FIRST BANCORP quarterly report, Q2 FY2020

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First BanCorp. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands, and Florida. Amounts below are in U.S. dollars.

Financial performance and position

  • Q2 earnings: Net income was $21.3 million, down from $41.3 million in Q2 2019; diluted EPS was $0.09 versus $0.19. Six-month net income was $23.5 million versus $84.6 million; diluted EPS was $0.10 versus $0.38.
  • Revenue and interest income: Q2 net interest income was $135.2 million, down 5.1% year over year; total interest income was $158.6 million versus $169.5 million. Reported total revenue, including net interest income and non-interest income, was $156.1 million versus $164.8 million. For the first half, net interest income was $273.9 million versus $282.7 million.
  • Margins: Q2 net interest margin fell to 4.22% from 4.90%; the interest-rate spread declined to 3.83% from 4.42%. Management attributed pressure to lower market rates, variable-rate loan repricing, securities premium amortization, and a larger share of low-yielding cash, securities, and PPP loans.
  • Credit costs: Q2 provision for credit losses was $39.0 million, compared with $12.5 million a year earlier. First-half provision was $116.4 million versus $23.9 million. The six-month reserve build was $88.9 million, reflecting COVID-19-related economic forecasts and the CECL model. Net charge-offs were $9.9 million in Q2 and $27.5 million for the first half.
  • Expenses and unusual items: Q2 non-interest expense declined to $89.8 million from $92.9 million. It included $2.9 million of merger and restructuring costs. Q2 non-interest income included a $5.0 million hurricane-related business-interruption insurance settlement; first-half results also included an $8.1 million gain on securities sales. Management’s adjusted net income, a non-GAAP measure excluding specified special items, was $22.0 million for Q2 and $16.0 million for the first half.
  • Cash flow: First-half operating cash flow was $122.4 million, investing cash flow was negative $905.3 million, and financing cash flow was positive $1.44 billion. Cash and cash equivalents increased $657.4 million to $1.30 billion.
  • Balance sheet and funding: Total assets were $14.10 billion, up from $12.61 billion at year-end 2019. Loans held for investment were $9.37 billion before the allowance; the loan allowance was $319.3 million, versus $155.1 million at year-end. Deposits rose to $10.70 billion from $9.35 billion. Total borrowings were $974.2 million, including $300 million in repurchase agreements, $490 million in FHLB advances, and $184.2 million in other borrowings. Stockholders’ equity was $2.21 billion.
  • Capital and liquidity: At June 30, First BanCorp.’s CET1, Tier 1, total capital, and leverage ratios were 21.52%, 21.90%, 25.08%, and 15.23%, respectively. The filing says the Bank and holding company exceeded regulatory capital requirements; reported ratios reflect elected CECL regulatory-capital transition relief. Cash and liquid securities exceeded 21% of assets. Available capacity included $386.4 million of FHLB credit and $997.1 million at the Federal Reserve discount window.

Material changes versus comparable periods

  • Profit and EPS declined substantially year over year, chiefly as credit-loss provisions rose and net interest income and margin fell.
  • First-half deposits increased by about $1.35 billion, while cash and available-for-sale securities grew. Management linked deposit growth partly to stimulus payments, lower customer spending, and loan payment deferrals.
  • CECL adoption on January 1, 2020 increased the total allowance by approximately $93.2 million, with a $62.3 million after-tax reduction to opening retained earnings. Prior-year results were not restated.
  • Gross loans grew by $363.5 million from year-end, including $359.6 million of PPP loans outstanding at June 30. Commercial and construction loans increased while residential mortgages declined.
  • Non-performing assets were $303.8 million, down from $317.4 million at year-end 2019. Nonaccrual loans were $204.0 million versus $210.7 million at year-end; these comparisons do not eliminate uncertainty about future performance.

Outlook, risks, and contingencies

  • COVID-19: Management said the pandemic’s duration and financial impact remained uncertain. Risks include recession, unemployment, borrower stress, further credit losses, lower fees and loan activity, and continued pressure on net interest income and margin. Puerto Rico reinstated some restrictions in July amid rising cases.
  • Payment deferrals and PPP: At June 30, 76,205 loans totaling $3.4 billion, or 36% of the held-for-investment portfolio, were under payment deferral arrangements. By July 31, the balance had fallen to $1.8 billion, or 20%. Deferrals may delay recognition of borrower stress. PPP loans carry below-market rates and may reduce margins; the filing also identifies potential legal, regulatory, and reputational risks from program participation.
  • Acquisition: FirstBank’s proposed acquisition of Banco Santander Puerto Rico had received required regulatory approvals. Subject to remaining closing conditions, the company expected completion by September 1, 2020. The stated pro forma figures were approximately $18.8 billion in assets, $12 billion in loans, and $15.4 billion in deposits. Merger costs and integration, deposit retention, and synergy realization remain risks.
  • Credit and geographic exposure: Approximately 73% of gross loans were in Puerto Rico, 22% in the U.S. (principally Florida), and 5% in the Virgin Islands. Hospitality, office, and retail real estate represented approximately 31% of commercial and construction loans and received higher reserve increases. Direct exposure to Puerto Rico government entities was $203.5 million; held-to-maturity Puerto Rico municipal bonds had a $9.3 million allowance. The filing notes uncertainty around Puerto Rico’s fiscal condition and the ability of public entities and guarantors to meet obligations.
  • Other matters: The company reported $306.2 million in net deferred tax assets, subject to realization and valuation risks. It disclosed ordinary-course legal proceedings but said no material loss disclosure was required based on its assessment at June 30. Management provided no numerical earnings guidance; it cautioned that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

  • Whether borrowers emerging from deferrals resume payments, and how delinquency, charge-offs, nonaccrual loans, and the allowance develop after deferral protections lapse.
  • Whether the CECL reserve assumptions remain adequate as actual unemployment, property values, and regional economic conditions evolve.
  • Whether the Santander Puerto Rico acquisition closed on schedule and whether integration costs, deposit retention, and expected benefits align with the company’s plans.
  • How lower rates, PPP lending, deposit mix, and securities prepayments affect net interest margin and recurring earnings.
  • Whether liquidity and capital remain strong after acquisition funding, continued dividends, and any additional credit losses; reported capital ratios include CECL transition relief.
  • The sustainability of deferred tax asset realizability and the credit quality of Puerto Rico municipal, PRHFA, and other government-related exposures.