $1.65 billion matured within 12 months. The company had $656 million of additional FHLB borrowing capacity.
  • Cash flow: First-half operating cash flow was $132.7 million, investing cash flow was $458.6 million, and financing cash flow was negative $705.0 million. Cash and cash equivalents ended at $682.4 million, down $113.7 million from year-end. Financing outflows included deposit reductions and a $200 million change in repurchase agreements.
  • Capital: June 30 Basel III ratios were 19.44% total capital, 16.37% CET1 and Tier 1, and 11.94% leverage for the holding company. FirstBank’s corresponding ratios were 19.13%, 15.81%, 17.85% and 13.03%, respectively. Tangible common equity ratio was 12.61%.
  • Asset quality: Non-performing assets, including loans held for sale, were $644.4 million, down $72.3 million from year-end; non-performing loans held for investment were $463.6 million, down from $523.9 million. The allowance was $221.5 million, or 2.40% of loans held for investment. Total TDR loans were $634.8 million; $400.8 million were in accrual status.

Material changes and unusual items

  • Bulk loan and OREO sale: In June, the company sold commercial and construction loans with a $147.5 million book value and OREO with a $2.9 million book value for $87.3 million. The transaction produced $61.4 million of charge-offs and a $48.7 million incremental pre-tax loss, including transaction costs. It accounted for much of the elevated Q2 provision and charge-offs.
  • Doral acquisition: In February, FirstBank acquired 10 Puerto Rico branches, assumed approximately $523.5 million of deposits, acquired loans with $324.8 million principal balance and received $217.7 million in cash. The transaction generated a $13.4 million bargain-purchase gain. First-half acquisition, conversion and interim servicing costs included $4.6 million of conversion costs and $3.6 million of servicing costs. Residential mortgage loans increased, while brokered CDs were reduced.
  • Puerto Rico securities impairment: The company recorded a $12.9 million credit-related OTTI charge on three Puerto Rico government-related bonds. At quarter-end, it held $52.7 million of Puerto Rico government debt, net of the impairment, with a reported fair value of $34.6 million. Management’s analysis estimated a weighted-average 70% cumulative default probability for the three bonds and stated that further impairments could be required.
  • Other credit and portfolio developments: PREPA’s $75 million credit facility was placed on non-accrual in Q1; its $74.1 million book value was accounted for on a cost-recovery basis. The company also established a $3.2 million reserve on previously acquired purchased-credit-impaired loans. Total non-performing assets fell partly due to the bulk sale, but the PREPA downgrade into non-accrual partly offset that reduction.

Outlook, risks and contingencies

  • The filing provides no specific earnings or financial guidance. Management said available borrowing capacity and efforts to grow retail deposits were expected to support funding needs in the foreseeable future, while noting liquidity depends significantly on deposits and brokered CDs.
  • Puerto Rico remained in a prolonged recession; management cited a government forecast of 0.7% GNP contraction for fiscal 2015. The Commonwealth faced budget and debt pressures, credit-rating downgrades and uncertainty over potential restructuring. After quarter-end, a $57.9 million Public Finance Corporation payment due August 1 was not made; the filing also reports that GDB made a separate $169.6 million debt-service payment.
  • Approximately 82% of gross loans held for investment were concentrated in Puerto Rico. Direct credit facilities to the Puerto Rico government, municipalities and public corporations totaled $326.7 million outstanding; the company also had $131 million of Puerto Rico hotel financings and $124 million of indirect exposure to mortgages guaranteed by the Puerto Rico Housing Authority.
  • A June 2010 Federal Reserve Written Agreement remained in effect. It restricts dividends to shareholders and transfers from FirstBank to the holding company without regulatory consent, as well as certain debt payments, debt issuance and capital repurchases. FirstBank’s FDIC Consent Order was terminated effective April 29, 2015. No common dividends were declared, and the company said dividends had been suspended since 2009.
  • Management reported that the company and FirstBank exceeded applicable regulatory capital thresholds. However, Basel III phase-in requirements, the phase-out of trust preferred securities from Tier 1 capital, and limits on holding-company access to bank dividends remain relevant. The company had deferred interest payments on subordinated debentures since March 2012; accrued deferred payments were approximately $24.9 million.
  • Management identified risks from credit deterioration, real estate markets, tax-asset realization, brokered-CD availability, funding and liquidity, interest-rate movements, regulatory requirements and Puerto Rico’s fiscal outlook. It stated that pending ordinary-course legal proceedings were not expected to have a material adverse effect.

Important facts for investors to verify

  • Whether the bulk-sale losses and higher provision signal further credit deterioration, and how the allowance develops after the sale-related charge-offs were incorporated into historical loss rates.
  • Updates to Puerto Rico government bond valuations, restructuring prospects and the company’s direct and indirect public-sector exposures, including PREPA and hotel loans supported by the Tourism Development Fund.
  • Brokered-CD renewal and replacement capacity, deposit trends, repo counterparty terms and the availability of FHLB borrowing capacity.
  • Whether the Doral branches and acquired loans deliver the expected deposit and mortgage benefits, and how recurring operating costs compare with one-time integration expenses.
  • Regulatory progress under the Federal Reserve Written Agreement, including any required approvals for dividends, debt payments or capital actions; also monitor deferred tax asset realization and Basel III capital treatment.