First BanCorp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. 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. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $207.9 | $184.7 | $589.7 | $545.8 |
| Provision for credit losses | $15.8 expense | $12.1 benefit | $12.0 expense | $53.5 benefit |
| Non-interest income | $29.7 | $29.9 | $93.5 | $90.8 |
| Non-interest expenses | $115.2 | $114.0 | $330.2 | $377.5 |
| Net income | $74.6 | $75.7 | $231.9 | $207.4 |
| Diluted EPS | $0.40 | $0.36 | $1.19 | $0.96 |
- Margins and returns: GAAP net interest margin was 4.31% for Q3, up from 3.60%; it was 4.04% for the nine months, versus 3.77%. Return on average assets was 1.55% for Q3 and 1.57% for the nine months. The efficiency ratio was 48.48% and 48.33%, respectively.
- Balance sheet at September 30: Assets were $18.44 billion, down $2.34 billion from year-end 2021. Loans held for investment were $11.30 billion gross and $11.04 billion net of allowance. Deposits were $16.57 billion, down $1.22 billion. Stockholders’ equity was $1.27 billion, down $836 million.
- Cash flow and liquidity: Operating activities provided $334.8 million in the first nine months; investing used $508.2 million and financing used $1.81 billion. Cash and cash equivalents fell $1.99 billion to $555.0 million. Management reported $3.4 billion of core liquidity reserves and available borrowing capacity of $1.3 billion at the FHLB and approximately $1.2 billion under the Federal Reserve Borrower-in-Custody program.
- Debt and funding: At quarter-end, borrowings included $200 million of repurchase agreements and $183.8 million of junior subordinated debentures; no FHLB advances remained after $200 million matured and was repaid. Deposits funded approximately 90% of Bank assets. The filing says available funds, unpledged securities, credit facilities and operating cash flow should meet operational needs for the foreseeable future.
- Capital: Regulatory capital ratios remained above stated minimums. FirstBank’s CET1 ratio was 17.00% and total capital ratio 19.07%; the holding company’s were 16.66% and 19.38%. Tangible common equity ratio fell to 6.55% from 9.81%, and tangible book value per share to $6.46 from $10.07.
- Credit quality: The loan and finance lease allowance was $257.9 million, 2.28% of gross loans, down from $269.0 million and 2.43% at year-end. Nonaccrual loans were $97.5 million, down from $110.7 million; total nonperforming assets were $143.3 million. Consumer-loan allowance rose amid portfolio growth, higher charge-offs and a weaker macroeconomic outlook.
Material changes versus comparable periods
- Q3 net income declined modestly year over year, while diluted EPS increased, supported by fewer weighted-average shares following repurchases. Nine-month net income and EPS increased year over year.
- Higher market rates and variable-rate loan repricing, higher yields on cash balances, consumer-loan growth and lower securities premium amortization lifted net interest income. Higher deposit and borrowing costs partly offset those benefits.
- Q3 provision shifted from a prior-year benefit to an expense, primarily reflecting consumer-credit growth and outlook. The 2021 comparison also included large residential mortgage charge-offs from a bulk loan sale; excluding those, prior-year net charge-offs were lower than the reported total suggests.
- Mortgage banking income weakened as mortgage loan sales and refinancing volumes declined. Nine-month non-interest expenses fell, largely because 2021 included BSPR integration and restructuring costs and COVID-related expenses; Q3 2022 expenses included $0.4 million of hurricane-related costs.
- Available-for-sale securities recorded $778.7 million of nine-month after-tax unrealized losses in other comprehensive income, mainly from rising rates. This drove much of the decline in equity and reduced the portfolio’s fair value to $5.67 billion from $6.45 billion.
- Gross loans grew about $238 million from year-end, led by consumer loans and finance leases; residential mortgage balances declined. Total assets and deposits contracted, while the company repurchased approximately 15.9 million shares for about $225 million and paid $65.9 million in common dividends during the nine months.
Outlook, commentary and risks
- The filing provides no quantified earnings or revenue guidance. Management described liquidity as sufficient for foreseeable operating needs and reported an asset-sensitive position: its model estimated next-12-month net interest income would rise $22.9 million under a gradual +200-basis-point scenario and fall $26.9 million under a -200-basis-point scenario using a growing-balance-sheet assumption. These are model estimates, not forecasts.
- Hurricane Fiona made landfall in Puerto Rico on September 17. The Bank reopened 98% of branches by September 28; one damaged leased branch was expected to reopen in 2023. Management recorded no separate hurricane-related ACL reserve at quarter-end, but said loss estimates could change as information develops. By October 31, 3,366 retail loans totaling $63.6 million had received payment deferrals or extensions.
- Puerto Rico represented approximately 79% of gross loans. Direct exposure to the Puerto Rico government, municipalities and public corporations was $327.2 million; separately, $86.7 million of residential mortgage loans were PRHFA-guaranteed. Puerto Rico fiscal conditions, recovery funding and government debt restructurings remain relevant risks.
- Key stated risks include inflation and rising rates, deposit attrition and funding costs, economic slowdown and unemployment, credit deterioration, securities valuation and potential credit losses, hurricane impacts, LIBOR transition, cyber and operational risks, regulation, and dependence on subsidiary dividends. About $359.4 million of LIBOR exposure lacked fallback language; the company expected to apply the LIBOR Act to residual exposure after June 2023.
- The FDIC adopted a uniform two-basis-point increase in initial base deposit insurance assessment rates starting in 2023; the company was awaiting final instructions to estimate the effect. The company said it did not currently expect the Inflation Reduction Act to materially affect results or liquidity.
- The company reported various ordinary-course legal proceedings and contingencies; management said their disposition was not expected to materially adversely affect consolidated financial position and that no additional loss-range disclosure was necessary. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit outflows continue, and how management replaces funding without materially pressuring margins or liquidity.
- Whether rising-rate effects on net interest income persist as deposit costs reprice and variable-rate assets reset.
- How unrealized securities losses, further rate changes or any need to sell securities affect equity, regulatory capital and tangible book value.
- Whether consumer-loan delinquencies, charge-offs and allowance needs increase, particularly in auto loans and leases; monitor hurricane-related deferrals and subsequent payment performance.
- Progress and remaining capacity under the share repurchase authorization, and the effect of buybacks and dividends on capital and liquidity.
- Updates on Puerto Rico exposures and fiscal conditions, the PRHFA-related assets, and the LIBOR transition for contracts without fallback provisions.