First BanCorp. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed April 1, 2013. This is an annual filing, not a standalone fourth-quarter report. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, Florida, and the U.S. and British Virgin Islands. It reported $13.1 billion in assets, $9.9 billion in deposits, and $1.5 billion in stockholders’ equity at year-end.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $461.7 million | $393.5 million |
| Provision for loan and lease losses | $120.5 million | $236.3 million |
| Non-interest income | $49.4 million | $108.0 million |
| Non-interest expenses | $354.9 million | $338.1 million |
| Net income (loss) | $29.8 million | $(82.2) million |
| Diluted earnings per common share | $0.14 | $2.18 |
| Total assets | $13.10 billion | $13.13 billion |
| Loans, gross | $10.14 billion | $10.58 billion |
| Deposits | $9.86 billion | $9.91 billion |
| Total borrowings | $1.64 billion | $1.62 billion |
- Margins and profitability: GAAP net interest margin rose to 3.64% from 2.78%; tax-equivalent margin excluding valuation changes rose to 3.68% from 2.86%. Return on average assets was 0.23%, versus negative 0.57%. The efficiency ratio increased to 69.44% from 67.41%.
- Credit quality: Net charge-offs fell to $179.0 million, or 1.74% of average loans, from $295.5 million, or 2.68%. Non-performing loans, including loans held for sale, were $977.8 million, or 9.70% of loans held for investment, down from $1.14 billion, or 10.78%. The allowance was $435.4 million, 4.33% of loans held for investment, versus $493.9 million, or 4.68%.
- Cash flow: Operating activities provided $228.9 million and investing activities provided $305.1 million; financing activities used $33.6 million. Cash and cash equivalents ended the year at $946.9 million, up from $446.6 million.
- Liquidity and funding: Management reported core and basic liquidity ratios of 9.24% and 11.59%, respectively, and $306.8 million of available FHLB credit. Brokered CDs were $3.4 billion, about 34% of deposits; approximately $2.2 billion were due within 12 months. The bank’s access to brokered CDs remained subject to FDIC approval.
- Capital: FirstBank’s total risk-based capital, Tier 1 risk-based capital, and leverage ratios were 17.35%, 16.04%, and 12.25%, respectively. Despite exceeding the consent-order minimums and ordinary well-capitalized thresholds, FirstBank could not be designated “well-capitalized” while subject to the FDIC Order. The corporation’s tangible common equity ratio was 10.44%, up from 10.25%.
Material changes versus the prior comparable period
- Net income improved from a loss to a profit, mainly as the loan-loss provision declined by $115.9 million and net interest income increased by $68.2 million. Lower funding costs and income from the acquired credit-card portfolio supported net interest income.
- Non-interest income declined $58.6 million, largely because 2011 included gains from securities and mortgage-loan sales; 2012 also included $19.3 million of losses from unconsolidated entities. Expenses increased $16.8 million, including costs of the card portfolio and higher compensation.
- In May 2012, the company acquired approximately $406 million of FirstBank-branded credit-card receivables from FIA. The portfolio was recorded at $368.9 million fair value; its year-end carrying value was $359.6 million, net of discount. The acquisition added approximately 140,000 active accounts.
- Loans declined $377.2 million, while cash and cash equivalents increased $500.3 million. Non-brokered deposits grew $313.7 million, while brokered CDs declined $356.9 million.
- The 2012 fourth quarter was profitable: net income was $14.5 million, versus a $14.8 million net loss in fourth-quarter 2011. The 2011 quarter’s common-stockholder results were materially affected by a $278.0 million noncash benefit from conversion of Treasury-held Series G preferred stock; consequently, reported 2011 EPS is not directly comparable.
Outlook, management commentary, risks, and unusual items
- Management said available borrowing capacity, deposit-growth efforts, and the 2011 capital raise were expected to support business plans in the foreseeable future, but continued liquidity depended in part on funding access and regulatory approvals. The filing gives no specific earnings or revenue guidance.
- The FDIC Order and Federal Reserve Written Agreement continued to impose capital, asset-quality, planning, and brokered-CD requirements. The agreements restrict dividends and certain debt payments, new debt, and capital actions absent regulatory approval. Common and preferred dividends had been suspended since August 2009; the company reported no current plan to resume them.
- The corporation deferred interest payments on $232 million of subordinated debentures; deferred payments through March 2013 totaled approximately $9.3 million. Further deferrals are permitted only within the indentures’ limits and are subject to regulatory approval.
- Credit exposure remained substantial: $977.8 million of non-performing loans, $185.8 million of OREO, and $941.7 million of troubled debt restructurings. Construction loans had $178.2 million in non-accrual status. Puerto Rico accounted for approximately 86% of gross loans, amid a prolonged recession and deterioration in the Commonwealth’s credit outlook.
- After year-end, the company agreed to sell classified and non-performing loans and OREO with aggregate carrying value of about $315.5 million for approximately $200.9 million. It expected an aggregate loss of about $65.2 million, including selling costs. One sale closed March 28, 2013, with a reported loss of about $60.2 million; the remaining loan sales were expected to close in the second quarter, with an expected $5.0 million loss recorded in the first quarter of 2013.
- The company’s $64.5 million carrying value for securities pledged in the Lehman Brothers dispute remained subject to litigation and review. The court had taken dispositive motions under advisement; recovery of all or a substantial portion was uncertain, and impairment could adversely affect earnings.
- Other notable exposures include the subordinated 35% investment in CPG/GS, whose majority investor has priority to recover its investment and a 12% return, and potential credit losses, collateral-value declines, funding-cost increases, regulatory actions, and added compliance costs. A $2.5 million non-recurring 2012 charge related to collectibility of tax credits was recorded.
- KPMG issued an unqualified opinion on the 2012 financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- Progress and final realized losses from the 2013 non-performing-asset sales, and their effect on subsequent credit ratios and capital.
- Whether the reduction in non-performing loans and provisions is sustained, including trends in delinquencies, charge-offs, OREO, TDR performance, and allowance coverage.
- FDIC approval for brokered-CD renewals and the refinancing plan for the approximately $2.2 billion due within 12 months; monitor liquidity and deposit mix.
- Status of the regulatory agreements, any additional supervisory actions, and restrictions on dividends, subordinated-debt payments, and capital transactions.
- Recoverability and valuation of the Lehman collateral and CPG/GS investment and related loans; both depend on uncertain litigation, collateral values, and cash flows.
- Whether Puerto Rico economic and government-credit deterioration affects borrower performance, government-related exposures, securities values, and funding costs.
- Fourth-quarter and future profitability excluding the one-time 2011 preferred-stock conversion benefit, and the contribution and credit performance of the acquired credit-card portfolio.