FIRST BANCORP /PR/ (FBP) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM
7.
MANAGEMENT’S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND
RESULTS
OF
OPERATIONS (“MD&A”)
The following MD&A
relates to the accompanying
audited consolidated financial
statements of First BanCorp.
(the “Corporation,”
“we,” “us,”
“our,”
or “First
BanCorp.”) and
should be
read in
conjunction
with such
financial statements
and the
notes thereto.
This
section also
presents certain
financial measures
that are not
based on
generally accepted
accounting principles
in the
United States
of
America
(“GAAP”).
See
“Non-GAAP
Financial
Measures
and
Reconciliations”
below
for
information
about
why
non-GAAP
financial measures are
presented, reconciliations
of non-GAAP financial
measures to the
most comparable GAAP
financial measures,
and references to non-GAAP financial measures reconciliations presented
in other sections.
The detailed financial discussion
that follows focuses on
2023 results compared to
2022. For a discussion of
2022 results compared
to 2021, see Part I, Item 7,
“Management’s Discussion
and Analysis of Financial Condition
and Results of Operations” included
in the
Corporation’s Annual Report
on Form 10-K for the year ended December 31, 2022, filed on February
28, 2023.
In
this
discussion
and
analysis
of
our
financial
condition
and
results
of
operations,
we
have
included
information
that
may
constitute
“forward-looking
statements”
within
the
meaning
of
the
safe
harbor
provisions
of
Section
27A
of
the
Securities
Act
and
Section 21E
of the
Exchange Act.
Forward-looking statements
are not
historical facts
or statements
of current
conditions, but
instead
represent only our beliefs
regarding future events, many
of which, by their nature,
are inherently uncertain and
outside our control. By
identifying
these statements
for you
in this
manner,
we are
alerting you
to the
possibility that
our actual
results, financial
condition,
liquidity and capital actions may differ materially
from the anticipated results, financial condition, liquidity
and capital actions in these
forward-looking
statements. Important
factors
that could
cause our
results, financial
condition, liquidity
and capital
actions to
differ
from those in these statements include, among others, those described in
“Risk Factors” in Part I, Item 1A of this Form 10-K.
EXECUTIVE SUMMARY
First BanCorp.
is a diversified
financial holding
company headquartered
in San Juan,
Puerto Rico offering
a full range
of financial
products to
consumers and
commercial customers
through various
subsidiaries. First
BanCorp.
is the
holding company
of FirstBank
Puerto
Rico
(“FirstBank”
or the
“Bank”)
and
FirstBank
Insurance
Agency.
Through
its wholly
-owned
subsidiaries,
the Corporation
operates
in
Puerto
Rico,
the
United
States
Virgin
Islands
(“USVI”),
the
British
Virgin
Islands
(“BVI”),
and
the
state
of
Florida,
concentrating on
commercial banking,
residential mortgage loans,
credit cards, personal
loans, small loans,
auto loans and
leases, and
insurance agency activities.
Significant Events
Economy and Market Volatility
The
Federal
Reserve
Board
has
implemented
monetary
policies
designed
to
curb
inflation.
On
January
11,
2024
the
Federal
Reserve Board published
the core Personal
Consumption Expenditures Price
Index over the
last 12 months,
which showed that
the all
items
index
increased
2.9
percent
before
seasonal
adjustment.
Other
recent
indicators
suggest
that
economic
activity
has
been
expanding. For 2023 as
a whole, GDP has expanded
at 3.1%. Although still strong,
the labor market remains
tight as payroll job
gains
have been well below those seen in 2022. In January 2024, the national unemployment
rate was 3.7% for the third month in a row.
Following
its
January
31,
2024
meeting,
the
Federal
Reserve
Board
announced
its
decision
to
leave
the
federal
funds
rate
unchanged,
at a
target
rate of
5.25% to
5.50%. The
Federal Reserve
Board commentary
suggested
that its
policy rate
is likely
at its
peak and
that, if
the economy
continues to
evolve as
expected, it
will likely
be dialing
back policy
restraint at
some point
this year.
Notwithstanding, it does not expect to reach such level of confidence by
the time of the March 2024 meeting.
The Corporation closed an unprecedented and challenging year for
the banking industry with strong financial performance and solid
loan
growth.
