First BanCorp. — 2022 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2022, filed February 28, 2023. 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, insurance and trust services. Puerto Rico is its principal market; approximately 79% of year-end loans held for investment were concentrated there.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $305.1 million | $281.0 million |
| Diluted EPS | $1.59 | $1.31 |
| Net interest income | $795.3 million | $729.9 million |
| Net interest margin (GAAP) | 4.12% | 3.73% |
| Provision for credit losses | $27.7 million expense | $65.7 million benefit |
| Non-interest income | $123.1 million | $121.2 million |
| Non-interest expenses | $443.1 million | $489.0 million |
| Return on average assets / equity | 1.57% / 18.66% | 1.38% / 12.56% |
| Efficiency ratio | 48.25% | 57.45% |
- Balance sheet at year-end: assets were $18.6 billion, gross loans $11.6 billion, deposits $16.1 billion, total borrowings $933.9 million and stockholders’ equity $1.3 billion.
- Cash flow and liquidity: operating cash flow was $440.5 million, investing cash flow was negative $681.5 million and financing cash flow was negative $1.82 billion. Cash and cash equivalents ended at $480.5 million, down $2.06 billion year over year. Core liquidity was $3.5 billion, or 19.0% of assets, versus $5.6 billion, or 27.0%, in 2021; available capacity was approximately $644 million at the FHLB and $1.3 billion at the Federal Reserve Discount Window.
- Capital and securities: regulatory CET1, Tier 1, total capital and leverage ratios were 16.53%, 16.53%, 19.21% and 10.70%, respectively; FirstBank’s corresponding ratios were 16.84%, 17.65%, 18.90% and 11.43%. Tangible common equity ratio declined to 6.81% from 9.81%, and tangible book value per share to $6.93 from $10.07. Available-for-sale securities recorded a $718.6 million fair-value decline during 2022, largely attributed to higher market rates.
- Credit quality: nonperforming assets fell to $129.2 million from $158.1 million; nonaccrual loans were $89.9 million, approximately 0.78% of loans held for investment. The loan and lease allowance was $260.5 million, or 2.25% of loans, compared with $269.0 million, or 2.43%, a year earlier. Net charge-offs were $34.2 million, or 0.31% of average loans.
Material changes versus 2021
- Net income rose by $24.0 million, supported by higher net interest income and lower reported expenses. Higher rates lifted yields on variable-rate commercial loans, interest-bearing cash and securities; the net interest margin increased 39 basis points.
- The credit-loss provision shifted from a $65.7 million benefit to a $27.7 million expense. Consumer-loan growth, a less favorable near-term economic outlook and higher consumer charge-offs contributed; 2021 benefited from releases of pandemic-related reserves.
- Reported expenses fell $45.9 million. The 2021 comparison included $26.4 million of Banco Santander Puerto Rico acquisition and restructuring costs and $3.0 million of COVID-related costs. Excluding those items, 2022 expenses were down $16.5 million.
- Gross loans increased $469.3 million, primarily from consumer loans, including auto loans and leases, and commercial lending; residential mortgage loans declined. Deposits fell $1.64 billion, reflecting customer movement to higher-yielding alternatives, spending and lower government transaction balances. Borrowings increased $250.1 million.
- Equity decreased $776.2 million, principally reflecting the available-for-sale securities valuation decline, $275 million of share repurchases and $88.2 million in declared common dividends, partly offset by earnings.
Outlook, management commentary, risks and unusual items
- Management described itself as cautiously optimistic about Puerto Rico, citing employment gains and anticipated disaster-recovery disbursements; it also warned that inflation, rising rates and a possible economic slowdown create uncertainty. The filing provides no specific company earnings or revenue guidance. Management stated it expects available funds, credit facilities and operating cash flows to meet cash needs for the foreseeable future.
- Management returned approximately $363 million to shareholders in 2022—about 119% of 2022 earnings—through $275 million of repurchases and $88 million of dividends. A $0.14 quarterly dividend was declared in February 2023, subject to Board approval at relevant times; approximately $125 million remained under the 2022 repurchase authorization at year-end.
- Funding warrants attention: core and other deposits declined, uninsured deposits were estimated at $7.6 billion, and $475 million of FHLB advances and $75.1 million of repurchase agreements were short-term and due in the first quarter of 2023. The company estimated FDIC deposit-insurance expense would increase approximately 56% in 2023 following a rate-schedule increase.
- Puerto Rico-related exposures include $338.9 million of direct government, municipal and public-corporation exposure, $84.7 million of PRHFA-guaranteed residential mortgage loans, and $2.3 billion of Puerto Rico public-sector deposits. Puerto Rico fiscal developments, recovery-fund timing and borrower/collateral performance remain risks. USVI government loans totaled $38.0 million and were reported current.
- Interest-rate risks include deposit repricing and lower securities values. At year-end, management’s 12-month simulations estimated net interest income would rise $11.5 million under a gradual +200-basis-point scenario and fall $17.0 million under a gradual -200-basis-point scenario using a growing balance sheet.
- LIBOR transition exposure included $1.4 billion of variable-rate commercial and construction loans (including unused commitments), $124.4 million of municipal bonds, $44.6 million of securities and $183.8 million of subordinated debentures. Approximately $338.6 million of contracts lacked fallback language; the company expected to follow the LIBOR Act and Regulation ZZ for residual exposure after June 30, 2023.
- Hurricane Fiona relief deferrals or extensions applied to $73.1 million of consumer and residential mortgage loans at year-end; borrowers unable to resume payments could need further assistance. Other principal risks include credit-loss estimation, commercial real-estate concentration, cyber and operational events, competition, regulatory compliance, tax-asset realization and the holding company’s dependence on FirstBank dividends.
- The auditor issued an unqualified opinion and reported effective internal control over financial reporting. Its critical audit matter was the judgment involved in the loan-loss model and macroeconomic forecasts. Management reported no significant 2022 special items and no material legal contingency disclosure was considered necessary; the filing notes that actual legal losses may differ from estimates.
Most important facts for investors to verify
- Whether deposit outflows continue and short-term FHLB and repurchase funding is renewed at acceptable cost.
- How securities valuation losses, deposit repricing and rate movements affect tangible equity, capital and net interest margin.
- Whether consumer-loan delinquencies and charge-offs rise, and whether the $260.5 million allowance remains adequate under updated economic forecasts.
- Whether planned dividends and repurchases remain supportable given liquidity, capital needs, regulatory limits and FirstBank’s capacity to upstream dividends.
- Whether Puerto Rico recovery-fund deployment, fiscal-plan implementation and government exposures evolve as management expects.
- Whether residual LIBOR contracts transition as planned and whether the deferred-tax-asset valuation assumptions remain supportable.