First BanCorp. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. 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. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $127.7 | $130.9 | $388.9 | $382.3 |
| Provision for loan losses | $27.0 | $22.2 | $85.7 | $220.8 |
| Non-interest income (loss) | $16.2 | $10.1 | $43.5 | $(28.0) |
| Non-interest expenses | $93.6 | $99.2 | $284.5 | $308.5 |
| Net income (loss) | $23.2 | $15.9 | $61.5 | $(179.3) |
| Diluted earnings (loss) per common share | $0.11 | $0.08 | $0.30 | $(0.87) |
- Q3 net interest margin was 4.14% on a GAAP basis (4.12% excluding derivative fair-value changes); the comparable GAAP margin was 4.20%. Nine-month GAAP margin was 4.21%, versus 4.06% in 2013. On a tax-equivalent basis excluding derivative fair-value changes, the nine-month margin was 4.35%, versus 4.15%.
- Q3 pretax income was $23.3 million, compared with $19.6 million; nine-month pretax income was $62.2 million, versus a $175.0 million loss. The 2013 nine-month result included a $66.6 million Lehman collateral impairment and materially higher loan-loss provisions, including impacts from 2013 bulk asset sales.
- At September 30, assets were $12.64 billion, essentially unchanged from December 31, 2013. Net loans were $9.17 billion, down from $9.43 billion; deposits were $9.70 billion, down from $9.88 billion. Stockholders’ equity rose to $1.32 billion from $1.22 billion.
- Cash and cash equivalents increased $314.3 million during the first nine months to $970.0 million. Operating cash flow was $236.9 million, investing cash flow was $234.9 million, and financing cash flow was negative $157.5 million.
- Loans held for investment totaled $9.32 billion gross, with a $225.4 million allowance (2.42% of loans), down from $285.9 million (2.97%) at year-end. Borrowings totaled approximately $1.46 billion: $900 million in repurchase agreements, $325 million in FHLB advances, and $232 million in other borrowings.
- Reported regulatory capital ratios at September 30 were 18.57% total capital, 17.30% Tier 1 and 12.34% leverage for the holding company; FirstBank’s ratios were 18.21%, 16.95% and 12.10%, respectively.
Material changes and notable items
- Quarterly net interest income fell $3.2 million year over year, primarily due to lower consumer-loan yields, including the completion of accretion of the acquired credit-card portfolio discount, lower mortgage-backed securities yields, and lower average earning assets. Lower funding costs partly offset the decline. For nine months, lower funding costs and higher mortgage-backed securities yields supported higher net interest income.
- Q3 loan-loss provision increased $4.8 million year over year, and annualized net charge-offs rose to 1.80% of average loans from 1.41%. Management cited higher Puerto Rico C&I charge-offs, including approximately $16 million tied to two relationships, and higher consumer-loan reserves. Nine-month provision fell substantially from 2013; comparison is affected by approximately $132 million of 2013 provision tied to bulk sales and loans transferred to held for sale.
- Total non-performing assets, including loans held for sale, were $744.4 million, up $19.0 million from year-end. Non-performing loans, including held-for-sale loans, rose $63.8 million to $614.2 million, principally after three commercial relationships totaling $83.8 million became non-performing. OREO declined $47.4 million to $112.8 million. Total TDR loans held for investment increased to $701.1 million from $630.3 million; $216.1 million were nonaccrual.
- In May, FirstBank accepted Doral mortgage loans with $241.7 million unpaid principal balance in full satisfaction of $232.9 million in secured borrowings; the acquired loans’ estimated fair value was $226.0 million. The transaction produced a $6.9 million loss, of which $1.4 million was an additional 2014 provision. In October, FirstBank separately purchased approximately $192.6 million of performing Doral residential mortgages for cash; this subsequent transaction was not included in September 30 balances.