Core
deposits,
other
than
government
and
brokered,
contracted
due
to
the
use
of
excess
liquidity
across
all
market
segments. Although
the Corporation
is seeing
an expected
correction
in the
credit cycle
of the
consumer lending
business driven
by
lower
levels
of
excess
liquidity
and
inflationary
pressures,
the
Corporation
expects
its
ample
reserve
coverage
levels
and
risk
management framework to withstand the impact of any additional credit
deterioration during 2024.
For 2024, the Corporation expects a reduction in the overall
average cost of its deposits as interest rates start to decrease
but expects
to continue to
be impacted by the
shift from non-interest-bearing
deposits to interest-bearing
deposits, though at
a lower degree. Also,
the
Corporation
expects
some
reductions
in
deposit
balances
due
to
the
customers’
use
of
their
excess
liquidity,
which
could
be
replaced with
wholesale funding
sources. Assuming
no meaningful
changes to
deposit balances,
the Corporation
expects net
interest
income
to
improve
in
2024
since
approximately
$1
billion
in
expected
cash
inflows
from
the
repayments
and
maturities
of
the
investment portfolio, which is yielding less than 1.5%, will fund
loan growth or be reinvested in higher yielding securities.
42
The Corporation remains
confident that the economic
prospects of Puerto Rico,
its primary market,
driven by a strong
labor market
and
an
unprecedented
level
of
federal
support,
will
support
the
Corporation
in
continuing
to
have
a
strong
financial
performance,
sustainable levels of loan growth, and any additional credit deterioration
contained.
Return of Capital to Shareholders and Dividend
Payment Increase
In 2023, the
Corporation returned approximately
$300 million, or close
to 100% of 2023
earnings, to its shareholders
through $200
million in repurchases of common stock and the payment of approximately
$100 million in common stock dividends.
For
the
year
ended
December
31,
2023,
the
Corporation
repurchased
14.1
million
shares of
its common
stock
for
a
total cost
of
$200
million.
Of
this
total,
$75
million
of
common
stock,
representing
5.1
million
common
shares
at
a
weighted-average
price
of
$14.76,
were
repurchased
under
the
$225
million
stock
repurchase
program
announced
on
July
24,
2023
(the
“2023
Repurchase
Plan”). As
of February
21, 2024,
the Corporation has
repurchased approximately
7.1 million
shares of common
stock totaling
$107.9
million
through open
market purchases
under the
2023 Repurchase
Plan. With
the additional
purchases, the
Corporation has
$117.1
million
remaining
for
share
repurchases
under
the
2023
Repurchase
Plan,
which
it
expects
to
execute
through
the
end
of
the
third
quarter of 2024.
On February
8, 2024,
the Corporation’s
Board of
Directors declared
a quarterly
cash dividend
of $0.16
per common
share, which
represents
an
increase
of
$0.02
per
common
share,
or
a
14%
increase,
compared
to
its
most
recent
quarterly
dividend
paid
in
December 2023.
The dividend
is payable
on March
8, 2024,
to shareholders
of record
at the close
of business
on February
23, 2024.
The increased quarterly dividend level equates to an annualized dividend
of $0.64 per common share.
Legislative and Regulatory
A
comprehensive
discussion
of
legislative
and
regulatory
matters
affecting
us
can
be
found
in
Part
I,
Item
1,
“Business
–
Supervision and Regulation” of this Form 10-K.
43
Overview of Results of Operations
The
Corporation’s
results
of operations
depend
primarily
on
its
net
interest
income,
which
is
the
difference
between
the
interest
income
earned
on
its
interest-earning
assets,
including
investment
securities
and
loans,
and
the
interest
expense
incurred
on
its
interest-bearing
liabilities,
including
deposits
and
borrowings.
Net
interest
income
is
affected
by
various
factors,
including
the
following:
(i)
the
interest
rate
environment;
(ii)
the
volumes,
mix,
and
composition
of
interest-earning
assets,
and
interest-bearing
liabilities; and
(iii) the
repricing
characteristics of
these assets
and liabilities.
The Corporation
’s
results of
operations also
depend on
the
provision
for
credit
losses,
non-interest
expenses
(such
as
personnel,
occupancy,
professional
service
fees,
the
FDIC
insurance
premium,
and
other
costs),
non-interest
income
(mainly
service
charges
and
fees
on
deposits,
cards
and
processing
income,
and
insurance income), gains (losses) on mortgage banking activities, and income
taxes.
