First BanCorp. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below identify the fourth quarter where relevant. 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.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | $12.61 billion | $12.24 billion |
| Total deposits | $9.35 billion | $8.99 billion |
| Total loans, including loans held for sale | $9.04 billion | $8.90 billion |
| Net interest income | $567.1 million | $525.4 million |
| Net interest margin | 4.85% | 4.55% |
| Provision for loan and lease losses | $40.2 million | $59.3 million |
| Non-interest income | $90.6 million | $82.3 million |
| Non-interest expenses | $378.1 million | $357.8 million |
| Net income | $167.4 million | $201.6 million |
| Net income attributable to common shareholders | $164.7 million; $0.76 diluted EPS | $198.9 million; $0.92 diluted EPS |
| Operating cash flow | $294.3 million | $288.3 million |
| Year-end cash and cash equivalents | $644.1 million | $586.2 million |
| Borrowings | $854.2 million | $1.07 billion |
| Stockholders’ equity | $2.23 billion | $2.04 billion |
Business performance and changes
- Net interest income increased 7.9%, supported by consumer-loan growth, higher commercial-loan yields and an improved funding mix. The margin expanded 30 basis points. Higher deposit costs partly offset asset-income growth.
- Net income fell 17.0%, largely because 2018 included a $63.2 million tax benefit from a partial reversal of the deferred-tax-asset valuation allowance. On management’s non-GAAP adjusted basis, net income was $165.6 million in 2019 versus $137.1 million in 2018; this measure excludes specified special items.
- Provision expense declined, and net charge-offs fell to $81.4 million, or 0.91% of average loans, from $94.7 million, or 1.09%. Nonaccrual loans decreased to $210.7 million from $332.1 million; total nonperforming assets fell to $317.4 million from $467.1 million. However, loans 30–89 days past due increased to $162.7 million from $136.6 million.
- Loans grew $140.4 million overall: consumer loans increased $336.9 million, while residential mortgages declined $217.0 million. About 74% of loans held for investment were concentrated in Puerto Rico.
- The allowance for loan and lease losses was $155.1 million, or 1.72% of loans held for investment, compared with $196.4 million, or 2.22%, a year earlier. The allowance covered 73.64% of nonaccrual loans, versus 62.15%.
- FDIC-insured deposits increased, while brokered CDs declined to $435.1 million from $555.6 million. FHLB advances fell to $570.0 million from $740.0 million. The company reported a $2.0 billion core liquidity reserve, equal to 15.8% of assets, and $547.6 million of remaining FHLB borrowing capacity.
- Regulatory capital remained well above stated well-capitalized thresholds. At year-end, First BanCorp.’s CET1, total capital and leverage ratios were 21.60%, 25.22% and 16.15%; FirstBank’s were 20.09%, 24.74% and 17.26%, respectively.
Material developments, outlook and risks
- Pending Santander acquisition: FirstBank agreed to acquire Banco Santander Puerto Rico’s holding company in an all-cash transaction. Based on September 30, 2019 balances, the estimated purchase price was approximately $1.255 billion, subject to closing-date adjustment. The seller was to transfer nonperforming assets and Santander Asset Management before closing. Regulatory approval and other conditions remained outstanding; closing was expected around mid-2020. First BanCorp. reported $11.4 million of 2019 merger and restructuring costs and estimated total restructuring charges of approximately $76 million. Management cited potential scale, funding and cost-synergy benefits but cautioned that benefits and integration success were uncertain.
- A voluntary separation program associated with the acquisition incurred a $3.4 million charge; 56 employees participated. Expected annual savings were approximately $2 million.
- Management raised the quarterly common dividend to $0.05 per share in October 2019. Total 2019 common dividends declared were $0.14 per share. Dividends remain subject to capital, regulatory and subsidiary-distribution constraints.
- Beginning January 1, 2020, CECL was expected to increase the allowance for credit losses by approximately $93 million, with a net-of-tax reduction to retained earnings. Management estimated an approximately 13-basis-point day-one CET1 impact after using the permitted three-year regulatory-capital phase-in.
- Puerto Rico’s prolonged economic and fiscal challenges, government debt restructuring, population decline and uncertainty over disaster-relief funding pose risks to borrowers, collateral values and public-sector exposures. Direct exposure to Puerto Rico government entities was $204.5 million; public-sector deposits in Puerto Rico were $826.9 million. A further $106.9 million of residential mortgages had PRHFA guarantees.
- Other key risks include credit deterioration and real-estate weakness; natural disasters; interest-rate and LIBOR-transition exposure; reliance on deposits and wholesale funding; regulatory and litigation matters; cybersecurity and third-party operational risks; and the ability to realize deferred tax assets. The 2020 Puerto Rico earthquakes caused, according to the filing, no material facility or OREO damage; borrower payment deferrals had been arranged on $14.5 million of consumer loans, $9.2 million of residential mortgages and $55.7 million of commercial mortgages.
- The filing provides no formal earnings guidance. Management said available liquidity and funding were expected to support business plans in the foreseeable future, while noting that actual results could differ from expectations. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether Santander acquisition approvals and closing conditions were satisfied, the final purchase price and funding terms, and the realized integration costs and synergies.
- Whether asset-quality improvement continued, particularly given the increase in early delinquencies, and whether the allowance remains adequate under CECL.
- Whether the estimated $93 million CECL allowance increase and capital impact matched actual adoption results.
- Whether FirstBank can realize deferred tax assets and sustain profitability amid Puerto Rico economic and fiscal uncertainty.
- Deposit retention and funding costs, brokered-CD maturities, public-sector deposit concentration, and liquidity after acquisition-related cash needs.
- Common and preferred dividend capacity, including the impact of subsidiary dividend restrictions and capital requirements.