First BanCorp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands and Florida. Comparisons below are to Q2 or the first six months of 2020 unless stated otherwise. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $184.8 | $135.2 | $361.0 | $273.9 |
| Provision for credit losses | $(26.2) benefit | $39.0 expense | $(41.4) benefit | $116.4 expense |
| Non-interest income | $29.9 | $20.9 | $60.8 | $51.1 |
| Non-interest expenses | $130.2 | $89.8 | $263.5 | $182.0 |
| Net income | $70.6 | $21.3 | $131.7 | $23.5 |
| Diluted earnings per common share | $0.33 | $0.09 | $0.60 | $0.10 |
Q2 return on average assets was 1.40% and return on average equity was 12.60%. Net interest margin was 3.81%, down from 4.22%; the six-month margin was 3.86%, versus 4.42%. The efficiency ratio was 60.64% for Q2 and 62.45% for the first half. Net interest income rose with the larger post-acquisition balance sheet and lower deposit costs, but margin was pressured by growth in lower-yielding cash and securities. Adjusted net income, a company-defined non-GAAP measure excluding specified special items, was $78.2 million for Q2 and $147.1 million for the first half.
Financial position, liquidity and capital
- At June 30, total assets were $21.37 billion, up $2.58 billion from December 31, 2020. Cash and cash equivalents were $2.79 billion; available-for-sale securities were $6.40 billion.
- Total loans, net, were $11.10 billion, down from $11.44 billion at year-end. Deposits increased to $18.07 billion from $15.32 billion; the increase included substantial growth in government deposits. Total borrowings were $803.8 million: $300 million in repurchase agreements, $320 million in FHLB advances and $183.8 million in other borrowings.
- Six-month operating cash flow was $224.5 million. Investing activities used $1.44 billion, principally reflecting securities purchases; financing activities provided $2.51 billion, mainly from deposit growth. Ending cash and cash equivalents increased $1.29 billion from the start of the year.
- Stockholders’ equity was $2.20 billion, down $70.2 million from year-end. The filing attributes the decline principally to $100 million of Q2 common-stock repurchases, a $70.4 million after-tax decline in accumulated other comprehensive income, and dividends, partly offset by earnings.
- At June 30, holding-company CET1, total capital and leverage ratios were 17.34%, 20.38% and 10.51%, respectively. FirstBank’s corresponding ratios were 16.92%, 19.91% and 11.12%. Regulatory capital figures include the elected transition relief for CECL.
- Management reported a $5.7 billion estimated core liquidity reserve, 26.4% of assets, and $787.1 million of additional FHLB borrowing capacity. It also cited approximately $1.1 billion of available Federal Reserve discount-window capacity. Management described liquidity and capital as strong.
Material changes and notable items
- Earnings and credit provisioning: The large year-over-year earnings increase mainly reflects the swing from prior-year credit-loss provision expense to 2021 reserve releases, higher net interest income and increased non-interest income. The Q2 loan provision included a $5.2 million recovery on a nonaccrual commercial loan; the company cautions that reserve estimates depend on economic forecasts and could change.
- Asset quality: The loan allowance was $325.0 million, or 2.85% of held-for-investment loans, versus $385.9 million, or 3.28%, at December 31. Nonaccrual loans were $182.7 million, down from $205.1 million; nonperforming assets were $255.6 million, or 1.20% of assets, versus $293.5 million, or 1.56%, at year-end. Adversely classified commercial and construction loans rose $57.3 million to $212.5 million, including downgrades of three commercial relationships totaling $48.2 million.
- Acquisition integration: First BanCorp. acquired Banco Santander Puerto Rico (BSPR) in September 2020. It completed conversion of the remaining core systems in early July 2021 and had consolidated nine Puerto Rico branches. Management expected full integration by the end of Q3 2021. Cumulative acquisition-related costs were $60.2 million through June 30; estimated total costs were approximately $65 million. Management forecast approximately $49 million in annual pretax savings, expected to be fully realized in 2022.
- Capital returns: The Board authorized up to $300 million of repurchases through June 30, 2022. The company repurchased $100 million of common stock in Q2 and reported $125 million repurchased under the program by August 4. The quarterly common dividend was $0.07 per share, compared with $0.05 a year earlier. Future repurchases and dividends remain subject to Board discretion, financial conditions and regulatory considerations.
- COVID-19 and PPP: Management reported improved activity but maintained a cautious economic view, citing uncertainty about the pandemic, variants, vaccination and the recovery. PPP loans, net of unearned fees, were approximately $349 million at quarter-end; the program ended May 31, 2021. The filing says all temporary 2020 deferral arrangements had ended, apart from a $0.2 million residential mortgage loan in the Virgin Islands.
- Unusual charges and comparison effects: Q2 merger and restructuring costs were $11.0 million, versus $2.9 million. Q2 COVID-related expenses were $1.1 million, versus $3.0 million. The 2020 comparisons included a $5.0 million hurricane-related insurance recovery in Q2 and an $8.1 million securities-sale gain in the first half. These items affect comparisons with reported and adjusted results.
- Subsequent event: On August 5, 2021, the company sold $52.5 million of nonperforming residential mortgages and $2.0 million of related servicing advances for $31.5 million. With existing reserves of approximately $20.9 million, it expected to record an additional loss of about $2.1 million in Q3. The company said the sale reduced nonperforming residential mortgage loans by 43%; pro forma nonperforming-loan and nonperforming-asset ratios would have been 1.15% and 0.95%, respectively.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided. Management’s stated outlook includes completing BSPR integration by the end of Q3 2021 and realizing approximately $49 million of annual pretax acquisition savings in 2022. The filing identifies material uncertainties around COVID-19 and economic conditions in Puerto Rico and other markets; credit quality and future reserve needs; Puerto Rico and U.S. Virgin Islands government finances; interest-rate movements and the LIBOR transition; deposit and wholesale funding availability; acquisition integration and customer retention; deferred-tax-asset realization; cybersecurity; and regulatory capital and dividend capacity. Puerto Rico municipal held-to-maturity bonds had a $10.7 million allowance, increased from $8.8 million at year-end; management noted uncertainty about potential future credit-loss charges. Legal proceedings were described as ordinary-course matters; management said no additional material loss-contingency disclosure was required as of June 30. The filing reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether lower credit-loss provisions and the Q2 loan recovery are sustainable, and how asset quality and criticized commercial exposures develop.
- Whether BSPR integration is completed on schedule, remaining costs stay near the $65 million estimate, and the projected $49 million savings are achieved.
- Whether deposit growth, especially government deposits, persists and how the resulting cash and securities mix affects net interest margin.
- How the August 2021 mortgage-loan sale and expected $2.1 million additional loss affect Q3 results and reported asset-quality ratios.
- Whether deferred tax assets are realized, and whether capital, liquidity and regulatory conditions support planned dividends and remaining repurchases.
- Exposure to Puerto Rico and USVI public-sector borrowers and securities, alongside pandemic, LIBOR-transition and cybersecurity risks.