First BanCorp. — 2023 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. First BanCorp. is a Puerto Rico-based financial holding company whose FirstBank subsidiary operates principally in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands and Florida. Figures below are generally in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $199.7 | $207.9 | $600.4 | $589.7 |
| Provision for credit losses | $4.4 | $15.8 | $42.1 | $12.0 |
| Non-interest income | $30.3 | $29.7 | $99.1 | $93.5 |
| Non-interest expense | $116.6 | $115.2 | $344.8 | $330.2 |
| Net income | $82.0 | $74.6 | $223.4 | $231.9 |
| Diluted earnings per share | $0.46 | $0.40 | $1.25 | $1.19 |
| Net interest margin, GAAP | 4.15% | 4.31% | 4.24% | 4.04% |
| Efficiency ratio | 50.71% | 48.48% | 49.29% | 48.33% |
- Balance sheet at September 30: Assets were $18.59 billion, loans held for investment were $11.95 billion gross and $11.69 billion net of allowance, and deposits totaled $16.44 billion. Total stockholders’ equity was $1.30 billion.
- Cash flow: Cash and cash equivalents ended the period at $584.9 million, up $104.4 million from year-end 2022. Nine-month operating cash flow was $283.7 million, investing cash flow was positive $17.5 million, and financing cash flow was negative $196.8 million.
- Credit: Loan and lease allowance for credit losses was $263.6 million, or 2.21% of loans held for investment, versus $260.5 million and 2.25% at year-end. Nonperforming assets were $130.2 million (0.70% of assets), versus $129.2 million. Nine-month net charge-offs rose to $46.6 million from $21.2 million; the annualized ratio increased to 0.54% from 0.25%.
- Liquidity and funding: Management reported $5.1 billion of combined available liquidity, equal to 107% of estimated uninsured deposits excluding fully collateralized government deposits. Cash and free high-quality liquid assets were about $2.7 billion. Core deposits, excluding government deposits and brokered CDs, fell $406 million to $12.9 billion, while total deposits rose $291.8 million from year-end. Estimated uninsured deposits excluding fully collateralized government deposits were $4.8 billion.
- Debt and capital: FHLB advances were $500 million, down from $675 million at year-end; other long-term borrowings were $161.7 million, down from $183.8 million. FirstBank’s regulatory ratios were 16.41% CET1, 17.20% Tier 1, 18.45% total capital and 11.12% leverage; it remained well-capitalized. The holding company’s respective ratios were 16.35%, 16.35%, 18.84% and 10.57%.
- Securities and equity: Available-for-sale securities had fair value of $5.18 billion and gross unrealized losses of $844.9 million. Accumulated other comprehensive loss was $851.4 million. Management attributed most securities valuation declines to higher interest rates, and stated it did not expect to need to sell U.S. government and agency securities before recovery.
Material changes versus comparable periods
- Q3 net income increased 9.9% year over year, while nine-month net income declined 3.7%. Quarterly net interest income fell 3.9%, primarily as deposit costs rose; nine-month net interest income increased 1.8% as higher loan yields and growth more than offset higher funding costs.
- Quarterly net interest margin declined 16 basis points year over year; the nine-month margin improved 20 basis points. Deposit repricing and migration from non-interest-bearing and lower-cost deposits pressured the quarter, partly offset by repricing of variable-rate commercial loans and growth in higher-yielding consumer loans.
- Q3 provision expense decreased year over year, but nine-month loan and lease provision increased to $47.7 million from $10.0 million. Consumer credit losses and commercial/construction reserves contributed to the nine-month increase. Q3 net charge-offs were $14.1 million, versus $8.6 million a year earlier, mainly reflecting higher consumer charge-offs.
- Loans held for investment grew $398.1 million from year-end to $11.95 billion gross, led by consumer lending and commercial/construction loans; residential mortgage balances declined. Total loan production was $1.37 billion in Q3, compared with $1.24 billion a year earlier, and $3.77 billion for nine months, compared with $3.92 billion.
- Total stockholders’ equity declined $22.5 million from year-end, reflecting $125 million of share repurchases, $75.6 million of dividends and lower AFS securities fair value, partly offset by earnings. The $350 million repurchase authorization was completed in Q3; a new authorization permits up to $225 million through Q3 2024. The company reported no repurchases under the new program in Q3; it reported approximately $25 million of purchases under it by November 1.
Outlook, commentary and risks
- Management described itself as cautiously optimistic on Puerto Rico and said it expects loan growth as securities cash flows are redeployed into higher-yielding assets and construction-loan draws accelerate. It also noted continued retail deposit migration to higher-rate alternatives and warned that competitive deposit pricing could raise funding costs.
- The filing gives no formal earnings or numerical financial guidance. The Federal Reserve’s target range was 5.25%–5.50% at quarter-end; management noted rates could rise further if appropriate. Static interest-rate simulations showed near-neutral 12-month sensitivity: a +200-basis-point shock was projected to raise net interest income 1.26%, while a -200-basis-point shock was projected to reduce it 2.22%. These are modeled estimates, not forecasts.
- Key risks include elevated rates and inflation, deposit outflows and funding costs, securities losses and potential forced sales, credit deterioration (including CRE and consumer lending), Puerto Rico’s fiscal and economic outlook, government exposure, regulatory changes and possible increases in FDIC assessments. Management estimated that the proposed FDIC special assessment, if finalized as proposed, could add about $6 million of expense; the amount was not yet final.
- The company reported an April 2023 cybersecurity incident at a third-party vendor involving some mortgage-business information. Its investigation found no compromise of its own systems, minimal operational and financial impact, and no evidence of misuse to date; it reported no material related expenses and did not expect future impact.
- First BanCorp. and its subsidiaries were defendants in ordinary-course legal matters. Management said it did not consider additional material loss disclosures necessary as of September 30, 2023. The filing also reports commitments to extend credit of about $2.0 billion and letters of credit of about $72.1 million.
- FirstBank and the holding company exceeded minimum regulatory capital requirements; management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Track core deposit retention, deposit mix, brokered-CD usage and deposit pricing alongside the reported liquidity buffers and uninsured-deposit estimates.
- Monitor net interest margin and funding costs, especially whether loan repricing and growth continue to offset deposit and borrowing-cost increases.
- Review consumer charge-offs, early delinquencies, nonaccrual commercial loans, CRE exposure and the adequacy of the $263.6 million loan allowance; management’s more adverse modeled scenario implied an approximately $44 million higher quantitative allowance before qualitative adjustments.
- Assess the recoverability and liquidity implications of the securities portfolio’s unrealized losses, including the extent of pledged assets and the assumptions behind management’s ability to hold securities through recovery.
- Verify the final FDIC special assessment, progress under the new share-repurchase authorization, and the capacity of the bank subsidiary to fund holding-company dividends, buybacks and debt service.
- Follow Puerto Rico and USVI fiscal developments and related exposures, including the $294.9 million direct Puerto Rico government exposure, $87.5 million in USVI public-corporation loans, and $417.7 million office-real-estate exposure.