- FirstBank’s investment in CPG/GS was reduced to zero after $7.3 million of equity-method losses for the first nine months. The Corporation reported no further obligation to fund the entity. In Q3 2013, CPG/GS losses were $5.9 million.
- During the first nine months, the Corporation exchanged 1.08 million preferred shares with $26.9 million liquidation value for 4.60 million common shares. The transaction reduced preferred equity and included a $1.7 million favorable effect in the nine-month common earnings-per-share calculation. Common and preferred dividends remained suspended; none were declared.
Liquidity, outlook, risks and contingencies
- Management reported a $1.6 billion core liquidity reserve, equal to 13.0% of assets, and a 15.9% basic liquidity ratio. Available additional FHLB borrowing capacity was approximately $371.8 million. Management said available borrowing capacity and efforts to grow retail deposits should meet funding needs in the foreseeable future.
- Brokered CDs were $3.06 billion; approximately $1.8 billion mature within 12 months. FirstBank may not issue, renew or roll them without FDIC approval. Its temporary waiver was effective through March 31, 2015, and future approvals were not assured. Government deposit withdrawals in Puerto Rico reduced public-sector deposits; non-brokered deposits excluding government funds increased $138.6 million from year-end.
- FirstBank and the holding company remained subject to regulatory agreements requiring, among other things, capital, asset-quality and operating plans. Despite ratios above specified capital thresholds, FirstBank could not be designated “well capitalized” while operating under the FDIC Order. The holding company could not pay dividends or receive bank dividends without required Federal Reserve approvals. The company had deferred trust-preferred interest since March 2012; deferred and accrued payments totaled approximately $20.1 million, and future payments were subject to Federal Reserve approval.
- Basel III requirements were scheduled to begin January 1, 2015, with certain requirements phased in through 2019. Management expected to elect to continue excluding AOCI from regulatory capital calculations. Its estimated fully phased-in capital ratios, based on September 30 balances, exceeded the stated minimums, but these were estimates and could change.
- Puerto Rico credit and market risk were significant. Approximately 83% of gross loans were concentrated in Puerto Rico. Public-sector lending outstanding was $316.3 million in Puerto Rico and $40.8 million in the Virgin Islands; the PREPA exposure was $75 million and became a TDR after a forbearance extended credit lines to March 31, 2015. Puerto Rico government and agency bonds had $61.1 million principal balance and $46.4 million fair value. Rating agencies downgraded Puerto Rico debt further into speculative grades in 2014; the issuers had not defaulted as of the filing.
- FirstBank maintained a $505.2 million valuation allowance against gross deferred tax assets of $525.4 million, including $373.6 million related to net operating losses. Management cited FirstBank’s three-year cumulative loss history as significant negative evidence; only $9.9 million of net deferred tax assets was recognized. An IRS settlement for tax years 2007–2009 was completed in 2014; $2.5 million was paid, and $1.4 million of related interest remained accrued.
- Management gave no specific earnings or financial guidance. It cautioned that interim results are not necessarily indicative of full-year results. Key risks include Puerto Rico’s weak economy and public finances, credit losses and foreclosures, brokered-deposit access, regulatory compliance and actions, interest-rate and securities valuation changes, and realization of deferred tax assets. Management said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether non-performing commercial/C&I loans, TDRs and charge-offs stabilize, and whether allowance levels remain adequate as consumer losses rise.
- FirstBank’s continued FDIC waiver and access to brokered CDs, upcoming maturities, deposit trends and liquidity after the October Doral cash purchase.
- Developments in Puerto Rico government and PREPA finances, associated loan and securities exposures, and any further ratings actions or defaults.
- Performance, credit marks and cash collections on the Doral loans, including the October purchase and its limited representation-and-warranty remedies.
- FirstBank’s progress under regulatory agreements, Basel III implementation, dividend restrictions and deferred trust-preferred interest.
- Evidence supporting realization of deferred tax assets, including future taxable income and the effect of the substantial valuation allowance.