First BanCorp. — 2012 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; compared primarily with the corresponding 2011 periods. Balance-sheet comparisons are to December 31, 2011. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank Puerto Rico and other subsidiaries in Puerto Rico, the U.S. mainland, and the U.S. and British Virgin Islands. Its business includes commercial and consumer banking, mortgage banking, insurance, and related services. The company and FirstBank remained subject to Federal Reserve and FDIC/OCIF regulatory agreements.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $125.5 | $94.3 | $336.1 | $295.0 |
| Provision for loan and lease losses | $29.0 | $46.4 | $90.0 | $194.4 |
| Non-interest income | $15.1 | $14.0 | $37.6 | $93.3 |
| Non-interest expense | $91.8 | $82.9 | $264.0 | $252.2 |
| Net income (loss) | $19.1 | $(24.0) | $15.2 | $(67.4) |
| Net income (loss) attributable to common stockholders | $19.1 | $(31.1) | $15.2 | $(88.8) |
| Diluted earnings (loss) per common share | $0.09 | $(1.46) | $0.07 | $(4.17) |
- Net interest margin on a tax-equivalent basis, excluding fair-value changes, was 4.02% for Q3 and 3.59% for the nine months, versus 2.86% and 2.81%, respectively, in 2011. The company attributed the improvement mainly to lower funding costs and interest income from its acquired credit-card portfolio.
- At September 30, total assets were $13.14 billion, deposits $9.90 billion, total liabilities $11.66 billion, and stockholders’ equity $1.48 billion. Net loans, including loans held for sale, were $9.81 billion; the allowance for loan and lease losses was $445.5 million.
- Cash and cash equivalents were $1.00 billion, up $557.2 million from year-end 2011. For the first nine months, operating cash flow was $190.8 million, investing cash flow $355.9 million, and financing cash flow $10.5 million.
- Borrowings totaled approximately $1.65 billion, including $900 million of repurchase agreements, $518.4 million of FHLB advances, and $232.0 million of other borrowings. The company reported $300.4 million of additional FHLB borrowing capacity.
- Regulatory capital ratios for FirstBank were 17.03% total risk-based capital, 15.71% Tier 1 risk-based capital, and 12.35% leverage, each above the FDIC Order’s stated eventual targets. Despite these ratios, the order prevents FirstBank from being treated as “well capitalized” under regulatory guidance.
Material changes versus comparable periods
- Q3 returned to profitability from a year-earlier loss; nine-month net income was also positive versus a substantial prior-year loss. Lower credit-loss provision and a stronger net interest contribution were key factors.
- Q3 net interest income rose $31.2 million year over year; the provision fell $17.5 million. Nine-month provision declined by $104.3 million.
- Non-interest income for the nine months fell $55.7 million, principally because 2011 included substantial investment-sale gains and mortgage-loan bulk-sale gains. Non-interest expense increased $11.8 million for the nine months, including higher compensation, credit-card servicing costs, REO costs, and a tax-credit contingency charge.
- On May 30, 2012, FirstBank acquired a FirstBank-branded credit-card portfolio with approximately $406 million contractual balance, recorded at about $368.9 million fair value. Consumer loans grew, while total net loans declined $270.3 million from year-end, mainly from commercial repayments, foreclosures, and charge-offs.
- Non-performing loans declined to $1.01 billion from $1.14 billion at year-end, but remained high at 9.89% of loans held for investment. REO rose to $177.0 million from $114.3 million, leaving total non-performing assets at $1.26 billion.
- Available-for-sale securities fell $325.4 million from year-end; cash and cash equivalents increased. Stockholders’ equity rose $40.0 million, including $23.3 million of other comprehensive income from unrealized securities gains.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management’s interest-rate simulation estimated that, over the next 12 months, a gradual 200-basis-point rate rise could increase net interest income by $9.8 million under a growing-balance-sheet scenario; a falling-rate scenario could reduce it by $2.0 million. These are model estimates, not guidance, and depend on assumptions.
- Access to brokered CDs depends on FDIC approval. Temporary waivers ran through December 31, 2012, and future approval was uncertain. Brokered CDs were $3.41 billion at quarter-end. Management also cited competition for core deposits and possible funding effects from credit-rating downgrades.
- The regulatory agreements impose capital, asset-quality, funding, and governance requirements. The Federal Reserve agreement restricts dividends to shareholders and dividends from FirstBank to the parent without consent. The company had suspended common and preferred dividends since 2009; no common dividends were declared in the periods shown. FirstBank had deferred interest payments due in September 2012 on subordinated debentures; future payments require Federal Reserve approval.
- Credit risk remains material: construction loans were 53.69% non-performing, and Puerto Rico represented about 85% of gross loans held for investment. The filing cites Puerto Rico’s prolonged recession, fiscal pressures, unemployment, and real-estate weakness as risks. The allowance and loss estimates depend on management assumptions and could require further provision.
- The company carried a $64.5 million non-performing asset, plus $2.1 million accrued interest, associated with securities pledged to Lehman. Litigation to recover the collateral remained unresolved; no estimated loss was accrued, and a partial or full impairment could adversely affect earnings.
- FirstBank’s three-year cumulative loss position contributed to a $360.0 million valuation allowance against deferred tax assets; the net deferred tax asset was $4.6 million. An IRS audit of 2007–2009 years remained in appeals, and management could not estimate a range of possible reserve changes.
- FIA remained the credit-card portfolio servicer for an 18-month period. Although management considered pre-acquisition due diligence adequate, it had not completed its own assessment of disclosure controls over FIA’s servicing systems and processes as of September 30, 2012.
- Other notable exposures include $925.1 million of troubled debt restructurings and the subordinated $32.3 million equity interest in CPG/GS, which recorded losses. The filing says ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether brokered-CD approvals were renewed after December 31, 2012, and how the funding mix and liquidity evolved.
- Whether non-performing loans, REO, charge-offs, and TDR performance continued to improve, particularly in construction and Puerto Rico commercial lending.
- Whether FirstBank met regulatory asset-quality and capital requirements and whether the regulatory agreements or dividend restrictions changed.
- Whether the acquired credit-card portfolio generated expected income and losses, and whether FirstBank completed its controls assessment of FIA’s servicing.
- Developments in Lehman collateral litigation and any resulting impairment charge or recovery.
- Changes in deferred-tax-asset realizability, tax audit reserves, and the company’s ability to generate sustained earnings and resume distributions.