First BanCorp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Comparisons below are year over year for income and cash flow, and versus December 31, 2022 for balance-sheet figures. First BanCorp. is a Puerto Rico-based financial holding company operating principally in Puerto Rico, Florida, and the U.S. and British Virgin Islands.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $199.8 million | $196.2 million | $400.7 million | $381.8 million |
| Provision for credit losses | $22.2 million | $10.0 million | $37.7 million | $(3.8) million benefit |
| Non-interest income | $36.3 million | $30.9 million | $68.8 million | $63.8 million |
| Non-interest expenses | $112.9 million | $108.3 million | $228.2 million | $215.0 million |
| Net income | $70.7 million | $74.7 million | $141.4 million | $157.3 million |
| Diluted earnings per share | $0.39 | $0.38 | $0.78 | $0.80 |
| GAAP net interest margin | 4.23% | 4.00% | 4.29% | 3.91% |
| Efficiency ratio | 47.83% | 47.69% | 48.60% | 48.25% |
- Q2 interest income rose to $252.2 million from $208.6 million, but interest expense increased much faster, to $52.4 million from $12.4 million. Higher loan yields and growth in consumer lending supported net interest income; deposit repricing and higher borrowing costs offset much of the benefit.
- Management reported Q2 adjusted net income of $66.8 million, excluding a $3.6 million legal-settlement gain and a $1.6 million gain from repurchasing subordinated debt, net of the stated tax adjustment. No significant special items were reported for the comparable 2022 periods.
Balance sheet, liquidity, and capital
- Total assets were $19.15 billion, up $518.0 million from year-end 2022. Cash and cash equivalents rose about $567 million to $1.05 billion; total investment securities fell about $186 million to $5.90 billion.
- Gross loans held for investment were $11.72 billion, up $166.5 million from year-end; loans net of allowance were $11.45 billion. Consumer loans and leases grew, while residential mortgage balances declined. About 79% of gross loans were concentrated in Puerto Rico, 17% in the U.S. (principally Florida), and 4% in the Virgin Islands.
- Total deposits were $16.82 billion, up $676.2 million. Core deposits excluding government deposits and brokered CDs declined $247 million to $13.0 billion, while public-sector deposits and brokered CDs increased. Estimated uninsured deposits were $8.0 billion including collateralized government deposits; $4.7 billion were uninsured excluding those collateralized balances.
- Borrowings declined about $198 million to $735.6 million: $500 million of FHLB advances, $73.9 million of repurchase agreements, and $161.7 million of other long-term borrowings. The company reported $5.6 billion of total available liquidity, including cash and free high-quality liquid assets, FHLB capacity, and Federal Reserve Discount Window capacity.
- Stockholders’ equity was $1.40 billion, up $72.5 million from year-end. Regulatory capital ratios remained well above minimums: FirstBank’s CET1 ratio was 16.54%, total capital ratio 18.59%, and leverage ratio 11.18%. The filing notes that regulatory capital still reflects the permitted phased-in treatment of CECL.
- Available-for-sale debt securities had a $765.8 million net unrealized loss at June 30, largely attributed to higher market interest rates. Accumulated other comprehensive loss was $772.4 million, compared with $804.8 million at year-end.
Cash flow and credit quality
- For the first half, operating cash flow was $166.5 million, investing cash flow was positive $25.0 million, and financing cash flow was positive $375.5 million. Cash and cash equivalents increased $567.0 million to $1.05 billion. Financing inflows principally reflected deposit growth, partly offset by borrowings repayments, dividends, and share repurchases.
- The allowance for loan and lease losses was $267.1 million, or 2.28% of loans, versus $260.5 million, or 2.25%, at year-end. Management cited increased commercial-real-estate uncertainty and consumer portfolio growth among the factors behind reserve increases.
- Q2 net charge-offs were $19.3 million, or 0.67% annualized, compared with $6.0 million, or 0.21%, a year earlier. The increase included a $6.2 million charge-off on a Florida power-generation C&I participation and higher consumer charge-offs. First-half net charge-offs were $32.5 million, or 0.56% annualized.
- Non-performing assets fell to $121.1 million from $129.2 million at year-end; nonaccrual loans were $82.0 million. Early-stage delinquent loans (30–89 days past due) increased to $118.5 million from $104.9 million.
Changes, outlook, risks, and unusual items
- Net income declined year over year despite higher net interest income, principally reflecting the larger credit-loss provision and higher operating costs. Q2 compensation and benefits expense rose $3.0 million; first-half expenses also reflected higher card-processing, FDIC insurance, and technology-related costs.
- Management said Puerto Rico economic activity and labor markets remained supportive, while noting inflation remained elevated and the Federal Reserve raised rates again in July. It expects higher rates to support variable-rate loan and cash yields, but also anticipates higher deposit costs and continued pressure from deposit migration to higher-cost products. No specific full-year earnings guidance is provided in the supplied filing text.
- Management described liquidity as strong, but highlighted deposit retention, wholesale funding costs, possible securities sales at a loss, and financial-industry volatility as risks. Core deposits declined despite overall deposit growth; available liquidity relies partly on secured borrowing facilities and collateral.
- Credit and geographic risks include commercial real estate uncertainty, consumer credit losses, concentration in Puerto Rico, and exposure to Puerto Rico and U.S. Virgin Islands government entities. Direct Puerto Rico government exposure was $344.3 million; separate PRHFA-guaranteed residential mortgage exposure was $81.1 million. USVI public-corporation loans increased to $78.9 million; the filing says those loans were performing and current.
- A proposed FDIC special assessment could add approximately $6 million to non-interest expense if finalized as proposed. The filing also identifies a third-party vendor security incident in April 2023 involving some mortgage-business data; First BanCorp. said its own systems were not compromised, the impact was minimal, and it had no evidence of misuse as of the filing.
- During Q2, the company repurchased $21.4 million par value of Trust Preferred Securities at 92.5% of par, recognizing a $1.6 million debt-extinguishment gain. On July 24, 2023, it authorized a new $225 million share-repurchase program and declared a $0.14 quarterly dividend; it expected about $150 million of repurchases in the second half of 2023. These are subsequent developments, not Q2-period results.
- The company adopted ASU 2022-02 on January 1, 2023; adoption increased the allowance by approximately $2.1 million and reduced retained earnings by approximately $1.3 million after tax. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It assessed pending legal matters as not expected to have a material adverse effect; no additional material loss disclosure was considered necessary.
Investor verification priorities
- Track deposit mix, especially core-deposit trends, uninsured balances, government deposits, and the cost and use of brokered CDs and wholesale funding.
- Review deposit pricing and net interest margin sensitivity as rates and deposit betas change; distinguish GAAP results from tax-equivalent and other non-GAAP measures.
- Assess charge-offs, delinquencies, criticized commercial loans, and allowance adequacy, including exposure to commercial real estate and consumer lending.
- Verify the status and cost of the FDIC assessment, the vendor incident, and remaining LIBOR-to-SOFR conversions.
- Monitor execution of announced buybacks and dividends against liquidity, capital, and regulatory constraints, and confirm Puerto Rico and USVI public-sector exposures and repayments.