First BanCorp. — 2023 Form 10-K
Business context and reporting period. First BanCorp. is a Puerto Rico-based financial holding company operating through FirstBank and other subsidiaries in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Its businesses include commercial and consumer banking, mortgage banking, auto finance and insurance. This annual report covers the fiscal year ended December 31, 2023; comparisons below are primarily with 2022.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Net income | $302.9 million | $305.1 million |
| Diluted earnings per share | $1.71 | $1.59 |
| Net interest income | $797.1 million | $795.3 million |
| GAAP net interest margin | 4.22% | 4.12% |
| Non-interest income | $132.7 million | $123.1 million |
| Non-interest expenses | $471.4 million | $443.1 million |
| Efficiency ratio | 50.70% | 48.25% |
| Provision for credit losses | $60.9 million | $27.7 million |
| Net charge-offs | $67.4 million; 0.58% of average loans | $34.2 million; 0.31% |
| Operating cash flow | $363.0 million | $440.5 million |
| Total assets | $18.9 billion | $18.6 billion |
| Loans, before allowance | $12.2 billion | $11.6 billion |
| Deposits | $16.6 billion | $16.1 billion |
| Total stockholders’ equity | $1.5 billion | $1.3 billion |
Earnings and margins. Net income was nearly flat year over year, while diluted EPS increased as share count fell. Higher loan and cash yields lifted interest income, but deposit and borrowing costs rose sharply; GAAP net interest income increased only slightly. Non-interest income benefited from a $3.6 million legal-settlement gain and a $3.0 million gain on a Florida banking-premises sale, among other items. Expenses increased, including compensation and FDIC insurance costs, and the efficiency ratio worsened.
Credit quality. The provision rose substantially, primarily reflecting loan growth and higher delinquency and charge-off levels in consumer loans and finance leases, together with the prior-year release of certain reserves. Non-performing assets declined to $125.9 million from $129.2 million, but early delinquency increased to $150.8 million from $104.9 million. Consumer and finance-lease net charge-offs increased to $62.3 million from $33.2 million. The loan-and-lease allowance was $261.8 million, or 2.15% of loans held for investment, versus 2.25% a year earlier.
Funding, liquidity and capital. Core deposits, excluding government deposits and brokered CDs, declined $667.9 million to $12.6 billion as customers used excess liquidity and shifted toward higher-yielding products. Brokered CDs increased to $783.3 million from $105.8 million; $700.9 million mature during 2024. Total borrowings were $661.7 million, including $500 million of FHLB advances and $161.7 million of junior subordinated debentures. Cash and cash equivalents were $663.2 million. The company reported $2.8 billion of cash and free high-quality liquid assets, plus borrowing capacity; combined available liquidity was $5.2 billion, or 118% of estimated uninsured deposits excluding fully collateralized government deposits. Estimated uninsured deposits on that basis were $4.4 billion. The company and bank reported regulatory capital ratios above well-capitalized thresholds; the parent’s CET1 ratio was 16.10% and total capital ratio 18.57%.
Securities and equity. Available-for-sale debt securities totaled $5.2 billion and had a $632.8 million net unrealized loss at year-end, largely reflecting market rates above the securities’ yields. Management said it did not intend to sell the securities and did not consider a forced sale likely before anticipated recovery. Stockholders’ equity increased $172.1 million, including a $165.4 million improvement in the fair value of available-for-sale securities recorded in other comprehensive income, partly offset by repurchases and dividends.
Material changes versus 2022
- Net income decreased by $2.2 million, while diluted EPS rose from $1.59 to $1.71, supported in part by a lower weighted-average share count.
- Net charge-offs nearly doubled, and the credit-loss provision increased by $33.2 million; consumer credit deterioration was the main pressure.
- Core deposits declined while brokered CDs rose significantly. Total deposits increased modestly, partly offsetting lower borrowings.
- Loans grew $627.7 million, primarily in consumer and commercial/construction portfolios; residential mortgage balances declined.
- Non-interest expenses rose $28.3 million and the efficiency ratio deteriorated by 2.45 percentage points.
- Cash flow from operations fell to $363.0 million from $440.5 million. Investing cash outflow narrowed substantially from 2022, when securities purchases were higher.
Outlook, commentary, risks and unusual items
Management outlook. Management expects 2024 deposit costs to decline as interest rates decrease, while continued migration from non-interest-bearing to interest-bearing deposits and possible further deposit runoff may persist. Assuming no meaningful change in deposit balances, management expects net interest income to improve: approximately $1 billion of expected investment-portfolio repayments and maturities, yielding less than 1.5%, could be deployed into loan growth or higher-yielding securities. Management also expects an ongoing consumer credit-cycle correction, but believes reserve coverage and risk controls can withstand additional deterioration. These are forward-looking expectations, not guaranteed results.
Key risks. The company highlights interest-rate and deposit competition risk, reliance on wholesale funding, potential deposit outflows, credit deterioration and collateral-value declines, and concentration in Puerto Rico. Approximately 80% of loans held for investment were in Puerto Rico. Puerto Rico government and municipal direct exposure was $297.9 million; separate exposure to PRHFA-guaranteed residential mortgages was $77.7 million. Puerto Rico public-sector deposits were $2.7 billion and described as fully collateralized. USVI public-corporation loans rose to $90.5 million from $38.0 million and were reported performing and current. Other risks include changing regulation and FDIC assessments, cybersecurity and third-party service-provider incidents, natural disasters, and uncertainty over Puerto Rico’s fiscal recovery and federal funding.
Unusual items and contingencies. The 2023 results included a $6.3 million FDIC special-assessment charge, a $3.6 million legal-settlement gain and a $1.6 million gain from repurchasing $21.4 million of junior subordinated debentures at a discount. The company also recognized a $3.0 million gain on the sale of a Florida banking premise. The FDIC’s estimate of losses underlying the special assessment increased after year-end; the company said it could not reasonably estimate the additional impact, if any. Management reported various ordinary-course legal proceedings, but no material loss estimate requiring disclosure as of year-end. The filing also reports an April 2023 third-party vendor security incident involving some mortgage-business information; the company said its own systems were not compromised, impact was minimal and it had no evidence of misuse.
Capital returns. In 2023, the company repurchased approximately 14.1 million shares for $200 million and declared $99.6 million of common dividends. The board declared a quarterly dividend of $0.16 per share in February 2024, a 14% increase from the prior quarterly dividend. The company had about $150 million of repurchase authorization remaining at December 31, 2023; capital returns remain subject to board, regulatory, liquidity and capital considerations.
Controls and audit. Crowe LLP issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2023. The auditor identified the allowance for credit losses, particularly economic forecasts and macroeconomic assumptions, as a critical audit matter.
Investor verification priorities
- Confirm whether core deposit trends stabilize and whether the planned reduction in funding costs translates into higher net interest income and margin.
- Track consumer delinquencies, auto and finance-lease charge-offs, nonaccrual inflows, and allowance adequacy against management’s forecasts.
- Review brokered-CD maturities, renewal costs, uninsured-deposit composition and the availability and terms of contingent liquidity facilities.
- Assess the size, duration and capital implications of unrealized securities losses, including whether any securities must be sold before recovery.
- Monitor Puerto Rico municipal, government and real-estate exposure, plus the performance and growth of USVI public-corporation lending.
- Verify the final FDIC special-assessment amount and collection period following the updated loss estimate disclosed after year-end.
- Evaluate the sustainability of dividends and repurchases given bank-to-parent dividend restrictions, funding needs and regulatory capital requirements.