Business context and reporting period
First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and an insurance agency, with banking operations in Puerto Rico, Florida, and the U.S. and British Virgin Islands. This is its Form 10-K for the fiscal year ended December 31, 2013; “2013” figures below are full-year unless noted. Amounts are in U.S. dollars.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets | $12.66 billion | $13.10 billion |
| Total deposits | $9.88 billion | $9.86 billion |
| Total loans, including held-for-sale | $9.71 billion | $10.14 billion |
| Total borrowings | $1.43 billion | $1.64 billion |
| Total stockholders’ equity | $1.22 billion | $1.49 billion |
| Net interest income | $514.9 million | $461.7 million |
| Provision for loan and lease losses | $243.8 million | $120.5 million |
| Non-interest income (loss) | $(15.5) million | $49.4 million |
| Non-interest expenses | $415.0 million | $354.9 million |
| Net income (loss) | $(164.5) million | $29.8 million |
| Net interest margin, excluding fair-value changes and on a tax-equivalent basis | 4.21% | 3.68% |
| Cash and cash equivalents at year-end | $655.7 million | $946.9 million |
Cash flow: Operating activities provided $341.7 million; investing activities used $431.4 million; financing activities used $201.4 million. Cash and cash equivalents declined $291.2 million during 2013.
Liquidity and capital: The company reported estimated core liquidity of $1.35 billion, or 10.67% of assets, and a basic liquidity ratio of 14.35%. FirstBank had $3.1 billion of brokered CDs at year-end, with approximately $1.7 billion maturing within 12 months. First BanCorp’s regulatory total capital, Tier 1 capital, and leverage ratios were 17.06%, 15.78%, and 11.71%; FirstBank’s were 16.67%, 15.40%, and 11.44%. Despite exceeding stated capital thresholds, FirstBank could not be designated “well-capitalized” while subject to the FDIC Order.
Material changes versus the prior comparable period
- Reported results swung from $29.8 million net income in 2012 to a $164.5 million net loss in 2013. Management identified $140.8 million of pretax charges related to distressed-asset sales and loan transfers to held for sale, and a $66.6 million non-cash write-off of collateral pledged to Lehman; a further $2.5 million was accrued for related attorneys’ fees.
- Management presented a non-GAAP adjusted 2013 net income of $45.4 million, excluding the identified bulk-sale and Lehman items, versus 2012 GAAP net income of $29.8 million. The adjustment is not a GAAP measure and should not be read as reported earnings.
- Net interest income increased 11%, primarily as funding costs fell and average mortgage-backed securities balances and the full-year contribution from the credit-card portfolio acquired in 2012 supported income. The average cost of funding fell 42 basis points; tax-equivalent net interest margin excluding fair-value changes rose to 4.21%.
- Year-end non-performing loans, including held-for-sale loans, fell 43% to $550.4 million, and non-performing assets fell 41% to $725.4 million. The decline largely reflected sales, charge-offs, transfers, and foreclosures, not solely improved borrower performance. Net charge-offs were $393.3 million, or 4.01% of average loans; excluding bulk-sale and transfer effects, management reported $160.9 million, or 1.68%.
- Assets declined 3%; loans fell $427.4 million. Stockholders’ equity declined $269.2 million, driven by the net loss and a $107.2 million decrease in other comprehensive income, including unrealized securities losses. Tangible common equity ratio fell to 8.71% from 10.44%.
- Fourth-quarter 2013 net income was $14.8 million, compared with $14.5 million in fourth-quarter 2012. The first two quarters of 2013 were loss-making; the third quarter reported $15.9 million net income.
Outlook, management commentary, risks, contingencies, and unusual items
- Regulatory restrictions: FirstBank remained subject to the FDIC/OCIF Order and First BanCorp. to the Federal Reserve Written Agreement. These restrict, among other things, dividends, certain debt and capital actions, and brokered-CD activity without regulatory approval. FDIC brokered-CD approval cited in the filing ran through March 31, 2014; future approvals were not assured.
- Funding and dividends: Brokered deposits represented about 35% of deposits under the company’s stated broader measure. Approximately $250 million of Puerto Rico public deposits was considered at high risk of migration following Act 24-2014. The company said liquidity planning considered this risk. Common and preferred dividends had been suspended since 2009; the company said it had no current plan to resume them. Parent-company cash needs also depend on regulatory approval and the bank’s ability to pay dividends.
- Puerto Rico exposure: Puerto Rico accounted for about 84% of gross loans held for investment. Credit facilities to the Puerto Rico government, municipalities, and public corporations totaled $397.8 million outstanding. The company also held Puerto Rico government and agency bonds with approximately $71.0 million amortized cost and $51.3 million fair value. Rating agencies downgraded Commonwealth debt to below investment grade in February 2014; management said the securities’ losses reflected market factors rather than expected cash-flow changes and considered them temporary, while continuing to monitor them.
- Credit and tax risks: The filing cites continued recession, property-value and collateral risk, loan defaults, foreclosures, and possible further provisions. Construction loans held for investment were $168.7 million, including $58.9 million nonaccrual. The gross deferred tax asset was $539.2 million, including $371.7 million of NOL-related assets, offset by a $522.7 million valuation allowance; realization depends on future taxable income. The IRS was reviewing disputed 2007–2009 tax years, and management could not reasonably estimate a range of possible reserve changes.
- Other unusual items and forward-looking risks: Puerto Rico’s 1% gross-receipts tax resulted in $5.9 million expense, partly offset by a $3.0 million income-tax credit. The company reported $225 million of trust-preferred securities subject to phase-out from Tier 1 capital by 2016. Basel III rules were scheduled to begin taking effect in 2015; management estimated pro forma fully phased-in ratios above minimums, subject to future changes. Management provided no specific earnings or revenue guidance. The filing also highlights interest-rate, deposit-insurance, regulatory, litigation, cyber, operational, and economic risks.
- Controls and audit: Management and KPMG concluded internal control over financial reporting was effective as of year-end. The financial statements received an unqualified audit opinion.
Most important facts an investor should verify
- Whether reported GAAP losses, excluding the 2013 asset-sale and Lehman charges, translate into durable profitability; review the assumptions and reconciliation behind management’s non-GAAP adjusted results.
- Whether non-performing loans, charge-offs, OREO write-downs, and new problem-loan inflows continue to decline without further material reserve needs.
- Whether FirstBank obtains future FDIC approvals for brokered CDs, replaces maturities affordably, and limits the impact of potential public-deposit migration.
- Whether the regulatory agreements are modified or lifted, and what they mean for capital classification, dividends, debt payments, and operating flexibility.
- How Puerto Rico credit downgrades, public-sector exposure, bond valuations, and the large deferred-tax valuation allowance affect capital, liquidity, and future earnings.