First BanCorp. — Q1 2015 Form 10-Q
Business context and reporting period. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank in Puerto Rico, the U.S. and British Virgin Islands, and Florida. This unaudited report covers the quarter ended March 31, 2015; income and cash-flow comparisons are year over year, while balance-sheet comparisons are against December 31, 2014. Results for the quarter are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Net income | $25.6 million; diluted EPS $0.12 | $17.1 million; diluted EPS $0.08 in Q1 2014 |
| Net interest income | $125.6 million | $131.3 million in Q1 2014 |
| Net interest margin | 4.18% GAAP; 4.31% tax-equivalent, excluding derivative fair-value changes | 4.27% GAAP; 4.43% tax-equivalent on the same adjusted basis in Q1 2014 |
| Provision for loan and lease losses | $33.0 million | $31.9 million in Q1 2014 |
| Non-interest income / expenses | $32.7 million / $91.7 million | $11.4 million / $92.8 million in Q1 2014 |
| Operating cash flow | $75.5 million provided | $73.5 million provided in Q1 2014 |
| Assets / deposits | $13.15 billion / $9.84 billion | $12.73 billion / $9.48 billion at December 31, 2014 |
| Equity | $1.71 billion | $1.67 billion at December 31, 2014 |
| Loans held for investment, gross / allowance | $9.49 billion / $226.1 million | $9.26 billion / $222.4 million at December 31, 2014 |
- Net income rose 50% year over year, but included a $13.4 million bargain-purchase gain from the Doral Bank transaction; the disclosed after-tax gain was $8.2 million. Income before taxes was $33.7 million and income tax expense was $8.0 million, versus $18.0 million and $0.9 million, respectively, in Q1 2014.
- Net interest income declined $5.7 million. Lower consumer-loan and mortgage-backed-security yields and lower commercial, construction, and consumer loan balances outweighed residential mortgage growth and lower deposit costs.
- Net charge-offs fell to $29.3 million, or 1.25% of average loans annualized, from $51.0 million, or 2.11%, in Q1 2014. The allowance was 2.38% of loans held for investment, versus 2.40% at year-end.
- Cash and cash equivalents were $984.4 million, up $188.3 million during the quarter. Investing activities provided $280.0 million, including $217.7 million net cash from the Doral acquisition; financing activities used $167.2 million, primarily reflecting repayments of maturing brokered CDs.
- Reported borrowings were $1.46 billion: $900 million in repurchase agreements, $325 million in FHLB advances, and $232.0 million in other borrowings. The company also reported $23.7 million of deferred and accrued interest on trust-preferred-related subordinated debentures.
Material changes and significant events
- On February 27, 2015, FirstBank acquired 10 Doral Bank branches in Puerto Rico, assumed approximately $523.5 million of deposits, acquired loans with $324.8 million principal balance and $311.4 million acquisition-date fair value, and received $217.7 million cash. The transaction had no FDIC loss-share arrangement. FirstBank recorded a $5.8 million core-deposit intangible and the bargain-purchase gain noted above; $2.1 million of transaction costs were identified as non-recurring.
- The acquisition helped make FirstBank Puerto Rico’s second-largest bank and added a source of deposits. Total deposits increased $357.1 million from year-end; brokered CDs declined $314.6 million to $2.57 billion. The filing attributes deposit growth to both organic growth and the Doral transaction.
- Total non-performing assets, including loans held for sale, increased to $754.3 million from $716.8 million. Non-performing loans, including held-for-sale loans, were $618.1 million, up $39.6 million; the main driver was a $75 million PREPA credit facility placed on non-accrual.
- FirstBank’s FDIC Consent Order, in place since 2010, was terminated effective April 29, 2015, after quarter-end. The holding company remains subject to its 2010 Federal Reserve Written Agreement.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management said its strategy includes growing non-brokered deposits and reducing reliance on brokered CDs. Management considered available borrowing capacity and deposit-growth efforts sufficient for foreseeable funding needs, while acknowledging that liquidity remains an ongoing challenge.
- Liquidity indicators improved: estimated core liquidity was $1.7 billion, or 13.0% of assets, and the basic liquidity ratio was 17.7%. Available additional FHLB credit was $615.4 million; unpledged liquid securities were approximately $745.2 million. Brokered CDs totaled $2.57 billion, with approximately $1.8 billion maturing within 12 months. The Bank’s funding remains materially reliant on deposits and brokered CDs.
- The Written Agreement generally restricts dividends to shareholders and from FirstBank to the holding company, payments on trust-preferred securities or subordinated debt, and specified debt or capital-security actions without regulatory consent. Common and preferred dividends remained suspended; no common dividends were declared for the quarter. Trust-preferred interest payments have been deferred since March 2012, subject to the indentures and regulatory approval for future payments.
- Regulatory capital ratios at March 31, 2015 were strong relative to stated thresholds: FirstBank’s total capital ratio was 18.89%, CET1 was 15.62%, Tier 1 was 17.61%, and leverage was 13.28%. First BanCorp.’s corresponding ratios were 19.20%, 16.15%, 16.15%, and 12.16%. Basel III capital rules took effect in 2015; certain adjustments and the capital conservation buffer are being phased in.
- Puerto Rico concentration is a key risk: approximately 83% of gross loans held for investment were concentrated there. The company held $65.5 million of Puerto Rico government and agency bonds at $41.5 million fair value, and their fair value declined $6.1 million in Q1. Management said contractual payments had been made and it intended and was able to hold the securities, but further fiscal deterioration or downgrades could reduce their value.
- Other credit risks include $705.1 million of TDR loans held for investment and $181.1 million of purchased credit-impaired loans, which are excluded from reported non-performing statistics. Non-performing assets also included $122.6 million of OREO. The allowance and impairment estimates depend on management judgments and collateral values.
- Management cited the prolonged Puerto Rico recession, government fiscal pressures, potential public-sector defaults, real-estate and consumer-credit conditions, brokered-CD availability, interest-rate changes, and regulatory requirements as risks. Litigation in the ordinary course was not expected by management to have a material adverse effect. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- How much of reported earnings was attributable to the one-time Doral bargain-purchase gain, and what recurring earnings contribution the acquired branches generate after integration costs.
- Whether the $75 million PREPA exposure is repaid, restructured, or requires additional provision, and how broader Puerto Rico public-sector and bond exposures evolve.
- Trends in non-performing loans, TDR performance, charge-offs, OREO dispositions, and allowance coverage, including the effect of purchased credit-impaired loans excluded from non-performing measures.
- Brokered-CD maturities, renewal availability and pricing, ongoing non-brokered deposit growth, and repurchase-agreement call and collateral terms.
- Progress toward satisfying the Federal Reserve Written Agreement and any regulatory approval required for dividends, debt payments, or other restricted actions.