First BanCorp. — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021. First BanCorp. is a Puerto Rico-based financial holding company operating in Puerto Rico, the U.S. and British Virgin Islands, and Florida. The results include Banco Santander Puerto Rico (BSPR), acquired September 1, 2020; year-over-year comparisons therefore reflect both the acquisition and differing pandemic conditions.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Interest income | $194.6 million | $165.3 million |
| Net interest income | $176.3 million | $138.6 million |
| Non-interest income | $31.0 million | $30.2 million |
| Net income | $61.2 million; $0.28 diluted EPS | $2.3 million; $0.01 diluted EPS |
| Provision for credit losses | $15.3 million net benefit | $77.4 million expense |
| Net interest margin | 3.91% | 4.63% |
| Return on average assets | 1.30% | 0.07% |
| Efficiency ratio | 64.33% | 54.60% |
Net income improved substantially as net interest income rose and the credit-loss provision shifted to a benefit from a large prior-year expense. The provision benefit reflected improved macroeconomic forecasts, including unemployment assumptions. Management also reported adjusted net income, a non-GAAP measure, of $68.9 million, excluding specified merger, pandemic, and other special items; the comparable adjusted result in Q1 2020 was a loss of $5.9 million.
Non-interest expenses increased to $133.3 million from $92.2 million, including $11.3 million of BSPR merger and restructuring costs versus $0.8 million a year earlier. Excluding specified special items, adjusted expenses rose $28.7 million, principally reflecting acquired personnel, branches, technology, and operating costs. The prior-year period also included an $8.2 million gain on investment-security sales.
Balance sheet, cash flow, and capital
- Assets and lending: Total assets were $19.4 billion at March 31, up $620.7 million from year-end. Gross loans held for investment were $11.64 billion, down from $11.78 billion; the allowance was $358.9 million, or 3.08% of loans. Investment securities available for sale totaled $5.41 billion, up from $4.65 billion.
- Credit quality: Net charge-offs were $12.5 million, or 0.43% annualized of average loans, versus $17.6 million, or 0.78%, in Q1 2020. Non-performing assets were $284.9 million, 1.47% of assets, down from $293.5 million at year-end. Nonaccrual loans were $201.1 million; loans past due 90 days or more and still accruing were $160.9 million.
- Deposits and borrowings: Deposits were $16.01 billion, up $693.1 million from year-end. Borrowings totaled $923.8 million: $300 million in repurchase agreements, $440 million in FHLB advances, and $183.8 million in other borrowings.
- Liquidity: Cash and cash equivalents were $1.52 billion. Management reported a $4.6 billion core liquidity reserve, 23.9% of assets, and $1.2 billion of additional FHLB borrowing capacity. Brokered CDs were $162.1 million; $76.5 million were scheduled to mature within twelve months.
- Cash flows: Operating activities provided $112.7 million; investing activities used $768.1 million, primarily reflecting securities purchases; financing activities provided $679.7 million, principally from deposit growth. Cash and cash equivalents increased $24.3 million during the quarter.
- Equity and capital: Stockholders’ equity was $2.22 billion, down $54.8 million from year-end, principally because a $98.9 million after-tax unrealized securities loss reduced accumulated other comprehensive income. CET1, Tier 1, total capital, and leverage ratios were 17.68%, 17.99%, 20.73%, and 11.36%, respectively. These ratios include the permitted phase-in of CECL effects on regulatory capital.
Material changes, outlook, and risks
- Net interest income increased $37.6 million year over year, aided by BSPR and larger average loan and securities balances, while lower funding costs helped offset reduced asset yields. NIM contracted 72 basis points, reflecting low rates, mortgage-security prepayments, lower reinvestment yields, and a larger share of lower-yielding cash and securities.
- BSPR integration was ongoing. Commercial, consumer, and credit-card system conversions were completed during the first four months of 2021; full system conversions were expected by the end of summer 2021. Management expected integration to finish in the second and third quarters of 2021, total merger and restructuring costs of about $65 million, and approximately $49 million in annual pretax savings fully realized during 2022. About $49.2 million of costs had been incurred through March 31, 2021.
- Management said Q1 results showed improvement toward pre-pandemic levels but maintained a cautious economic outlook amid COVID-19 uncertainty, variants, and the pace of recovery. The company originated $209.3 million of PPP loans in the quarter; its PPP portfolio was $430.5 million net of unearned fees.
- On April 26, 2021, the board approved a stock repurchase program of up to $300 million through June 30, 2022. The program is discretionary and dependent on capital, liquidity, performance, and market conditions. The Q1 common dividend was $0.07 per share, 40% above the preceding quarter.
- Credit and geographic risks include Puerto Rico concentration (79% of gross loans held for investment), economic and fiscal uncertainty, government and municipal exposures, and $324.1 million of commercial loans modified under COVID-related relief provisions. The filing also identifies CRE and consumer credit risks, changing interest rates, funding access, deferred-tax-asset realization, and LIBOR transition risks.
- Direct exposure to Puerto Rico government entities and obligations was $391.1 million, including $193.6 million in investment securities and $197.5 million in loans; separate PRHFA-guaranteed residential mortgage exposure was $103.8 million. USVI government-entity loans were $62.2 million and were reported current.
- A cybersecurity incident in October 2020 temporarily affected some service channels. The investigation was materially complete; the company reported no evidence of personal-information misuse and did not expect a material impact, while noting residual potential for customer, operational, remediation, or legal effects.
- Management said legal proceedings and contingencies were not expected to have a material adverse effect and that no additional material loss disclosure was required. Disclosure controls were considered effective; BSPR’s internal controls were excluded from the period-end evaluation while integration-related processes and systems were being assessed.
Investor verification priorities
- Assess how much of the earnings improvement came from reserve releases and acquisition-related balance-sheet growth, and whether those effects are sustainable.
- Track NIM, deposit mix and cost, low-yielding liquidity, securities valuation changes, and the effect of rate movements and mortgage prepayments.
- Monitor credit trends after payment deferrals, including nonaccrual inflows, criticized commercial loans, consumer delinquencies, TDR performance, and adequacy of the ACL.
- Verify BSPR integration milestones, remaining costs, branch actions, and delivery of the expected $49 million annual savings.
- Review capital and liquidity capacity after any share repurchases, dividend decisions, and the CECL regulatory-capital transition; confirm the timing and actual scale of repurchases.
- Evaluate Puerto Rico and USVI fiscal developments, government-related exposures, and the recoverability of the $306.4 million net deferred tax asset.