Business context and reporting period
First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. This Form 10-K reports the fiscal year ended December 31, 2015; the filing also provides fourth-quarter results and events. Assets were $12.57 billion, deposits $9.34 billion and stockholders’ equity $1.69 billion at year-end.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total interest income | $605.6 million | $633.9 million |
| Net interest income | $502.3 million | $518.1 million |
| Net interest margin, GAAP | 4.15% | 4.20% |
| Provision for loan and lease losses | $172.0 million | $109.5 million |
| Non-interest income | $81.3 million | $61.3 million |
| Non-interest expenses | $383.8 million | $378.3 million |
| Pre-tax income | $27.7 million | $91.6 million |
| Net income | $21.3 million | $392.3 million |
| Diluted earnings per common share | $0.10 | $1.87 |
Fourth-quarter 2015 net income was $15.0 million. The prior-year annual comparison is distorted by a $302.9 million deferred-tax valuation allowance reversal in 2014; excluding specified unusual items, management reported adjusted pre-tax income of $78.7 million in 2015 versus $91.6 million in 2014. The adjusted measure is non-GAAP.
Cash and cash equivalents were $752.5 million at year-end, down from $796.1 million. Cash from operations was $261.9 million, investing activities provided $439.0 million and financing activities used $744.5 million. Gross loans, including loans held for sale, were $9.31 billion; the allowance for loan losses was $240.7 million. Total borrowings were $1.38 billion, including $700 million of repurchase agreements, $455 million of FHLB advances and $226.5 million of other borrowings.
Capital ratios at December 31, 2015 were 20.01% total capital, 16.92% common equity Tier 1, 16.92% Tier 1 and 12.22% leverage at the holding company. The tangible common equity ratio was 12.84%. These ratios were above stated Basel III minimums, but the Written Agreement remains in force and the filing says the Corporation cannot be considered well-capitalized while subject to it.
Liquidity measures included $1.5 billion of core liquidity, or 12.3% of assets, and a 17.4% basic liquidity ratio. FirstBank held $2.1 billion in brokered CDs, about 22.5% of deposits; approximately $1.3 billion matured within the following 12 months. The filing does not provide a consolidated-company free cash flow measure.
Material changes versus the prior comparable period
- Net income fell sharply from 2014, principally because 2014 included the $302.9 million tax benefit. Pre-tax income also declined, as higher credit provisions and lower net interest income outweighed higher non-interest income.
- Net interest income fell $15.8 million; the GAAP net interest margin declined 5 basis points. Lower commercial, construction and consumer loan balances and lower mortgage-backed securities income were partly offset by mortgage loans acquired from Doral and lower deposit funding costs.
- Provision expense rose $62.5 million. It included $46.9 million associated with the 2015 bulk asset sale; excluding that sale, the provision was $125.1 million. Net charge-offs were $153.7 million, including $61.4 million related to the sale; excluding that transaction, they were $92.3 million.
- Non-performing loans declined to $450.9 million from $578.5 million, and non-performing assets to $609.9 million from $716.8 million. The non-performing loan ratio was 4.77% of loans held for investment.
- Deposits declined $145.8 million overall, as a $789.6 million reduction in brokered CDs was partly offset by growth in non-brokered deposits, including deposits acquired from Doral. Loans were nearly flat overall, with residential mortgage growth offset by lower commercial, construction and consumer balances.
Outlook, commentary, risks and unusual items
Management gave no specific earnings or revenue guidance. It said liquidity and available borrowing capacity, together with efforts to grow retail deposits, were expected to support business plans in the foreseeable future. Puerto Rico’s prolonged recession, fiscal stress and potential debt restructuring create significant uncertainty; the filing cited projected real GNP contraction of 0.9% for fiscal 2015 and 1.2% for fiscal 2016.
- Regulatory restrictions: The 2010 Federal Reserve Written Agreement requires the holding company to serve as a source of strength to FirstBank and generally bars dividends, certain debt payments, new or increased debt and capital repurchases without prior regulatory consent. Common and preferred dividends have been suspended since 2009. The FDIC Consent Order for FirstBank was terminated effective April 29, 2015, but the Federal Reserve Written Agreement remained.
- Puerto Rico exposure: Government, municipal and public-corporation credit facilities totaled $314.6 million outstanding at year-end, with book value of $311.0 million. The $71.1 million PREPA exposure was on non-accrual. Hotel-industry financings of $129.4 million supported by a Tourism Development Fund guarantee were adversely classified but remained accruing; management was assessing whether the guarantee’s reliability warranted non-accrual treatment. The Corporation also held Puerto Rico government securities with $49.7 million amortized cost, net of impairment, and $28.2 million fair value.
- Unusual transactions: The Doral Bank branch acquisition added $522.7 million of deposits and loans with $324.8 million principal balance, generated a $13.4 million bargain-purchase gain, and had no FDIC loss-sharing arrangement. The bulk sale of mostly troubled commercial and construction assets generated a $48.7 million pre-tax loss. A 10-year merchant-services alliance generated a $7.0 million gain, with $3.0 million deferred for recognition over the agreement term. A voluntary early-retirement program incurred $2.2 million in charges; management expected approximately $1.9 million of annual savings in 2016.
- Funding and debt service: The Corporation relies in part on brokered CDs and FHLB funding; funding availability and cost may be affected by market conditions, regulatory status and credit ratings. It had deferred subordinated-debt interest payments since March 2012, with approximately $28.7 million accrued at year-end, subject to regulatory restrictions and indenture limits.
- Other risks: Elevated non-performing assets, collateral values, possible further Puerto Rico security impairments, deferred-tax-asset realization, interest-rate changes, deposit-insurance costs, regulatory compliance, operational and cyber risk, and litigation could affect results. Management and the auditors reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Reconcile the $21.3 million 2015 net income and $0.10 diluted EPS with the $392.3 million prior-year result, especially the 2014 tax valuation allowance reversal and 2015 unusual items.
- Track Puerto Rico government developments and potential losses or non-accrual classification affecting PREPA, Tourism Development Fund-guaranteed hotel loans, municipal and public-corporation exposures, and government securities.
- Assess the quality and sustainability of asset-quality improvement: the bulk sale reduced reported problem assets but produced substantial charge-offs and losses; verify subsequent delinquencies, recoveries, OREO and reserve adequacy.
- Monitor brokered-CD maturities, replacement funding, liquidity reserves and the ability to obtain regulatory approval for parent-company cash needs, debt payments or dividends.
- Confirm compliance with the Federal Reserve Written Agreement, capital requirements and any effects of the phase-out of trust-preferred securities from Tier 1 capital.
- Review deferred tax asset assumptions and the remaining $201.7 million valuation allowance, including FirstBank’s ability to generate taxable income before NOLs expire.