The
Corporation
had
net
income
of
$302.9
million,
or
$1.71
per
diluted
common
share,
for
the
year
ended
December
31,
2023,
compared
to
$305.1
million,
or
$1.59
per
diluted
common
share,
for
the
year
ended
December
31,
2022.
Other
relevant
selected
financial indicators for the periods presented are included below:
Year
Ended December 31,
2023
2022
2021
Key Performance Indicator:
(1)
Return on Average
Assets
(2)
1.62
%
1.57
%
1.38
%
Return on Average
Common Equity
(3)
21.86
18.66
12.56
Efficiency Ratio
(4)
50.70
48.25
57.45
(1)
These financial ratios are used by management to monitor the Corporation’s
financial performance and whether it is using its assets efficiently.
(2)
Indicates how profitable the Corporation is in relation to its total assets
and is calculated by dividing net income by its average total
assets.
(3)
Measures the Corporation’s performance
based on its average common stockholders’ equity and is calculated
by dividing net income by its average total common stockholders’
equity.
(4)
Measures how much the Corporation incurred to generate a
dollar of revenue and is calculated by dividing non-interest expenses
by total revenue.
The key
drivers of
the Corporation’s
GAAP financial
results for
the year
ended December
31, 2023,
compared to
the year
ended
December 31, 2022, include the following:
●
Net interest
income for
the year
ended December
31, 2023
increased to
$797.1 million,
compared to
$795.3 million
for the
year ended December 31, 2022. The increase in net interest income
reflects a 10 basis points increase in net interest margin to
4.22%,
which
was mainly
associated
with the
effect
of both
a higher
interest rate
environment,
driving
an increase
in loan
and investment security yields, and the growth
in the consumer loan portfolio, partially offset
by higher rates paid on deposits
coupled
with
a
change
in
the
mix
of
deposit
and
borrowing
composition.
See
"Net
Interest
Income"
below
for
additional
information.
●
The provision
for credit
losses on
loans, finance
leases, unfunded
loan commitments
and debt
securities for
the year
ended
December 31,
2023 was
$60.9 million,
compared to
$27.7 million
for the
year ended
December 31,
2022. The
increase was
mainly driven by a
combination of loan growth,
higher delinquency and historical
charge-off levels
in the consumer loan
and
finance
lease
portfolios,
and
the
effect
in
2022
of
reductions
in
qualitative
reserves
associated
with
reduced
uncertainty
around the
economic impact
of the COVID-19
pandemic, particularly
on loans in
the hotel, transportation
and entertainment
industries.
Net charge-offs
totaled $67.4
million for
the year
ended December
31, 2023,
or 0.58%
of average
loans,
compared to
$34.2
million,
or
0.31%
of
average
loans,
for
the
year
ended
December
31,
2022,
mainly
driven
by
a
$29.1
million
increase
in
consumer loans
and finance leases
net charge-offs.
See “Provision for
Credit Losses” and
“Risk Management”
below for the
analysis of the allowance for credit losses (“ACL”) and non-performing
assets and related ratios.
●
The Corporation
recorded non-interest income
of $132.7 million
for the year
ended December 31,
2023, compared to
$123.1
million for
the year
ended December
31, 2022.
The increase
of $9.6
million in
non-interest income
was mainly
driven by
a
$3.6
million
gain
recognized
from
a
legal
settlement,
a
$3.5
million
increase
in
card
and
processing
income,
and
a
$3.0
million
gain
related
to the
sale of
banking
premise
in the
Florida
region,
partially
offset
by lower
revenues from
mortgage
banking activities. See “Non-Interest Income”
below for additional information.
44
●
The
Corporation
recorded
non-interest
expenses
of
$471.4
million
for
the
year
ended
December
31,
2023,
compared
to
$443.1 million for
the year ended
December 31, 2022.
The increase of
$28.3 million in
non-interest expenses
mainly reflects
a $16.8
million increase
in employees’
compensation and
benefits expenses,
mostly driven
by annual
salary merit
increases
and
minimum
wage adjustments,
and
a FDIC
special assessment
expense
of $6.3
million. The
efficiency
ratio for
the year
ended
December
31,
2023
was
50.70%,
compared
to
48.25%
for
the
year
ended
December
31,
2022.
