First BanCorp. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed March 1, 2021. The filing also provides unaudited quarterly results, including fourth-quarter 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.
Business context and major transaction
Effective September 1, 2020, First BanCorp. acquired Banco Santander Puerto Rico (BSPR) for approximately $1.28 billion in cash. The acquisition added approximately $5.56 billion of assets, including $2.51 billion of loans, $1.17 billion of investment securities and $1.68 billion of cash, and $4.19 billion of deposits. BSPR’s non-performing assets were excluded from the transaction. The acquisition expanded the customer base by more than 30%, to approximately 675,000.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net interest income | $600.3 million | $567.1 million |
| Provision for credit losses | $171.0 million | $39.8 million |
| Non-interest income | $111.2 million | $90.6 million |
| Non-interest expense | $424.2 million | $378.5 million |
| Income before taxes | $116.3 million | $239.4 million |
| Net income | $102.3 million | $167.4 million |
| Net income attributable to common stockholders | $99.6 million | $164.7 million |
| Diluted earnings per common share | $0.46 | $0.76 |
| Net interest margin | 4.15% | 4.85% |
| Net charge-offs / average loans | 0.48% | 0.91% |
Year-end balance sheet: Assets were $18.79 billion, deposits $15.32 billion, borrowings $923.8 million and stockholders’ equity $2.28 billion. Gross loans were $11.83 billion, with an allowance for credit losses (ACL) of $385.9 million. Non-performing assets were $293.5 million, down from $317.4 million; nonaccrual loans were $205.1 million, or 1.74% of loans held for investment.
Cash flow and liquidity: Operating activities provided $297.7 million; investing activities used $1.24 billion; and financing activities provided $1.79 billion. Cash and cash equivalents ended the year at $1.49 billion, up $849.7 million. Core liquidity was $4.1 billion, or 21.6% of assets; the bank also reported $1.2 billion of available FHLB capacity and approximately $960 million available through the Federal Reserve discount window. Total borrowings increased to $923.8 million from $854.2 million.
Capital: First BanCorp.’s CET1, Tier 1, total capital and leverage ratios were 17.31%, 17.61%, 20.37% and 11.26%, respectively. These remained above regulatory thresholds but were lower than the respective 2019 ratios of 21.60%, 22.00%, 25.22% and 16.15%. The company elected the five-year regulatory-capital transition for CECL.
Material changes versus the prior year
- Net income fell by $65.1 million, primarily reflecting the much higher credit-loss provision, lower net interest margin and higher expenses. Net interest income increased by $33.2 million, mainly because of BSPR and lower funding costs, but margin compression offset part of that growth.
- The $171.0 million provision for credit losses included $38.9 million of initial CECL provision for acquired non-PCD loans; management attributed much of the remaining increase to pandemic-driven economic forecasts. CECL adoption increased the opening ACL by $93.2 million before tax and reduced beginning retained earnings by $62.3 million after tax.
- Assets rose $6.18 billion and deposits rose $5.97 billion, substantially reflecting BSPR, with additional deposit growth associated with stimulus payments and lower spending. Commercial and construction, residential mortgage, and consumer loans all increased.
- Non-interest income benefited from $13.2 million of investment-security sale gains, higher mortgage banking income and a $5.0 million hurricane business-interruption insurance settlement. Transaction-related fees were affected by pandemic restrictions.
- Non-interest expense increased $45.8 million. It included $26.5 million of BSPR merger and restructuring costs and $5.4 million of pandemic-related costs. Excluding identified special items, management reported adjusted expenses of $393.5 million versus $370.6 million.
- Net charge-offs declined to $47.9 million from $81.4 million, while the ACL-to-loans ratio increased to 3.28% from 1.72%, reflecting CECL, acquired-loan reserves and revised economic forecasts.
Outlook, management commentary, risks and unusual items
- BSPR integration: Management estimated approximately $65 million in total merger and restructuring costs, of which $37.9 million had been incurred through year-end 2020. It expected most remaining costs in the first half of 2021, planned to consolidate 9 to 10 branches during 2021, and expected full annual pre-tax savings of approximately $47 million in 2022. Management expected system conversions to finish by late summer 2021.
- COVID-19 and credit: Management said the pandemic’s longer-term impact could not be estimated. At year-end, 688 loans totaling $32.7 million were under temporary deferral arrangements; commercial loans totaling $244.3 million were permanently modified under CARES Act provisions. Pandemic-related deterioration in forecasts, particularly for commercial real estate and sectors such as hospitality, retail and entertainment, could lead to additional provisions or losses.
- Support programs: The year-end SBA PPP portfolio was $406.0 million, net of unearned fees. First BanCorp. also originated 23 Main Street loans totaling $184.4 million and sold $175.1 million of participations.
- Cybersecurity incident: An October 23, 2020 incident temporarily affected certain service channels. Normal operations were restored shortly thereafter; the investigation identified no evidence of misuse of personal information. Management did not expect a material impact but cautioned that customer, legal, remediation and regulatory costs remained possible.
- Other principal risks: Credit and collateral deterioration, Puerto Rico’s fiscal and economic condition, concentrated geographic and public-sector exposures, interest-rate and LIBOR transition risks, funding availability, acquisition integration, deferred-tax-asset realization, regulatory compliance and cybersecurity. Direct exposure to Puerto Rico government entities was $394.8 million; Puerto Rico public-sector deposits were $1.8 billion. Approximately 79% of loans held for investment were concentrated in Puerto Rico.
- Unusual items and distributions: Other identified items included hurricane-related insurance recoveries, investment-security gains and an $8.0 million partial reversal of the deferred-tax valuation allowance. Common dividends declared were $0.20 per share for 2020; in January 2021, the quarterly dividend was raised to $0.07 per share, subject to Board approval and applicable restrictions.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. BSPR’s controls were excluded from the 2020 internal-control assessment because of the acquisition timing; integration of those controls remained in progress.
Most important facts for investors to verify
- Whether BSPR integration is completed on schedule, remaining costs stay near estimates, and the projected $47 million annual savings are achieved.
- Whether pandemic-related borrower stress translates into higher delinquencies, charge-offs and ACL needs after deferrals and modifications end.
- Whether earnings and net interest margin stabilize as acquired balances, low interest rates and deposit costs evolve.
- Whether capital and liquidity remain robust after the acquisition, CECL transition and dividends; confirm restrictions on bank-to-parent dividends.
- Whether the large deferred tax asset can be realized and whether Puerto Rico public-sector exposure and deposits remain manageable.
- Whether the cybersecurity incident results in further remediation expense, customer attrition, claims or regulatory action.