First BanCorp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. First BanCorp. is a Puerto Rico-based financial holding company operating principally in Puerto Rico, Florida, the U.S. Virgin Islands and the British Virgin Islands. Results include the acquired Banco Santander Puerto Rico (BSPR); Q3 2020 included only one month of BSPR operations, limiting comparability.
Financial performance and position
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $184.7 | $148.7 | $545.8 | $422.6 |
| Provision for credit losses (benefit) | $(12.1) | $46.9 | $(53.5) | $163.3 |
| Non-interest income | $29.9 | $29.9 | $90.8 | $81.0 |
| Non-interest expenses | $114.0 | $107.5 | $377.5 | $289.5 |
| Net income | $75.7 | $28.6 | $207.4 | $52.1 |
| Diluted EPS | $0.36 | $0.13 | $0.96 | $0.23 |
- Revenue and earnings: Q3 total revenue, comprising net interest income and non-interest income, was $214.7 million versus $178.6 million. Net income attributable to common shareholders was $75.0 million in Q3 and $205.4 million for the nine-month period.
- Margins: Q3 net interest margin declined to 3.60% from 3.93%; the nine-month margin was 3.77% versus 4.23%. Management attributed pressure to a larger share of lower-yielding cash and securities amid deposit growth and soft commercial lending demand. Q3 return on average assets was 1.42%, compared with 0.72%.
- Cash flow: Nine-month operating cash flow was $303.6 million; investing cash outflow was $1.48 billion; financing cash inflow was $2.34 billion. Cash and cash equivalents ended at $2.66 billion, up $1.16 billion from year-end 2020.
- Balance sheet and liquidity: Assets were $21.26 billion, up $2.46 billion from December 31, 2020. Deposits were $17.98 billion, up $2.67 billion; cash and due from banks was $2.66 billion. Management reported core liquidity of $5.8 billion (27.3% of assets), basic liquidity of 32.2% of assets, and $1.1 billion of additional FHLB borrowing capacity.
- Loans, credit and reserves: Gross loans held for investment were $11.14 billion, down from $11.78 billion at year-end; the allowance for loan and lease losses fell to $288.4 million from $385.9 million. Non-performing assets declined to $172.4 million from $293.5 million (0.81% versus 1.56% of assets). Nonaccrual loans were $122.1 million; adversely classified commercial and construction loans rose $87.1 million to $242.3 million.
- Debt and capital: Borrowings totaled $803.8 million: $300 million in repurchase agreements, $320 million of FHLB advances and $183.8 million of other borrowings. First BanCorp.’s CET1, Tier 1, total capital and leverage ratios were 17.62%, 17.92%, 20.67% and 10.17%, respectively. Stockholders’ equity was $2.20 billion, down $77.2 million, including the effect of share repurchases and an $89.2 million after-tax decline in accumulated other comprehensive income.
Material changes and unusual items
- Reported earnings improved substantially from the prior-year periods, principally reflecting provision releases rather than credit-loss expense, lower deposit costs and BSPR-related scale. The Q3 2020 provision included $38.9 million of day-one acquired-loan and securities reserves.
- Q3 2021 net charge-offs were $27.9 million, versus $11.4 million a year earlier. They included $23.1 million associated with the sale of $52.5 million of nonaccrual residential mortgages and related advances. The sale generated $31.5 million of proceeds; excluding its charge-offs, Q3 net charge-offs were about $4.9 million.
- Available-for-sale securities grew to $6.69 billion from $4.65 billion at year-end, while their unrealized losses drove a $89.2 million nine-month reduction in accumulated other comprehensive income. Purchases of securities were $3.29 billion; there were no available-for-sale securities sales in the first nine months of 2021.
- BSPR systems conversion was completed in July 2021 and nine Puerto Rico branches had been consolidated since the acquisition. Merger and restructuring costs were $24.6 million for the first nine months; management estimated total costs of about $65 million, with the remainder expected in Q4 2021. It projected approximately $49 million in annual pretax savings, fully realized in 2022.
- During the first nine months, the company repurchased 12.1 million common shares for about $150 million under a $300 million authorization. After quarter-end, it announced a $0.10 quarterly common dividend and redemption of all $36.1 million of Series A–E preferred stock, scheduled for November 30, 2021.
- Management reported adjusted net income, a non-GAAP measure excluding specified special items, of $77.5 million for Q3 and $224.6 million for the first nine months, versus $22.4 million and $38.4 million, respectively, in 2020.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management described economic activity as improving but maintained a cautious outlook because of COVID-19 uncertainty, including variants, vaccination progress and potential effects on borrowers and the economy.
- Management’s September ACL estimate used a favorable base-case economic forecast, including improving commercial real estate price expectations. It cautioned that changes in forecasts, borrower performance or portfolio mix could materially alter reserves and results.
- Key exposures include Puerto Rico’s fiscal position and debt restructuring, government and municipal borrowers, the USVI economy, and the concentration of 78% of held-for-investment loans in Puerto Rico. Direct Puerto Rico government exposure was $362.6 million; a further $96.5 million of residential mortgage loans was guaranteed by PRHFA. The company noted uncertainty about the PRHFA’s financial capacity.
- Interest-rate and funding risks include margin pressure, securities valuation changes, prepayments and possible limits on wholesale funding. The company was transitioning LIBOR-linked products; significant LIBOR-based balances included $2.0 billion of commercial and construction loans and $183.8 million of junior subordinated debentures.
- Commercial loans totaling $329.9 million had COVID-related modifications under statutory relief provisions. Management also cited operational, cybersecurity, regulatory, tax-asset realization and acquisition-integration risks. It reported no legal contingency requiring additional disclosure and stated that regulatory capital ratios exceeded applicable minimums.
Important facts for investors to verify
- Whether reserve releases and the favorable macroeconomic assumptions supporting them remain appropriate, especially given the increase in adversely classified commercial and construction loans.
- The underlying credit quality and recoveries from the residential mortgage portfolio, including the bulk-sale economics, delinquency trends and remaining foreclosure exposure.
- Whether the projected $49 million of annual BSPR savings is achieved in 2022, and whether remaining integration costs and expenses trend as expected.
- How sustained deposit growth, high liquidity and securities reinvestment yields affect net interest margin and earnings.
- The realization of the $243.4 million net deferred tax asset, the effect of the $150 million share repurchase and preferred-stock redemption on capital, and the capacity to sustain dividends.
- A filing inconsistency: the balance sheet reports deposits of $17.985 billion, while the MD&A selected financial data reports $17.895 billion. Verify the correct figure against the filed financial statements.