FIRST BANCORP quarterly report, Q2 FY2014

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First BanCorp. — Form 10-Q Summary

Business context and reporting period

First BanCorp. is a Puerto Rico-based financial holding company operating principally through FirstBank in Puerto Rico, the U.S. and British Virgin Islands, and Florida. This unaudited filing covers the quarter and six months ended June 30, 2014; balance-sheet comparisons are to December 31, 2013. Amounts below are in U.S. dollars.

Financial and operating performance

  • Earnings: Second-quarter net income was $21.2 million, versus a net loss of $122.6 million in Q2 2013; diluted EPS was $0.11 versus a loss of $0.60. First-half net income was $38.3 million, versus a loss of $195.2 million in the prior-year period. Common-stockholder earnings include a one-time benefit from exchanges of preferred stock for common stock: $1.3 million for Q2 and $1.7 million for the first half.
  • Interest income and margins: Q2 net interest income was $129.9 million, up $3.0 million year over year; first-half net interest income was $261.2 million, up $9.8 million. GAAP net interest margin was 4.21% for Q2 versus 4.04%; on the company’s tax-equivalent basis excluding derivative fair-value changes, it was 4.37% versus 4.12%. Lower deposit costs and maturities of higher-cost FHLB advances supported the improvement.
  • Credit costs: Provision for loan and lease losses was $26.7 million in Q2 and $58.7 million for the first half, compared with $87.5 million and $198.6 million, respectively, in 2013. Prior-year periods included substantial bulk-sale and loan-transfer charges. Excluding identified transaction impacts, management reported a higher Q2 provision, citing commercial-loan downgrades and a higher auto-loan reserve.
  • Other income and expenses: Q2 non-interest income was $15.9 million, compared with a $51.7 million loss in Q2 2013, which included a $66.6 million Lehman collateral write-off. Q2 non-interest expense fell 11.8% to $98.1 million, mainly due to lower OREO losses, professional fees, deposit insurance costs and taxes. Mortgage-banking revenue declined.
  • Cash flow: In the first half, operating cash flow was $150.1 million, investing cash flow was $104.9 million, and financing cash flow was negative $233.1 million. Cash and cash equivalents increased $22.0 million to $677.7 million.
  • Balance sheet and funding: Total assets were $12.52 billion, down $133.7 million from year-end; net loans were $9.30 billion. Deposits were $9.63 billion, down $249.1 million. Borrowings totaled $1.45 billion: $900 million in repurchase agreements, $320 million in FHLB advances and $232.0 million in other borrowings. Stockholders’ equity was $1.31 billion, up $90.1 million.
  • Capital and liquidity: FirstBank’s total capital, Tier 1 and leverage ratios were 17.70%, 16.43% and 11.79%; the holding company’s were 18.06%, 16.80% and 12.04%. The company reported core liquidity of $1.4 billion (10.9% of assets) and basic liquidity of 14.1% of assets. It had $396.8 million of additional FHLB capacity and about $695.8 million of unpledged liquid securities.
  • Asset quality: Non-performing assets, including loans held for sale, were $757.3 million, or 6.05% of assets, up $31.9 million from year-end. Non-performing loans held for investment were $564.6 million, up $69.1 million; three commercial relationships contributed $83.8 million of inflows. OREO declined $38.4 million to $121.8 million. The allowance was $241.2 million, or 2.55% of loans held for investment, down from 2.97% at year-end.

Material changes and unusual items

  • On May 30, FirstBank acquired mortgage loans from Doral with unpaid principal of approximately $241.7 million in full satisfaction of $232.9 million of secured borrowings. The loans’ estimated fair value was $226.0 million, producing a $6.9 million loss; $1.4 million was an additional Q2 provision. Approximately $102.8 million of the acquired loans were purchased credit-impaired and are excluded from reported non-performing loan statistics.
  • FirstBank classified its $75 million direct exposure to PREPA adversely in Q2 amid Puerto Rico public-corporation downgrades, the Recovery Act and uncertainty about repayment. Its total exposure to public corporations covered by the Act was $84.7 million. Lenders, including FirstBank, agreed in July not to exercise certain PREPA remedies through August 14 unless extended.
  • Puerto Rico government and agency securities totaled $61.1 million at fair value of $45.0 million. The issuers had made scheduled payments, but further fiscal deterioration or downgrades could reduce values.
  • Puerto Rico public-sector deposits fell to $252.6 million from $546.5 million at year-end; the company reported withdrawals of approximately $341.6 million by public corporations and agencies in Q2. Total brokered CDs were $3.10 billion, including about $1.8 billion maturing within twelve months.
  • The company exchanged 1.08 million preferred shares, with $26.9 million aggregate liquidation value, for 4.60 million common shares. Common and preferred dividends remained suspended; no common dividends were declared.
  • The company deferred interest payments on its subordinated debentures due from March 2012 through June 2014; deferred and accrued payments totaled approximately $18.2 million at June 30. Future payments require Federal Reserve approval.

Outlook, regulatory matters and risks

The filing provides no earnings guidance. Interest-rate simulations estimate that a gradual 200-basis-point increase could raise next-12-month net interest income by $12.5 million in a growing-balance-sheet scenario; a declining-rate scenario could reduce it by $6.5 million. These are model estimates, not forecasts. Management stated it believes available borrowing capacity and efforts to grow retail deposits should support funding needs, but brokered-CD access depends on FDIC approval; the current temporary waiver ran through September 30, 2014.

FirstBank remained subject to a 2010 FDIC/OCIF consent order and First BanCorp. to a Federal Reserve written agreement. The orders require capital, asset-quality and other corrective actions, restrict brokered-CD activity and prohibit dividends to shareholders or from FirstBank to the parent without regulatory approval. Despite capital ratios above stated minimums, FirstBank could not be designated “well capitalized” while operating under the order. Basel III changes were scheduled to begin in 2015; management expected to elect to continue excluding AOCI from regulatory capital calculations.

Key risks include Puerto Rico’s weak economy and sovereign/public-corporation credit stress, loan delinquencies and collateral values, dependence on brokered CDs and government deposits, regulatory actions, and realization of deferred tax assets. The company had a gross deferred tax asset of $520.6 million, but maintained a $510.8 million valuation allowance; the bank subsidiary was in a three-year cumulative loss position. Management said pending legal proceedings were not expected to have a material adverse effect. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

  • Whether FDIC approval to renew or issue brokered CDs continued after September 30, 2014, and how the $1.8 billion of near-term brokered-CD maturities were funded.
  • Developments in PREPA and other Puerto Rico public-sector exposures, including the $75 million PREPA credit line, the adverse classification, and any repayment or forbearance changes.
  • Trends in non-performing loans, charge-offs and OREO, especially the three commercial relationships that drove much of the increase in non-performing assets.
  • Whether the Doral-acquired loans perform in line with fair-value and expected-cash-flow assumptions, and how purchased credit-impaired loans are treated in asset-quality reporting.
  • Capital and liquidity compliance under the regulatory agreements, deferred subordinated-debt interest, and any change in restrictions on dividends.