First BanCorp. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 13, 2012. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted. The company is a Puerto Rico-based financial holding company operating in Puerto Rico, Florida, and the U.S. and British Virgin Islands.
Key financial results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total interest income | $659.6 | $832.7 |
| Net interest income | $393.5 | $461.7 |
| Provision for loan and lease losses | $236.3 | $634.6 |
| Non-interest income | $108.0 | $117.9 |
| Non-interest expenses | $338.1 | $366.2 |
| Net loss | $(82.2) | $(524.3) |
| Net income (loss) attributable to common stockholders, diluted | $195.8 | $(122.0) |
| Cash and cash equivalents, year-end | $446.6 | $370.3 |
Reported diluted common-stockholder income of $195.8 million, or $2.18 per share, does not represent a return to operating profitability: it included a one-time, non-cash $278.0 million benefit from converting Treasury-held Series G preferred stock into common stock. The company reported a consolidated net loss and said it had not achieved net income since the quarter ended March 31, 2009. In Q4 2011, consolidated net loss was $14.8 million, while diluted income attributable to common stockholders was $263.2 million, principally reflecting that conversion accounting item.
Tax-equivalent net interest margin excluding fair-value effects on derivatives and certain liabilities was 2.86%, up from 2.77% in 2010. This margin improvement did not offset lower net interest income as the balance sheet contracted. The filing does not provide a conventional non-bank revenue measure; interest income plus non-interest income totaled approximately $767.6 million, versus $950.6 million in 2010.
Balance sheet, liquidity, and capital
- Total assets were $13.1 billion, down $2.5 billion year over year. Gross loans, including loans held for sale, were $10.6 billion; investment securities and money-market investments totaled $2.2 billion.
- Total deposits fell to $9.9 billion from $12.1 billion. Brokered CDs declined by $2.5 billion to $3.7 billion, but still represented about 38% of deposits. Approximately $2.5 billion of brokered CDs mature in 2012; continued issuance, renewal, and rollover require FDIC approval under the regulatory order.
- Total borrowings were $1.6 billion, down from $2.3 billion. Stockholders’ equity rose to $1.44 billion from $1.06 billion, principally following the equity raise and preferred-stock conversion.
- Cash flow from operations was $156.9 million; investing activities provided $2.33 billion, primarily from loan and securities sales, repayments, and prepayments; financing activities used $2.41 billion, largely through deposit and borrowing repayments. Cash increased by $76.3 million.
- Management reported basic liquidity of approximately 7.6% of assets, above its 5% minimum, and $506 million of additional FHLB borrowing capacity. The Bank had about $440.1 million in cash and cash equivalents; the holding company had $44.8 million.
- After the $525 million common-stock private placement, the Corporation’s total, Tier 1 risk-based, and leverage capital ratios were 17.12%, 15.79%, and 11.91%; FirstBank’s were 16.58%, 15.25%, and 11.52%. These exceeded the FDIC Order’s minimum ratios, but FirstBank could not be classified as “well-capitalized” while subject to the order.
Asset quality and changes versus 2010
- The loan-loss provision declined to $236.3 million from $634.6 million, and net charge-offs declined to $295.5 million from $609.7 million. Management attributed the reduction mainly to lower specific and general reserve charges and a smaller loan portfolio. The 2010 comparison included a $102.9 million provision and $165.1 million of charge-offs associated with loans transferred to held for sale.
- Non-performing loans held for investment were $1.14 billion, or 10.78% of that portfolio, versus $1.24 billion, or 10.63%, in 2010. The year-end allowance was $493.9 million, 4.68% of loans held for investment; allowance coverage of non-performing loans was 43.39%.
- Non-performing assets including loans held for sale were $1.34 billion. Construction lending remained a significant credit concern: $250.0 million of construction loans were non-performing, and the construction portfolio had a 58.44% non-performing ratio. Total TDRs were $820.5 million.
- Deleveraging included sales of about $518 million of performing residential mortgages and a $269.3 million book-value pool of adversely classified and non-performing loans to CPG/GS. FirstBank retained a subordinated 35% interest and provided substantial financing to the buyer; the equity interest was $43.4 million and loans to CPG/GS totaled $201.2 million at year-end. The investor’s capital and 12% priority return rank ahead of FirstBank’s equity return.
- Investment securities and money-market balances fell to $2.2 billion from $3.4 billion. Sales and repayments reduced assets and helped fund the retirement of brokered CDs, FHLB advances, and repurchase agreements.
Outlook, risks, and unusual items
- Management stated that, based on current and expected liquidity needs and sources, it expected to meet obligations for the foreseeable future. This assessment is conditional: management warned that difficulty executing plans, obtaining sufficient brokered-CD approvals, or complying with regulatory requirements could prompt further regulatory action and materially harm the business.
- FirstBank remained subject to an FDIC/OCIF Consent Order and the holding company to a Federal Reserve Written Agreement. These impose capital, asset-quality, planning, reporting, brokered-deposit, and other restrictions. The holding company cannot receive Bank dividends or make specified debt payments, incur certain debt, or pay dividends without Federal Reserve approval.
- Credit risks include persistent non-performing assets, construction and commercial real-estate exposure, collateral-value uncertainty, and Puerto Rico’s prolonged recession. FirstBank’s $100 million Virgin Islands construction-loan relationship contributed to increased regional credit losses.
- Liquidity depends in part on brokered CDs. FDIC approval to renew or roll over certain deposits extended only through March 31, 2012 at the filing date. Failure to obtain further approvals could require faster asset sales or more expensive funding.
- The company had $231.9 million of subordinated debentures and had deferred certain interest payments; future distributions required Federal Reserve approval. The Corporation elected to defer the March 2012 interest payment.
- Management identified no specific earnings guidance. It expected to continue improving efficiency through expense control, business rationalization, and targeted technology investment. It also expected the debit-card interchange rule to reduce annual revenue by approximately $2.5–$3.0 million without offsetting actions.
- Other notable exposures include the disputed recovery of $64.5 million of securities pledged to Lehman Brothers Special Financing, reported as a non-performing asset; a $1.4 million unsecured Lehman exposure was reserved. Goodwill testing found no impairment, though the Florida reporting unit’s first-step test indicated potential impairment. PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether reported common-stockholder income is being interpreted correctly: FY 2011 consolidated results remained a net loss, and common income depended on a non-cash preferred-stock conversion benefit.
- Current status and terms of the FDIC/OCIF Consent Order and Federal Reserve Written Agreement, including progress toward termination and continued restrictions.
- FDIC approvals and actual renewal or replacement of the $2.5 billion of brokered CDs maturing in 2012, alongside liquidity and funding costs.
- Subsequent trends in non-performing loans, construction credit quality, charge-offs, TDR performance, and allowance adequacy.
- Collections and recoverability of FirstBank’s seller-financed loans and subordinated investment in CPG/GS, and the status of the Lehman collateral litigation.
- Whether earnings, core deposits, and operating cash generation improve enough to sustain capital and liquidity without further asset sales or external capital.