First BanCorp. — Q3 2019 Form 10-Q
Business context and reporting period. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. This unaudited 10-Q covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $144.4 million | $132.5 million | $427.2 million | $387.7 million |
| Provision for loan and lease losses | $7.4 million | $11.5 million | $31.8 million | $51.6 million |
| Non-interest income | $21.4 million | $18.5 million | $66.2 million | $61.8 million |
| Non-interest expenses | $92.8 million | $90.9 million | $275.7 million | $267.1 million |
| Net income | $46.3 million | $36.3 million | $130.9 million | $100.5 million |
| Diluted EPS | $0.21 | $0.16 | $0.59 | $0.45 |
| Net interest margin | 4.89% | 4.54% | 4.90% | 4.48% |
Q3 return on average assets was 1.47%, return on average common equity was 8.53%, and the efficiency ratio was 55.98%. Tangible book value per common share was $9.79, compared with $8.52 a year earlier.
Financial position, cash flow and liquidity
- Total assets were $12.53 billion, up $287.2 million from year-end 2018. Gross loans were $9.01 billion; loans held for investment grew modestly, with consumer lending growth partly offset by lower residential mortgage balances.
- Total deposits were $9.13 billion, up $138.2 million. Cash and cash equivalents rose $389.7 million to $975.9 million. Management cited maturities and prepayments of investment securities, operating cash generation and loans as factors in the balance changes.
- For the first nine months, operating cash flow was $235.7 million, investing cash flow was positive $81.1 million, and financing cash flow was positive $73.0 million. Cash increased $389.7 million from the beginning of the period.
- Balance-sheet borrowings totaled approximately $1.02 billion: $740 million of FHLB advances, $100 million of repurchase agreements reported net of reverse-repurchase balances, and $184.2 million of other borrowings. Brokered CDs were $483.0 million, down $72.6 million from year-end; about $246.3 million mature within 12 months.
- Management reported a $2.0 billion core liquidity reserve, 15.9% of assets; a basic liquidity ratio of 18.8%; $360.8 million of additional FHLB borrowing capacity; and approximately $0.9 billion of unpledged liquid securities. The filing notes that Bank liquidity remains dependent on deposits and that the company has historically relied on brokered CDs.
- At September 30, First BanCorp.’s regulatory capital ratios were 25.27% total capital, 21.61% CET1, 22.02% Tier 1 and 16.04% leverage. FirstBank’s corresponding ratios were 24.78%, 20.07%, 23.52% and 17.16%.
Material changes versus comparable periods
- Net income increased 27.6% in Q3 year over year and 30.3% for the nine-month period. Higher net interest income was a major driver, reflecting growth in consumer and performing commercial loans and higher loan yields. Q3 NIM increased 35 basis points.
- Credit costs were lower: Q3 provision fell $4.1 million and nine-month provision fell $19.9 million. Net charge-offs were $13.8 million in Q3 versus $33.0 million a year earlier; the prior-year quarter included significant charge-offs on commercial and construction loans transferred to held for sale.
- Non-performing assets fell to $332.1 million from $467.1 million at year-end 2018; the NPA-to-assets ratio was 2.65%. Nonaccrual loans held for investment were $216.2 million, and the allowance was $165.6 million, or 1.85% of loans held for investment. TDR loans held for investment totaled $495.8 million.
- Loan mix shifted toward consumer lending: consumer loans and finance leases increased by $255.0 million from year-end, while residential mortgage loans declined by $165.3 million. Total loans before allowance rose $109.6 million.
- Stockholders’ equity rose $155.9 million to $2.20 billion, driven by earnings and a $45.5 million improvement in accumulated other comprehensive income, partly offset by dividends. The company paid a $0.03-per-share common dividend in Q3; after quarter-end, it announced a $0.05 dividend for December 2019.
Outlook, management commentary and notable items
- Acquisition announced after quarter-end: On October 21, 2019, FirstBank agreed to acquire Santander Bancorp, parent of Banco Santander Puerto Rico, in an all-cash transaction. Consideration comprises a $425 million base amount plus $638 million of excess capital, subject to closing adjustments. FirstBank is not expected to assume BSPR’s non-performing assets. Closing was expected around mid-2020, subject to regulatory approvals and other conditions. Management cited improved scale, funding and risk profile, and potential cost savings and synergies. The company estimated about $76 million in restructuring charges, with half expected at closing and the remainder in 2021. Completion, integration, customer retention and synergies are uncertain.
- No specific operating earnings guidance is provided in the filing. Management described continued loan demand and plans to grow customer deposits while reducing reliance on brokered CDs. Interest-rate simulations indicated an asset-sensitive position: under a growing-balance-sheet scenario, modeled 12-month net interest income increased $17.8 million in a rising-rate scenario and decreased $26.1 million in a falling-rate scenario. These are model estimates, not forecasts of actual results.
- CECL adoption: The company planned to adopt the expected-credit-loss standard on January 1, 2020. Based on work completed and conditions at September 30, it estimated an initial allowance increase of 57%–67% versus then-current credit-loss reserves. With the expected three-year regulatory-capital phase-in, modeled CET1, Tier 1, total capital and leverage ratios would have been lower by 16, 16, 15 and 12 basis points, respectively. Estimates remain subject to portfolio, economic and model changes.
- Unusual items: Q3 results included approximately $3.0 million of accelerated discount accretion from a commercial mortgage payoff, a $0.5 million impairment charge on private-label mortgage-backed securities, and hurricane-related insurance recoveries. The first nine months also included a $6.4 million hurricane-related loan-reserve release and a $2.3 million employee-retention benefit. Management’s adjusted net income, a non-GAAP measure excluding specified items, was $44.7 million for Q3 and $122.5 million for the nine months.
- Principal risks: The filing highlights Puerto Rico’s prolonged economic and fiscal challenges, PROMESA-related restructuring uncertainty, disaster-recovery funding timing, real-estate and credit quality, deposit competition and brokered-CD funding, interest-rate and LIBOR transition risk, acquisition execution, deferred-tax-asset realization, cyber and operational risks, and regulatory requirements. Approximately 74% of gross loans were concentrated in Puerto Rico. Direct exposure to Puerto Rico government entities and obligations was $204.8 million; separate exposure to PRHFA-guaranteed residential loans was $108.0 million. All reported USVI government loans were performing.
- Management said legal proceedings and other contingencies were not expected to have a material adverse effect based on information available; it reported no material-loss disclosure requirement at September 30. A shareholder class action and related third-party complaint were dismissed by agreement on September 12, 2019.
Important facts for investors to verify
- Track approval, closing conditions, final consideration, acquired balance-sheet quality, restructuring costs and integration/synergy delivery for the proposed Santander transaction.
- Assess the CECL opening allowance and retained-earnings effect when finalized, including any resulting regulatory-capital changes.
- Review credit trends beneath the reported improvement in non-performing assets, including early delinquencies, TDR performance, charge-offs and the lower allowance-to-loan ratio.
- Monitor liquidity and deposit composition, particularly brokered-CD maturities, government deposits and access to FHLB and other funding.
- Evaluate Puerto Rico fiscal and economic developments, municipal and PRHFA exposures, and whether deferred tax assets remain realizable.
- Confirm subsequent dividend declarations and the company’s ability to sustain distributions alongside acquisition funding and capital needs.