First BanCorp. — 2021 Form 10-K
Business and period: Puerto Rico-based financial holding company operating in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Its six reportable segments include commercial and corporate banking, mortgage banking, consumer banking, treasury and investments, U.S. operations and Virgin Islands operations. This annual report covers the year ended December 31, 2021; references to “Q4 2021” should not be read as a standalone quarterly report.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $281.0 million | $102.3 million |
| Diluted earnings per share | $1.31 | $0.46 |
| Net interest income | $729.9 million | $600.3 million |
| Net interest margin (GAAP) | 3.73% | 4.15% |
| Provision for credit losses | $65.7 million benefit | $171.0 million expense |
| Non-interest income | $121.2 million | $111.2 million |
| Non-interest expense | $489.0 million | $424.2 million |
| Return on average assets | 1.38% | 0.67% |
| Efficiency ratio | 57.45% | 59.62% |
Adjusted net income, a non-GAAP measure excluding specified special items, was $299.4 million in 2021 versus $97.1 million in 2020. Income tax expense rose to $146.8 million from $14.1 million; the reported 2021 effective tax rate was 33.9% excluding specified entities and discrete items, compared with 17% in 2020.
At year-end, total assets were $20.8 billion, deposits $17.8 billion, loans held for investment before allowance $11.1 billion, and stockholders’ equity $2.1 billion. Total borrowings were $683.8 million: $300 million of repurchase agreements, $200 million of FHLB advances and $183.8 million of other borrowings, including subordinated debentures.
Cash and cash equivalents were $2.5 billion. Operating cash flow was $399.7 million; investing activities used $1.3 billion and financing activities provided $1.9 billion. Management reported a $5.6 billion core liquidity reserve, or 27.0% of assets, and $1.2 billion of additional FHLB borrowing capacity. Regulatory capital ratios were strong: First BanCorp. reported CET1 and Tier 1 ratios of 17.80%, total capital of 20.50%, and leverage of 10.14%. FirstBank’s corresponding ratios were 18.12%, 19.03%, 20.23% and 10.85%.
Material changes versus 2020
- Net income increased substantially as the company recorded a $65.7 million credit-loss provision benefit, compared with a $171.0 million expense in 2020. Releases reflected improved economic forecasts and lower loan balances; they are not equivalent to recurring operating revenue.
- Net interest income rose, partly because average interest-earning assets increased following the September 2020 acquisition of Banco Santander Puerto Rico (BSPR), deposit costs fell, and $13.2 million of PPP fees were accelerated into income after loan forgiveness. Margin nevertheless contracted 42 basis points, reflecting lower rates and a greater share of lower-yielding cash and securities.
- Non-interest expenses rose, largely due to the acquired BSPR operations. The company completed core-system conversion in 2021; cumulative BSPR merger and restructuring costs were $64.4 million, including $26.4 million in 2021. Management estimated approximately $49 million in annual pre-tax savings at full realization, expected during 2022, and did not expect significant additional merger and restructuring costs in 2022.
- Total loans declined $731.8 million, including lower residential mortgage and commercial/construction balances and a $261 million reduction in PPP loans; consumer loans and leases increased $278.4 million. Deposits rose $2.5 billion overall, with growth in non-interest-bearing and government deposits.
- Nonaccrual loans fell 46% to $110.7 million and non-performing assets fell 46% to $158.1 million. A $52.5 million bulk sale of nonaccrual residential mortgages produced $23.1 million of net charge-offs. Adversely classified commercial and construction loans increased $22.1 million to $177.3 million.
- Stockholders’ equity declined $173.4 million, reflecting approximately $317.8 million returned through share repurchases, dividends and preferred-stock redemption, as well as a $139.5 million reduction in other comprehensive income, mostly from lower available-for-sale securities values.
Outlook, risks and unusual items
- Outlook: Management described the outlook as cautious amid COVID-19 variants, inflation, rising interest rates and uncertainty in Puerto Rico. It reported 17% growth in total loan originations in 2021 and a strong commercial pipeline, but the filing provides no company-specific earnings or margin guidance.
- Economic and geographic exposure: Approximately 79% of gross loans held for investment were in Puerto Rico. Direct exposure to Puerto Rico government entities was $360.1 million, while Puerto Rico public-sector deposits were $2.7 billion. The Commonwealth’s debt-adjustment plan was confirmed in January 2022; its ultimate economic effects, and the status of other public-sector obligations, remain uncertain. Loans to USVI public corporations were $39.2 million and performing at year-end.
- Credit and estimates: The allowance for credit losses on loans and leases was $269.0 million, down from $385.9 million. Management’s adverse-scenario sensitivity analysis indicated a hypothetical approximately $40 million increase in modeled credit losses, excluding qualitative adjustments. Estimates depend on economic forecasts, collateral values and borrower performance.
- Liquidity and funding: Deposits are the principal funding source. Brokered CDs were $100.4 million, and $200 million of FHLB advances were scheduled to mature in 2022. Management said available funds, facilities and operating cash flows should meet foreseeable needs, but warned that funding access or costs could worsen.
- Interest rates and LIBOR: Management estimated that a gradual 200-basis-point rate increase would raise next-12-month net interest income by $39.1 million under its growing-balance-sheet scenario; a modeled decline would reduce it by $13.5 million. These are model estimates, not guidance. The company stopped entering new U.S. dollar LIBOR contracts at year-end 2021 and is transitioning primarily to CME Term SOFR; transition work is expected to continue through 2023. The filing identifies $2.0 billion of LIBOR-based commercial and construction loans and $183.8 million of LIBOR-linked subordinated debentures, among other exposures.
- Capital returns: The company repurchased 16.7 million common shares for $213.9 million, redeemed all Series A–E preferred stock for $36.1 million, and raised its quarterly common dividend to $0.10 per share in Q4. Dividends and repurchases remain subject to board and regulatory considerations.
- Other items: The 2021 income includes PPP forgiveness-related accelerated fee recognition and a substantial reserve release. 2020 included a $13.2 million securities-sale gain, an $8.0 million deferred-tax-allowance reversal and $6.2 million of hurricane-related insurance recoveries. The auditor issued an unqualified opinion and reported effective internal control over financial reporting; the allowance-for-credit-losses model and macroeconomic assumptions were identified as a critical audit matter.
Important facts for investors to verify
- How much 2021 earnings growth is sustainable after separating credit-loss reserve releases, PPP fee acceleration, acquisition effects and other special items.
- Whether BSPR integration achieves the estimated $49 million annual pre-tax savings in 2022, and whether customer or deposit attrition affects those savings.
- Credit quality trends in Puerto Rico commercial real estate, hospitality and retail, and the performance of loans modified during the pandemic; verify how the $342.4 million of commercial loans modified under CARES Act provisions performs after deferrals.
- The recoverability of deferred tax assets, including the $69.7 million FirstBank valuation allowance and NOLs with expiration periods beginning in 2022.
- Exposure to Puerto Rico government-related borrowers and public-sector deposits, including the financial condition of PRHFA and the implications of the Commonwealth’s confirmed debt restructuring.
- Execution and contract coverage of the LIBOR-to-SOFR transition, and the sensitivity of margins and securities values to rising rates and prepayments.