First BanCorp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. First BanCorp. is a financial holding company operating primarily in Puerto Rico, with banking and related activities in Florida, the U.S. Virgin Islands and the British Virgin Islands. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 / June 30, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $196.2 million | $184.8 million in Q2 2021 |
| Net interest margin (GAAP) | 4.00% | 3.81% in Q2 2021 |
| Provision for credit losses | $10.0 million expense | $26.2 million benefit in Q2 2021 |
| Non-interest income | $30.9 million | $29.9 million in Q2 2021 |
| Non-interest expenses | $108.3 million | $130.2 million in Q2 2021 |
| Income before taxes | $108.8 million | $110.7 million in Q2 2021 |
| Net income / diluted EPS | $74.7 million / $0.38 | $70.6 million / $0.33 in Q2 2021 |
| Total assets | $19.53 billion | $20.79 billion at December 31, 2021 |
| Total deposits | $17.14 billion | $17.78 billion at December 31, 2021 |
| Loans held for investment, gross | $11.21 billion | $11.06 billion at December 31, 2021 |
| Stockholders’ equity | $1.56 billion | $2.10 billion at December 31, 2021 |
For the first six months, net income was $157.3 million versus $131.7 million in 2021; GAAP net interest income was $381.8 million versus $361.0 million, and GAAP net interest margin was 3.91% versus 3.86%. The six-month provision was a $3.8 million benefit, compared with a $41.4 million benefit in 2021. Operating cash flow was $219.6 million; investing cash use was $557.7 million and financing cash use was $941.5 million. Cash and cash equivalents fell $1.28 billion to $1.26 billion.
The loan allowance was $252.2 million, or 2.25% of gross loans held for investment, down from $269.0 million and 2.43% at year-end. Nonaccrual loans declined to $99.1 million from $110.7 million; total non-performing assets were $147.5 million versus $158.1 million. The company reported $94.5 million of loans 90 days past due and still accruing.
Borrowings included $200 million of repurchase agreements, $200 million of FHLB advances and $183.8 million of junior subordinated debentures. FirstBank exceeded regulatory minimums and was well-capitalized; at June 30, First BanCorp.’s CET1 ratio was 16.95%, total capital ratio 19.67% and leverage ratio 10.18%. Tangible common equity ratio was 7.67%, down from 9.81% at year-end; tangible book value per share was $7.80 versus $10.07.
Material changes and notable items
- Q2 earnings rose year over year, despite a much less favorable credit-loss provision comparison. Lower deposit funding costs, higher interest on cash and variable-rate commercial loans, and reduced securities premium amortization supported net interest income and margin.
- Expenses were lower partly because Q2 2021 included $11.0 million of merger and restructuring costs and $1.1 million of COVID-related costs. Excluding those items, management said Q2 2022 expenses fell $9.8 million year over year. No comparable special items were reported for the 2022 quarter or first half.
- Mortgage banking income declined, reflecting lower secondary-market loan sales. Consumer loans and finance leases grew, while residential mortgages contracted. Total loan production was $1.48 billion in Q2, compared with $1.28 billion a year earlier; excluding 2021 PPP originations, management reported higher production.
- Equity fell $543.9 million from year-end, principally because of a $507.8 million after-tax decline in available-for-sale securities’ unrealized value recorded in other comprehensive loss, plus $150 million of share repurchases and $43.3 million of common dividends, partly offset by earnings.
- The board authorized a new $350 million repurchase program in April. The company repurchased approximately $100 million under it in Q2; as of August 3, total purchases under the program were about $150 million. A $0.12-per-share quarterly dividend was declared in July.
Outlook, risks and contingencies
The filing provides no formal earnings or full-year financial guidance. Management’s modeled 12-month net interest income sensitivity, assuming a growing balance sheet, estimated an increase of $26.9 million under a gradual 200-basis-point rate rise and a decrease of $33.2 million under a gradual 200-basis-point decline, relative to an unchanged-rate scenario. These are model estimates dependent on assumptions, not forecasts or guarantees.
Management identified rising rates and inflation, weaker loan demand, higher expenses, supply-chain disruption, the Ukraine conflict, COVID-19 effects, economic slowdown, real-estate conditions, funding availability and credit deterioration as risks. Approximately 79% of gross loans were concentrated in Puerto Rico. Direct exposure to the Puerto Rico government, municipalities and public corporations was $353.2 million; the company also had $88.5 million of PRHFA-guaranteed residential mortgage exposure. Puerto Rico public-sector deposits were $2.3 billion. The filing notes uncertainty around Puerto Rico’s fiscal position and future municipal credit losses.
The company was transitioning away from LIBOR, with $2.0 billion of variable-rate commercial and construction loans (including unused commitments), $49.3 million of securities, $132.6 million of municipal bonds and $183.8 million of subordinated debentures exposed to LIBOR. About $369 million of total exposure lacked fallback language; the company expected to follow the LIBOR Act for residual exposure after June 30, 2023.
Management reported no legal-contingency disclosure was required as of June 30 and did not expect the final disposition of proceedings, claims and contingencies to materially adversely affect consolidated financial position. The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Most important facts for investors to verify
- Whether higher rates continue to improve net interest income after deposit costs reprice, and how actual results compare with the disclosed sensitivity model.
- Deposit trends, public-sector and uninsured deposit concentrations, and the availability of FHLB and other contingent funding.
- Credit quality, especially consumer-loan allowance growth, delinquency trends, Puerto Rico exposures and municipal-bond reserves.
- The magnitude and duration of unrealized securities losses, their capital effects, and whether any losses become credit-related.
- Execution and capital impact of the share-repurchase program and continued dividends, including the capacity of FirstBank to upstream dividends to the holding company.
- Progress on LIBOR contract remediation and the financial impact of the transition, particularly for exposures without fallback language.