First BanCorp. — 2016 Form 10-K
Business context and reporting period. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and related businesses in Puerto Rico, Florida, the U.S. Virgin Islands and British Virgin Islands. The filing covers the fiscal year ended December 31, 2016; quarterly figures below are for the fourth quarter. Unless stated otherwise, amounts are in U.S. dollars.
Key financial results
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Interest income | $585.3 million | $605.6 million | Down $20.3 million |
| Net interest income | $484.1 million | $502.3 million | Down $18.1 million |
| Net interest margin | 4.14% | 4.15% | Down 1 basis point |
| Provision for loan and lease losses | $86.7 million | $172.0 million | Lower, partly reflecting the unusually large 2015 bulk-sale charge |
| Non-interest income | $88.0 million | $81.3 million | Up $6.6 million |
| Non-interest expenses | $355.1 million | $383.8 million | Down $28.8 million |
| Income before taxes | $130.3 million | $27.7 million | Improved |
| Net income | $93.2 million | $21.3 million | Diluted EPS: $0.43 vs. $0.10 |
| Total assets | $11.92 billion | $12.57 billion | Down $650.6 million |
| Loans, gross | $8.94 billion | $9.15 billion | Down $211.4 million |
| Deposits | $8.83 billion | $9.34 billion | Down $506.9 million |
| Borrowings | $1.19 billion | $1.38 billion | Down $195.3 million |
| Total equity | $1.79 billion | $1.69 billion | Up $92.1 million |
Profit quality and margins. Reported 2016 net income included both gains and charges, including a $4.2 million gain on repurchased trust preferred securities, a $6.1 million gain on securities sales, $6.7 million of securities impairment charges and a $1.8 million loan-sale charge. Management’s non-GAAP adjusted net income was $87.7 million, versus $59.2 million in 2015; this measure excludes selected items and is not a GAAP result. The efficiency ratio improved to 62.07% from 65.77%.
Cash flow and liquidity. Operating cash flow was $199.4 million, investing cash flow was $83.2 million and financing cash flow was negative $735.4 million. Cash and cash equivalents fell to $299.7 million from $752.5 million, largely as the company repaid maturing brokered CDs and repurchase agreements. Management reported core liquidity of $1.6 billion, or 13.35% of assets, and a basic liquidity ratio of 19.7%. Available additional FHLB credit was $754.3 million. Brokered CDs totaled $1.44 billion, with approximately $798.8 million maturing within 12 months.
Capital. At year-end, First BanCorp.’s total capital, CET1, Tier 1 and leverage ratios were 21.34%, 17.74%, 17.74% and 13.70%, respectively; FirstBank’s corresponding ratios were 20.80%, 16.92%, 19.53% and 15.10%. Both substantially exceeded the stated well-capitalized thresholds. The tangible common equity ratio increased to 14.34% from 12.84%.
Material changes and unusual items
- Net interest income declined as average loan balances fell, especially in consumer and commercial lending, and securities prepayments were reinvested at lower yields. Lower funding costs partly offset the decline.
- Reported credit provisions fell year over year, but asset quality weakened: non-performing loans, including loans held for sale, rose 26% to $568.2 million; non-performing assets increased 20% to $734.5 million. The allowance declined to $205.6 million, or 2.31% of loans, from $240.7 million, or 2.64%.
- Net charge-offs were $121.8 million, or 1.37% of average loans. Excluding the 2016 non-performing-asset sale, management reported adjusted net charge-offs of $117.2 million, or 1.32%; adjusted charge-offs increased from 2015, including four large Puerto Rico commercial charge-offs totaling $28.0 million.
- During the fourth quarter, the company sold a pool of non-performing assets with $16.3 million book value for $11.3 million net proceeds, recording an incremental pre-tax loss of $1.8 million. It also recognized a $1.5 million recovery of a previously written-off CMO and a $2.7 million credit-card rewards liability adjustment.
- FirstBank reduced brokered CDs by $657.8 million and repaid $400 million of repurchase agreements at maturity, while increasing FHLB advances by $215 million. Non-brokered deposits excluding government deposits rose $164.5 million.
Outlook, risks and contingencies
- Puerto Rico exposure and economy: Puerto Rico had been in recession since 2006. The filing cites defaults by the Commonwealth and public entities, PROMESA-related debt restructuring uncertainty, and projected economic contraction. Direct exposure to the Puerto Rico government, municipalities and public corporations was $323.3 million at year-end, down from $360.7 million. Public-sector deposits in Puerto Rico were $408.8 million.
- TDF-guaranteed hotel loans: $127.7 million was outstanding, with a $111.8 million book value. The loans were placed on non-accrual and classified as impaired in 2016. Two facilities were not receiving TDF guarantee collections and incurred $13.9 million in second-half charge-offs. The largest facility matured in February 2017 and was under renegotiation.
- Government securities and PREPA: GDB and Public Buildings Authority bonds were placed on non-accrual; their $35.6 million amortized cost was carried at $20.5 million fair value after cumulative impairment charges. In the first quarter of 2017, the company sold its PREPA participation, with $75 million principal and $64 million book value at sale, for $53.2 million gross proceeds; it recorded a further $0.6 million loss against book value net of reserve.
- Regulatory restrictions and distributions: The 2010 Federal Reserve Written Agreement continues to restrict dividends, debt, repurchases and payments on subordinated debt without regulatory approval. The company paid deferred and scheduled subordinated-debt interest during 2016 after approvals. Preferred-stock dividends resumed for December 2016 and were paid for January and February 2017; approvals were reported through March 2017. No common-stock dividends were declared for 2016.
- Tax assets: Net deferred tax assets were $281.7 million, net of a $207.2 million valuation allowance. Realization depends on future taxable income, including at FirstBank; adverse results could require a larger allowance and materially affect earnings.
- Other risks: The filing highlights high non-performing assets, reliance on brokered CDs, funding-cost and interest-rate sensitivity, collateral valuation risk, regulatory compliance, litigation, cyber and vendor risks, and potential hurricane disruption. Management gave no quantitative earnings guidance; the filing text does not provide a clear numeric company forecast.
Important facts for investors to verify
- Whether non-performing loan inflows, charge-offs and the allowance evolve favorably, particularly for Puerto Rico commercial credits and TDF-backed hotel loans.
- Progress and final terms of Puerto Rico debt restructuring, and effects on municipal, public-corporation and government-guarantee exposures and deposits.
- Brokered-CD maturities, replacement funding availability and cost, FHLB capacity, and the durability of reported liquidity.
- Future Federal Reserve and OCIF approvals for preferred dividends and subordinated-debt interest, and the continuing requirements of the Written Agreement.
- Whether FirstBank generates sufficient taxable income to realize deferred tax assets and avoid further valuation-allowance charges.
- Reconcile reported GAAP earnings with management’s adjusted, non-GAAP measures and assess the recurrence and cash impact of unusual items.