First BanCorp. — 2017 Form 10-K Summary
Business context and reporting period. This annual report covers the year ended December 31, 2017 and was filed March 15, 2018. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and subsidiaries in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Its six reportable segments span commercial, consumer, mortgage, treasury and geographic banking operations. Year-end assets were $12.26 billion, deposits $9.02 billion and stockholders’ equity $1.87 billion.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Total interest income | $588.4 million | $585.3 million |
| Net interest income | $491.6 million | $484.1 million |
| Net interest margin | 4.36% | 4.14% |
| Provision for loan and lease losses | $144.3 million | $86.7 million |
| Non-interest income | $62.4 million | $88.0 million |
| Non-interest expenses | $347.7 million | $355.1 million |
| Net income | $67.0 million | $93.2 million |
| Net income attributable to common shareholders | $64.3 million; $0.30 diluted EPS | $93.0 million; $0.43 diluted EPS |
| Return on average assets | 0.56% | 0.75% |
| Efficiency ratio | 62.77% | 62.07% |
Cash flow and liquidity. Operating activities provided $236.0 million, investing activities used $73.3 million and financing activities provided $254.0 million. Cash and cash equivalents rose $416.7 million to $716.4 million, largely reflecting post-hurricane deposit growth. Estimated core liquidity was $1.9 billion, or 15.6% of assets; basic liquidity was 21.2% of assets. The Bank had $683.6 million of additional FHLB borrowing capacity.
Funding and debt. Deposits increased $191.4 million year over year. Non-interest-bearing deposits grew $349.5 million, while brokered CDs declined $289.2 million to $1.2 billion (about 13% of deposits); $656.9 million of brokered CDs mature within 12 months. Total borrowings were $1.22 billion: $715 million of FHLB advances, $300 million of repurchase agreements and $208.6 million of other borrowings, principally subordinated debentures.
Capital and asset quality. First BanCorp.’s regulatory ratios were 22.53% total capital, 18.96% CET1, 18.97% Tier 1 and 14.03% leverage; FirstBank’s corresponding ratios were 22.06%, 17.70%, 20.79% and 15.39%. The allowance for loan and lease losses was $231.8 million, or 2.62% of loans held for investment, up from 2.31%. Non-performing loans were $497.8 million, approximately 6% of the loan portfolio; non-performing assets were $650.6 million, or 5.31% of assets. Net charge-offs were $118.0 million, or 1.33% of average loans.
Material changes versus the prior year
- Net income fell $26.3 million, while reported provision expense rose $57.5 million, principally due to $71.3 million of storm-related provision expense. Excluding identified special items, management reported adjusted net income of $108.3 million versus $87.7 million in 2016; this is a non-GAAP measure.
- Net interest income increased $7.4 million and margin rose 22 basis points, reflecting higher commercial loan yields and lower funding costs, partly offset by lower residential mortgage and consumer loan income.
- Non-interest income declined $25.6 million, including lower mortgage banking revenue, the absence of 2016 securities-sale gains and higher Puerto Rico bond impairment charges. Non-interest expenses decreased $7.4 million.
- Total loans declined $53.4 million to $8.88 billion. Puerto Rico and Virgin Islands loan balances contracted, while Florida balances grew. Loan production was approximately $2.9 billion, broadly unchanged from 2016.
- Non-performing assets declined $83.9 million year over year, helped by asset sales and resolutions, but increased in the second half amid hurricane-related collection disruption.
Outlook, commentary and principal risks
- Hurricanes and credit uncertainty: Irma and Maria caused extensive disruption. The $68.5 million storm-related allowance at year-end included $62.9 million for Puerto Rico and $5.6 million for the Virgin Islands. Management cautioned that estimates may change as borrower conditions, insurance claims and recovery progress become clearer. Three-month deferrals covered 9,588 residential mortgages totaling $1.3 billion and 351 commercial/construction loans totaling $1.2 billion. Early delinquencies improved in some portfolios after deferrals ended in January 2018, but commercial early delinquencies increased.
- Recovery and outlook: The filing gives no specific company earnings or growth guidance. Management expects storm-related deposits to decline over time but said the timing and extent are uncertain. Puerto Rico’s revised fiscal plan assumed substantial federal and insurance recovery funds and projected an 11% GNP contraction in fiscal 2018; these are government forecasts, not First BanCorp. guidance, and remained subject to uncertainty and oversight-board review.
- Puerto Rico and government exposure: Direct exposure to the Puerto Rico government, municipalities and public corporations was $214.5 million, down from $323.3 million. Separately, three non-performing hotel commercial mortgages previously guaranteed by the Tourism Development Fund had $120.2 million principal outstanding and $70.8 million book value; after guarantee payments, real estate is their remaining collateral. The bank also held $490.3 million of Puerto Rico public-sector deposits. Puerto Rico and U.S. territory fiscal distress, PROMESA restructurings and related actions could affect borrowers, deposits, collateral values and securities.
- Concentration, liquidity and regulation: About 75% of gross loans were concentrated in Puerto Rico. Brokered CDs remain a meaningful funding source, and continued access depends partly on capital, market conditions and regulatory requirements. Although the Federal Reserve terminated its formal written agreement in October 2017, approvals remain required for specified dividends, debt payments, borrowing and capital actions. Common dividends remained suspended; preferred dividends had approval through March 2018.
- Controls and reporting: Management and KPMG identified a material weakness in controls over assumptions used to estimate commercial loan-loss reserves, specifically the historical loss rate applied to substandard loans. The weakness did not result in a financial-statement adjustment, but management concluded internal control over financial reporting was ineffective; KPMG issued an adverse ICFR opinion while giving the financial statements an unqualified audit opinion. Management planned enhanced procedures and independent review during 2018.
- Other items: The company recognized a $13.2 million tax benefit from changing certain subsidiaries to pass-through tax status. Its $294.8 million net deferred tax asset depends on future taxable income; $191.2 million of valuation allowance remained. U.S. tax reform and Puerto Rico tax proposals may affect future results. The company also reported ongoing legal proceedings but said no material loss accrual beyond amounts recorded was considered necessary based on information then available.
Important facts for investors to verify
- Whether the commercial-loan allowance material weakness was remediated and independently validated, and whether subsequent reporting or reserve estimates required adjustments.
- Actual post-deferral payment performance, hurricane-related delinquency and charge-off trends, insurance recoveries, and adequacy of the $68.5 million storm allowance.
- Realization assumptions for the $294.8 million net deferred tax asset and the effect of ownership-change limits on NOL utilization.
- Ongoing exposure and recoveries related to Puerto Rico municipalities, public-sector deposits and the non-performing hotel loans released from the TDF guarantee.
- Brokered-CD maturities and replacement funding, deposit volatility, regulatory approvals for preferred dividends and debt payments, and the continued suspension of common dividends.
- How reported GAAP earnings compare with management’s non-GAAP adjusted results and the underlying performance of each banking segment.