See
“Non-Interest
Expenses” below for additional information.
●
Income tax
expense decreased to
$94.6 million
for the year
ended December
31, 2023, compared
to $142.5 million
for 2022
driven by a
lower effective
tax rate and
lower pre-tax income.
The Corporation’s
annual effective
tax rate, excluding
entities
with pre-tax
losses from which
a tax benefit
cannot be
recognized and
discrete items, decreased
to 23.5%
for the year
ended
December 31,
2023, compared
to 31.2%
for 2022. See
“Income Taxes”
below and
Note 22 –
“Income Taxes
”
to the audited
consolidated financial statements included in Part II, Item 8 of this Form
10-K for additional information.
●
As of
December 31,
2023, total
assets were
approximately $18.9
billion, an
increase of
$275.1 million
from December
31,
2022,
primarily reflecting
a $627.7
million increase
in the
total loan
portfolio before
the ACL and
a $182.7
million increase
in
cash
and
cash
equivalents,
partially
offset
by
a
$452.4
million
decrease
in
total
investment
securities
net
of
a
$165.4
million increase in the fair value of available-for-sale debt
securities.
●
As of December
31, 2023,
total liabilities were
$17.4 billion,
an increase of
$103.0 million
from December
31, 2022, driven
by
a
$412.5
million
increase
in
total
deposits,
which
includes
a
$677.5
million
increase
in
brokered
certificates
of
deposit
(“CDs”), partially offset
by a $272.2 million decrease
in borrowings,
primarily in short-term borrowings.
See “Liquidity Risk
Management”
below for additional information about the Corporation’s
funding sources and strategy.
●
The Bank’s
primary sources of funding
are consumer and commercial
core deposits, which exclude
government deposits and
brokered
CDs.
As
of
December
31,
2023,
these
core
deposits,
amounting
to
$12.6
billion,
funded
66.64%
of
total
assets.
Excluding
fully
collateralized
government
deposits,
estimated
uninsured
deposits amounted
to $4.4
billion
as of
December
31, 2023. In
addition to approximately
$2.8 billion in
cash and free
high-quality liquid
assets, the Bank
maintains borrowing
capacity
at
the
Federal
Home
Loan
Bank
(“FHLB”)
and
the
Federal
Reserve
Bank
of
New
York
’s
(the
“FED”)
Discount
Window.
As of
December 31,
2023,
the Corporation
had approximately
$1.5 billion
available for
funding under
the FED’s
Discount Window and
$924.2 million available for
additional borrowing capacity on FHLB
lines of credit based on
collateral
pledged
at
these
entities.
On
a
combined
basis,
as
of
December
31,
2023,
the
Corporation
had
$5.2
billion,
or
118%
of
estimated
uninsured
deposits,
available
to
meet
liquidity
needs.
See
“Liquidity
Risk
Management”
below
for
additional
information about the Corporation’s
funding sources and strategy.
●
As of
December 31,
2023, the
Corporation’s
total stockholders’
equity was
$1.5 billion,
an increase
of $172.1
million from
December 31, 2022, mainly
driven by a $165.4 million increase
in the fair value of
available-for-sale debt securities recorded
as
part
of
accumulated
other
comprehensive
loss
and
net
income
generated
in
2023,
partially
offset
by
$200.0
million
in
repurchases
of
common
stock
and
$99.6
million
in
dividends
declared
in
2023.
The
Corporation’s
CET1
capital,
tier
1
capital, total capital,
and leverage ratios
were 16.10%, 16.10%,
18.57%, and 10.78%,
respectively,
as of December
31, 2023,
compared
to
CET1
capital,
tier
1
capital,
total
capital,
and
leverage
ratios
of
16.53%,
16.53%,
19.21%,
and
10.70%,
respectively, as of
December 31, 2022.
See “Risk Management – Capital” below for additional information.
●
Total
loan
production,
including
purchases,
refinancings,
renewals,
and
draws
from
existing
revolving
and
non-revolving
commitments, decreased
by $230.8
million to
$5.1 billion
for the
year ended
December 31,
2023. See
“Financial Condition
and Operating Data Analysis” below for additional information.
