First BanCorp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Results include Banco Santander Puerto Rico (BSPR) from its September 1, 2020 acquisition date, so reported comparisons with 2019 are not fully like-for-like.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $148.7 million | $144.4 million | $422.6 million | $427.2 million |
| Non-interest income | $29.9 million | $21.4 million | $81.0 million | $66.2 million |
| Provision for credit losses | $46.9 million | $7.4 million | $163.3 million | $31.3 million |
| Net income | $28.6 million | $46.3 million | $52.1 million | $130.9 million |
| Diluted earnings per common share | $0.13 | $0.21 | $0.23 | $0.59 |
| Net interest margin | 3.93% | 4.89% | 4.23% | 4.90% |
Q3 total revenue, defined as net interest income plus non-interest income, was $178.6 million versus $165.8 million. Nine-month total was $503.6 million versus $493.3 million. The filing reports a Q3 return on average assets of 0.72% versus 1.47%, and an efficiency ratio of 60.18% versus 55.98%.
- Balance sheet at September 30: Assets were $18.66 billion, up from $12.61 billion at December 31, 2019. Gross loans held for investment were $11.85 billion; deposits were $15.20 billion; and stockholders’ equity was $2.23 billion.
- Credit reserves and asset quality: The loan and finance lease allowance was $384.7 million, or 3.25% of loans, versus $155.1 million and 1.72% at year-end 2019. Nonaccrual loans were $201.3 million; nonperforming assets were $293.3 million, or 1.57% of assets, down from $317.4 million at year-end.
- Cash flow: Nine-month operating cash flow was $170.6 million, investing cash outflow was $88.1 million, and financing cash inflow was $1.74 billion. Cash and cash equivalents ended the period at $2.47 billion.
- Debt and liquidity: Borrowings totaled approximately $973.8 million, comprising $300 million of repurchase agreements, $490 million of FHLB advances and $183.8 million of other borrowings. Management reported liquid cash and securities above 19.2% of assets, approximately $1.4 billion of unused FHLB capacity and $936.1 million available through the Federal Reserve discount window.
- Capital: First BanCorp.’s CET1, Tier 1, total capital and leverage ratios were 17.21%, 17.52%, 20.32% and 13.04%, respectively. The Bank’s ratios were 15.91%, 18.57%, 19.83% and 13.83%. The company elected regulatory transition relief for CECL; ratios also reflect the acquisition, with the full leverage-ratio effect expected in the December 2020 quarter.
Material changes and significant items
- BSPR acquisition: Completed September 1 for estimated cash consideration of $1.28 billion. BSPR brought approximately $5.5 billion of assets, $2.6 billion of gross loans, $4.2 billion of deposits and 27 Puerto Rico branches. Preliminary purchase accounting recorded $6.3 million of goodwill and $39.2 million of identifiable intangibles; valuations and purchase price remained subject to adjustment.
- BSPR contributed $14.0 million of net interest income and $2.0 million of non-interest income for September, while its reported net loss included a $38.9 million day-one provision for non-PCD acquired loans. Acquisition-related merger and restructuring expense was $10.4 million in Q3 and $14.2 million for the first nine months.
- Q3 net income fell year over year as higher credit provisions and integration costs outweighed stronger non-interest income and lower funding costs. Non-interest income included a $5.3 million securities-sale gain; the nine-month period included $13.4 million of securities gains and a $5.0 million hurricane-related insurance settlement benefit.
- Net interest margin contracted amid lower market rates and a greater share of low-yielding cash, securities and PPP loans. Lower deposit costs partly offset reduced asset yields.
- Adoption of CECL on January 1 increased the allowance for loans by $81.2 million and the allowance for unfunded commitments by $3.9 million, with an after-tax retained-earnings reduction of $62.3 million. The filing states that much of the subsequent legacy reserve build reflected pandemic-related economic forecasts.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management said BSPR integration and system conversion were expected to be completed in the second quarter of 2021. The company planned to consolidate 8–10 branches in the first half of 2021 and estimated voluntary separation program costs of $5.2–$8.0 million, with some costs expected in Q4 2020 and the remainder in 2021.
- COVID-19 effects remained uncertain. At September 30, payment deferrals covered 25,173 loans totaling approximately $1.2 billion, or 10% of the held-for-investment portfolio. Management reported that borrowers on approximately $1.1 billion had resumed scheduled payments by October 30; loans still under moratorium were reported at $119 million at October 30.
- The company had $453.4 million of SBA PPP loans on its books at September 30. Management noted that pandemic effects on borrowers, unemployment, credit quality, transaction fees, funding and economic conditions could continue to affect results.
- Credit exposure is geographically concentrated: approximately 79% of gross loans were in Puerto Rico. Direct exposure to Puerto Rico government entities was $400.5 million, including municipal obligations; management cautioned that future credit-loss charges on municipal securities could be required. It also reported $64.0 million of USVI government-entity loans, all current at quarter-end.
- On October 23, 2020, the company detected a cybersecurity incident affecting certain service channels and temporarily interrupted some services. It said the incident had been contained, normal operations resumed and it had found no evidence of data misuse, but investigation was ongoing and outcomes were uncertain.
- Other risks include the uncertain duration and severity of the pandemic, BSPR integration and realization of synergies, Puerto Rico’s fiscal and economic challenges, credit deterioration in hospitality and real estate, interest-rate changes, and the ability to realize deferred tax assets. The company reported no legal-contingency disclosures it considered necessary based on its assessment at September 30.
Important facts for investors to verify
- Subsequent credit performance, renewals and payment status of the $1.2 billion of loans under deferral at quarter-end, and the adequacy of CECL reserves as forecasts change.
- BSPR purchase-accounting adjustments, integration costs, branch closures, separation-program costs, deposit retention and progress toward expected synergies.
- Whether reported earnings excluding securities gains, acquisition costs, pandemic expenses and tax benefits provide a useful view of ongoing performance; adjusted earnings are non-GAAP.
- Liquidity and funding trends, including deposit composition, brokered and non-maturity brokered deposits, and the effect of acquired assets on regulatory leverage ratios.
- Developments in the October cybersecurity incident, including any customer impact, remediation costs, claims or regulatory consequences.
- Credit exposure to Puerto Rico municipalities and other public entities, and the assumptions supporting the $347.5 million net deferred tax asset.