First BanCorp. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. First BanCorp. is a financial holding company operating primarily in Puerto Rico, with banking operations in Florida, the U.S. Virgin Islands and the British Virgin Islands.
Financial performance and condition
Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise indicated.
| Metric | 2018 | 2017 |
|---|---|---|
| Total interest income | $625.0 | $588.4 |
| Net interest income | $525.4 | $491.6 |
| Net interest margin | 4.55% | 4.36% |
| Provision for loan and lease losses | $59.3 | $144.3 |
| Non-interest income | $82.3 | $62.4 |
| Non-interest expense | $357.8 | $347.7 |
| Income before taxes | $190.6 | $62.0 |
| Net income | $201.6 | $67.0 |
| Diluted earnings per common share | $0.92 | $0.30 |
| Net cash provided by operating activities | $288.3 | $236.0 |
| Net cash used in investing activities | $(223.3) | $(73.3) |
| Net cash used in financing activities | $(195.3) | Cash provided: $254.0 |
- Quarterly results: Fourth-quarter 2018 net income was $101.1 million, or $0.46 per diluted share. This quarter included the $63.2 million deferred-tax valuation allowance reversal and a $9.9 million tax charge related to Puerto Rico tax reform.
- Balance sheet at year-end: Total assets were $12.24 billion; deposits were $8.99 billion; gross loans, including loans held for sale, were $8.90 billion; and total stockholders’ equity was $2.04 billion.
- Debt and funding: Reported borrowings totaled $1.07 billion, including $740 million of FHLB advances, $150 million of repurchase agreements presented net, and $184.2 million of other borrowings, principally subordinated debentures. Brokered CDs were $555.6 million, about 6% of deposits; $259.6 million were due within 12 months.
- Liquidity: Cash and cash equivalents were $586.2 million, down $130.2 million year over year. Management reported core liquidity of $1.9 billion, or 15.6% of assets, and a basic liquidity ratio of 19.0%, versus 21.2% a year earlier. Additional FHLB borrowing capacity was $422.2 million.
- Capital: First BanCorp.’s year-end total capital, CET1, Tier 1 and leverage ratios were 24.00%, 20.30%, 20.71% and 15.37%, respectively. Tangible common equity ratio was 16.14%, up from 14.65%.
- Asset quality: Non-performing assets were $467.1 million, down from $650.6 million; nonaccrual loans, including held-for-sale loans, were $332.1 million, down from $497.8 million. Allowance for loan and lease losses was $196.4 million, or 2.22% of loans held for investment, versus $231.8 million, or 2.62%. Net charge-offs were $94.7 million, or 1.09% of average loans, versus $118.0 million, or 1.33%.
Material changes versus 2017
- Net income rose to $201.6 million from $67.0 million. Management’s non-GAAP adjusted net income was $137.1 million versus $107.9 million; these adjusted figures exclude specified unusual items and are not GAAP measures.
- Net interest income increased $33.8 million, and margin expanded 19 basis points. Management cited repricing of variable-rate commercial loans, reinvestment in higher-yielding securities and a funding mix improved by growth in non-interest-bearing deposits.
- The reported provision fell by $85.0 million. This reflected, in part, a $16.9 million hurricane-related reserve release in 2018 versus $71.3 million of hurricane-related provision in 2017. Excluding these hurricane reserve changes, the adjusted provision increased to $76.2 million from $73.0 million.
- Non-interest income increased $19.9 million, partly because 2017 included $12.2 million of impairment charges on Puerto Rico government securities. Non-interest expenses increased $10.1 million, including higher compensation and OREO costs; lower FDIC insurance expense partly offset the increase.
- Nonaccrual assets declined following loan repayments, restorations to accrual, charge-offs and sales. The company transferred $74.4 million of nonaccrual commercial and construction loans to held for sale after $22.2 million of write-downs; about $57.2 million of the transferred loans were sold, with an additional $2.7 million net loss reported.
- Deposits totaled $8.99 billion versus $9.02 billion. Non-interest-bearing demand deposits grew $561.8 million, while brokered CDs declined $594.9 million. Cash and cash equivalents fell as the company repaid maturing funding and reinvested liquidity.
Outlook, management commentary and risks
- The filing does not provide company-specific earnings or revenue guidance. Management said it expects hurricane-related deposit balances to decline over time, but the timing and extent are uncertain. Liquidity planning assumes continued access to funding and growth in customer deposits.
- Management’s estimates supporting the deferred-tax asset reversal depend on future taxable income. The $319.9 million net deferred tax asset included a $100.7 million valuation allowance; the filing identifies Puerto Rico economic conditions, non-performing assets and NOL expiration dates as relevant uncertainties.
- Puerto Rico represented approximately 74% of gross loans held for investment. Direct exposure to the Puerto Rico government, municipalities and public corporations was $214.6 million; the company also had $112.1 million of residential mortgage loans guaranteed by the Puerto Rico Housing Finance Authority. Puerto Rico public-sector deposits were $677.3 million.
- USVI government exposure was $55.8 million, with loans reported as performing and current at year-end. The company cautioned that fiscal and economic deterioration in the territories could affect borrowers and collateral values.
- Hurricanes Irma and Maria continued to pose credit and insurance-claim uncertainties. The hurricane-related qualitative allowance was $19.2 million at year-end, versus $55.6 million in 2017. The company had a $3.4 million insurance claim receivable and said possible future claim gains depended on agreement with insurers.
- Dividend and holding-company payments remain subject to regulatory approval. The company reinstated a $0.03 quarterly common dividend in December 2018, its first since 2009, and had approval for common and preferred dividends through December 2019, subject to conditions.
- Interest-rate simulations estimated that next-12-month net interest income would increase $8.7 million in a rising-rate scenario and decrease $9.1 million in a falling-rate scenario under a growing-balance-sheet assumption. These are model estimates, not guidance.
- Other risks include dependence on brokered CDs and regulatory approvals, elevated credit risk and foreclosure delays, Puerto Rico fiscal and debt-restructuring uncertainty, securities valuation losses, interest-rate and funding costs, litigation, cybersecurity and third-party operational risks. The company also identified CECL implementation as a significant upcoming accounting change.
- The First Circuit ruled in February 2019 that PROMESA oversight-board appointments were unconstitutional, subject to a 90-day period for validation or reconstitution. The filing notes uncertainty around the effect on Puerto Rico’s debt-restructuring process.
Most important facts for investors to verify
- How much of 2018 earnings growth is sustainable after isolating the $63.2 million tax benefit, hurricane reserve release and other unusual items.
- Whether the deferred-tax asset can be realized within the applicable NOL carryforward periods, and whether further valuation allowance changes are needed.
- Whether asset-quality improvement continues, particularly given new commercial loan downgrades, construction-loan losses and the remaining $467.1 million of non-performing assets.
- Whether post-hurricane deposits remain stable and the company can continue reducing brokered-CD reliance while meeting maturities and funding needs.
- Whether Puerto Rico, municipal and USVI exposures, public-sector deposits, collateral values and restructuring developments remain consistent with management’s assumptions.
- Whether regulatory approvals for dividends and parent-company debt payments continue beyond December 2019.
- The impact of CECL adoption, expected January 2020, on the allowance, earnings and capital; the filing does not provide a quantified expected impact.
- Internal controls were reported effective at December 31, 2018, and the 2018 auditor issued an unqualified opinion. Investors may also wish to verify remediation of the 2017 material weakness in commercial-loan allowance methodology; the filing describes enhancements implemented during 2018.