●
Total
non-performing
assets were
$125.9 million
as of
December 31,
2023, a
decrease of
$3.3 million,
from December
31,
2022,
primarily
related
to
a
decrease
of
$10.6
million
in
nonaccrual
residential
mortgage
loans,
partially
offset
by
a
$7.6
million increase in nonaccrual consumer
loans, mainly in the auto loan and
finance lease portfolios.
See “Risk Management –
Nonaccrual Loans and Non-Performing Assets” below for additional information.
●
Adversely
classified
commercial
and
construction
loans
decreased
by
$26.1
million
to
$67.5
million
as
of
December
31,
2023,
compared to
December 31,
2022, mainly
driven by
the payoff
of a
$24.3 million
commercial
and industrial
(“C&I”)
participated loan in the Florida region.
45
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
The Corporation
has included
in this
Form 10-K
the following
financial measures
that are
not recognized
under GAAP,
which are
referred to as non-GAAP financial measures:
Net Interest Income,
Interest Rate Spread,
and Net Interest Margin, Excluding
Valuations
,
and on a Tax
-Equivalent Basis
Net interest
income, interest
rate spread,
and net
interest margin,
excluding the
changes in
the fair
value of
derivative instruments
and on
a tax-equivalent
basis, are
reported in
order to
provide to
investors additional
information about
the Corporation’s
net interest
income
that management
uses and
believes should
facilitate comparability and
analysis of
the periods
presented.
The changes
in the
fair value
of derivative
instruments have
no effect
on interest
due or
interest earned
on interest-bearing
liabilities or
interest-earning
assets, respectively.
The tax-equivalent
adjustment to
net interest
income recognizes
the income
tax savings
when comparing
taxable
and
tax-exempt
assets
and
assumes
a
marginal
income
tax
rate.
Income
from
tax-exempt
earning
assets
is
increased
by
an
amount
equivalent to
the taxes
that would
have been
paid if
this income
had been
taxable at
statutory rates.
Management believes
that it
is a
standard
practice
in
the banking
industry
to
present
net
interest
income,
interest
rate
spread,
and
net
interest
margin
on
a
fully
tax-
equivalent basis. This adjustment
puts all earning assets, most notably
tax-exempt securities and tax-exempt
loans, on a common basis
that facilitates comparison of results to the results of peers.
See “Result of Operations
– Net Interest Income”
below, for
the table that reconciles
net interest income
in accordance with GAAP
to
the
non-GAAP
financial
measure
of
net
interest
income,
excluding
valuations,
and
on
a
tax-equivalent
basis
for
the
indicated
periods. The table also reconciles
net interest spread and
net interest margin on
a GAAP basis to these items
excluding valuations, and
on a tax-equivalent basis.
Tangible
Common Equity Ratio and Tangible
Book Value
Per Common Share
The tangible
common equity
ratio and
tangible book
value per
common share
are non-GAAP
financial measures
that management
believes are generally
used by the financial
community to evaluate
capital adequacy.
Tangible
common equity is total
common equity
less
goodwill
and
other
intangibles.
Similarly,
tangible
assets
are
total
assets
less
goodwill
and
other
intangibles.
Management
and
many
stock
analysts
use
the
tangible
common
equity
ratio
and
tangible
book
value
per
common
share
in
conjunction
with
more
traditional bank capital
ratios to compare
the capital adequacy
of banking organizations
with significant
amounts of goodwill
or other
intangible assets,
typically stemming
from the
use of
the purchase
method of
accounting for
mergers
and acquisitions.
Accordingly,
the Corporation
believes that
disclosures of
these financial
measures may
be useful to
investors. Neither
tangible common
equity nor
tangible assets, or the related measures,
should be considered in isolation or
as a substitute for stockholders’ equity,
total assets, or any
other measure
calculated in
accordance with
GAAP.
Moreover,
the manner
in which
the Corporation
calculates its
tangible common
equity, tangible assets, and
any other related measures may differ from that of other companies reporting
measures with similar names.
See “Risk
Management –
Capital” below
for the
table that
reconciles the
Corporation’s
total equity
and total
assets in
accordance
with GAAP to
the tangible common
equity and tangible
assets figures used
to calculate the
non-GAAP financial measures
of tangible
common equity ratio and tangible book value per common share.
Adjusted Net Income,
Adjusted Non-Interest Income and Adjusted Non-Interest
Expenses
To
supplement the
Corporation’s