First BanCorp. — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 31, 2014; comparative income and cash-flow figures are for Q1 2013. 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 results and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net income (loss) | $17.1 million; $0.08 diluted EPS | Q1 2013: loss of $72.6 million; loss of $0.35 per share |
| Interest income / expense | $160.6 million / $29.3 million | Q1 2013: $160.2 million / $35.7 million |
| Net interest income | $131.3 million | Q1 2013: $124.5 million |
| Provision for loan losses | $31.9 million | Q1 2013: $111.1 million |
| Non-interest income / expenses | $11.4 million / $92.8 million | Q1 2013: $13.6 million / $98.0 million |
| Cash flow | Operating +$73.5 million; investing −$8.4 million; financing +$120.7 million; cash and equivalents ended at $841.5 million | Q1 2013: operating +$30.7 million; investing −$202.1 million; financing −$13.1 million |
| Total assets / equity | $12.82 billion / $1.26 billion | December 31, 2013: $12.66 billion / $1.22 billion |
| Loans and allowance | Net loans $9.38 billion; allowance $266.8 million, or 2.79% of loans held for investment | December 31, 2013: net loans $9.43 billion; allowance $285.9 million, or 2.97% |
| Deposits / borrowings | Deposits $10.00 billion; borrowings $1.43 billion | December 31, 2013: deposits $9.88 billion; borrowings $1.43 billion |
- Reported net interest margin was 4.27%, versus 3.96% in Q1 2013; on a tax-equivalent basis excluding derivative fair-value changes, margin was 4.43%, versus 4.00%. The latter is a non-GAAP measure.
- Capital ratios at March 31 were 17.50% total capital, 16.23% Tier 1, and 11.74% leverage for the holding company; FirstBank’s respective ratios were 17.12%, 15.85%, and 11.47%. Despite ratios exceeding stated well-capitalized thresholds, FirstBank is not treated as well capitalized while subject to its FDIC Order.
- Core liquidity reserve was reported at $1.6 billion, or 12.40% of assets; basic liquidity was approximately 16.10%. FirstBank had $473.5 million of additional FHLB capacity. The parent company reported $37.5 million of cash and equivalents.
Material changes versus comparable periods
- Profitability improved from the prior-year loss. Net interest income rose $6.8 million, chiefly from lower funding costs, improved deposit mix, and increased U.S. agency mortgage-backed securities income.
- The $79.2 million decrease in provision for loan losses is substantially affected by Q1 2013’s bulk asset sale and loan transfers to held for sale, which drove $64.1 million of provision. Excluding those items, management reported a $15.1 million lower provision year over year.
- Net charge-offs were $51.0 million, or 2.11% annualized, versus $204.0 million, or 8.10%, in Q1 2013. The prior period included $134.5 million of charge-offs tied to the bulk sale and held-for-sale transfers; excluding those, the comparison is less pronounced.
- Non-interest income fell $2.3 million, including a larger loss from the CPG/GS investment and lower mortgage banking activity. Non-interest expense declined $5.2 million, partly reflecting prior-year bulk-sale and preferred-exchange expenses, but technology outsourcing and Puerto Rico’s gross-receipts tax partly offset savings.
- Non-performing loans held for investment increased to $521.8 million from $495.5 million at year-end; including held-for-sale loans, non-performing loans were $576.5 million. Total non-performing assets, including held-for-sale loans, were $730.7 million, with a 5.70% ratio to assets.
- Available-for-sale securities rose to $2.03 billion. Other comprehensive income increased $22.5 million, including a $4.8 million first-quarter fair-value increase in Puerto Rico government obligations.
Outlook, risks, contingencies, and unusual items
- Regulatory restrictions: FirstBank remains under the 2010 FDIC/OCIF Consent Order and the holding company under a Federal Reserve Written Agreement. These impose capital, asset-quality, planning, and other requirements; the agreements restrict dividends and certain payments and transactions. The company said its capital-plan items were completed, while non-performing-asset reduction continues.
- Funding and liquidity: Brokered CDs were $3.13 billion; approximately $1.8 billion mature within twelve months. Continued access requires FDIC approval, with the current temporary waiver through September 30, 2014. Management said future approvals cannot be assured. Approximately $800 million of repurchase agreements had lender call rights beginning April 9, 2014; no lender had exercised them by the filing date.
- Puerto Rico exposure: About 84% of gross held-for-investment loans were concentrated in Puerto Rico. Government-related loans outstanding were $403.9 million; Puerto Rico public-sector deposits were $550.3 million. Following Act 24-2014, management identified $250 million of public deposits as at high risk of migration; approximately $106.6 million was withdrawn in April 2014. The company stated liquidity planning considered possible further outflows.
- Puerto Rico government and agency securities had $76.2 million amortized exposure and $61.4 million fair value. The Commonwealth and other issuers were downgraded below investment grade in February 2014. The issuers had continued scheduled payments, but further fiscal deterioration could reduce security values.
- The largest single borrower exposure identified was a $235.9 million secured loan to Doral Financial. The filing describes repayment and collateral-substitution risks, including the possibility of losses if collateral cash flows are insufficient.
- The company recorded a $6.6 million equity-method loss on CPG/GS, reducing its investment carrying value to $0.7 million. Its subordinated equity return depends on the majority investor first receiving its investment and a 12% priority return.
- Deferred tax assets were $528.7 million gross, including $372.5 million of net operating losses; a $519.3 million valuation allowance left $8.3 million net. Management cited FirstBank’s three-year cumulative loss position as significant negative evidence regarding realization.
- The company had deferred interest payments on trust-preferred subordinated debentures since March 2012, totaling approximately $16.4 million accrued through March 31, 2014; future payments require Federal Reserve approval. Basel III capital changes begin in 2015, including phase-out of trust-preferred securities from Tier 1 capital by 2016.
- No common dividends were declared. In Q1, the company exchanged $6.2 million liquidation value of preferred stock for 1,075,283 common shares; the exchange added $0.4 million to retained earnings and common-stockholder income. No full-year earnings guidance is provided in the supplied filing text.
- Management stated that pending legal proceedings were not expected to have a material adverse effect. Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Key facts investors should verify
- Whether FDIC approvals for brokered-CD renewals continue after September 30, 2014, and how deposit maturities and public-sector deposit outflows affect liquidity.
- Compliance progress under both regulatory agreements, including asset-quality objectives, dividend restrictions, and the effect of Basel III implementation.
- Trends in non-performing loans, delinquencies, charge-offs, OREO, and allowance coverage, accounting for the unusually large prior-year bulk-sale comparison.
- Developments in Puerto Rico’s fiscal condition, government and agency security valuations, government-related credit exposure, and the Doral secured loan and collateral-substitution provisions.
- CPG/GS recoverability, deferred-tax-asset realization, and resolution of the outstanding tax examinations and $4.3 million unrecognized tax benefit.