First Ban(FBP) - 2022 Q4 - Annual Report

PART I Business First BanCorp. is a financial holding company providing diverse banking services across Puerto Rico, the U.S., and the Virgin Islands, with $18.6 billion in assets and six reportable segments - