First BanCorp. — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014; filed March 16, 2015. The filing reports annual results, with select fourth-quarter information. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands.
Financial results and condition
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net interest income | $518.1 million | $514.9 million |
| Provision for loan and lease losses | $109.5 million | $243.8 million |
| Non-interest income (loss) | $61.3 million | ($15.5 million) |
| Non-interest expenses | $378.3 million | $415.0 million |
| Income (loss) before income taxes | $91.6 million | ($159.3 million) |
| Income tax benefit (expense) | $300.6 million benefit | $5.2 million expense |
| Net income (loss) | $392.3 million | ($164.5 million) |
| Diluted earnings (loss) per common share | $1.87 | ($0.80) |
- Fourth quarter: Net income was $330.8 million, compared with $14.8 million in Q4 2013. The quarter included a $302.9 million income tax benefit from a partial reversal of FirstBank’s deferred-tax-asset valuation allowance.
- Margins: GAAP net interest margin was 4.20%, versus 4.11% in 2013. Excluding fair-value changes and a $2.5 million prepayment penalty, and on a tax-equivalent basis, margin was 4.34%, versus 4.21%.
- Balance sheet at year-end: Total assets were $12.7 billion; deposits $9.48 billion; loans, net of allowance, $9.12 billion; borrowings $1.46 billion; and stockholders’ equity $1.67 billion.
- Cash flow: Operating activities provided $264.4 million; investing activities provided $254.7 million; financing activities used $378.6 million. Cash and cash equivalents ended at $796.1 million, up $140.4 million year over year.
- Liquidity and funding: Management reported core liquidity of $1.5 billion, or 11.69% of assets, and a basic liquidity ratio of 15.6%. Brokered CDs were $2.9 billion, approximately 34% of deposits; about $1.8 billion mature within 12 months. Available additional FHLB capacity was $487.6 million.
- Capital: FirstBank’s total capital, Tier 1 capital and leverage ratios were 19.37%, 18.10% and 13.04%, respectively. Despite exceeding stated well-capitalized thresholds and FDIC Order minimums, FirstBank could not be designated well-capitalized while subject to the regulatory order. The company’s estimated fully phased-in Basel III ratios were 15.1% CET1, 15.5% Tier 1, 19.2% total capital and 11.7% leverage.
Material changes versus the prior year
- Reported earnings swung from a $164.5 million loss to $392.3 million of income, chiefly because of the $302.9 million tax valuation-allowance reversal. Management based the reversal on six consecutive profitable quarters and forecasts of future taxable income; $204.6 million of valuation allowance remained.
- The 2013 comparison included $140.8 million of after-tax losses associated with bulk asset sales and transfers to held for sale, and a $66.6 million Lehman collateral write-off plus a $2.5 million legal-fee contingency. Management reported adjusted 2013 net income of $45.4 million, a non-GAAP measure.
- Provision expense fell from 2013, which included $132.0 million related to bulk sales and loan transfers. Net charge-offs declined to $173.0 million from $393.3 million; excluding identified transaction-related charge-offs, the company reported $166.1 million, or 1.74% of average loans, versus $160.9 million, or 1.68%, in 2013.
- Net non-performing loans, including loans held for sale, rose 5% to $578.5 million. Total non-performing assets declined 1% to $716.8 million. The allowance fell to $222.4 million, or 2.40% of loans held for investment, from $285.9 million, or 2.97%.
- Deposits declined $396.0 million, including a $305.1 million decrease in government deposits and a $255.0 million decrease in brokered CDs, partly offset by growth in non-brokered deposits excluding government deposits. Puerto Rico public-sector withdrawals included approximately $341.6 million following Act 24-2014.
Outlook, risks and unusual items
- Outlook: No quantitative earnings or revenue guidance is provided. Management said available borrowing capacity and efforts to grow retail deposits were expected to support business plans in the foreseeable future, while noting funding remains a challenge.
- Regulatory restrictions: FirstBank remained under the 2010 FDIC/OCIF Consent Order and the parent under a Federal Reserve Written Agreement. These restrict dividends, debt and capital actions, new financial activities, and brokered-CD activity without regulatory approval. Brokered-CD approval cited in the filing ran through March 31, 2015; future approval was not assured. Common and preferred dividends remained suspended, with no current plan to resume.
- Credit and Puerto Rico exposure: Approximately 83% of loans were concentrated in Puerto Rico amid recessionary conditions and government fiscal stress. The company had $308.0 million outstanding in Puerto Rico government, municipal and public-corporation facilities, including $75.0 million to PREPA; $133.3 million of Puerto Rico hotel financing guaranteed by the Tourism Development Fund; and $61.2 million face amount of Puerto Rico government obligations carried at $43.2 million fair value. PREPA’s facility was classified as a troubled debt restructuring but remained on accrual.
- Acquisitions: In February 2015, FirstBank acquired 10 Doral Bank branches, assumed approximately $625 million in deposits and purchased approximately $325 million in performing residential mortgages through an alliance with Popular. The loans were bought at an approximately 9% discount, deposits assumed at a 1.6% premium, and management expected the transaction to be accretive. Integration, asset quality and customer retention remain risks.
- Other exposures: Unrealized investment-security losses were $42.5 million at year-end; management warned that credit-related impairment could affect earnings and capital. Other key risks include loan-loss estimation, reliance on brokered funding, interest-rate changes, government credit deterioration, regulatory compliance, litigation, cyber and operational risks, and hurricanes.
- Debt service: The holding company had $231.96 million of subordinated debentures and had deferred quarterly interest payments since March 2012; deferred interest and accrued payments totaled approximately $21.9 million. Future payments required Federal Reserve approval.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Key investor verification points
- Separate recurring operating performance from the $302.9 million deferred-tax valuation-allowance benefit; verify the assumptions supporting future taxable income and potential NOL utilization.
- Track non-performing loans, charge-offs, reserve coverage and consumer-auto credit performance, particularly given the lower allowance ratio and elevated non-performing assets.
- Confirm renewal of FDIC approval for brokered CDs, refinancing of near-term maturities, and progress in replacing public-sector deposits with stable core funding.
- Monitor compliance with the FDIC Order and Written Agreement, including capital requirements, dividend restrictions and the ability to service parent-company debt.
- Assess Puerto Rico sovereign and public-corporation exposure, especially PREPA, government-bond valuation and deposit outflows, alongside the economic effects of proposed tax changes.
- Verify final Doral acquisition accounting, integration costs, acquired-loan performance and whether expected earnings accretion is achieved.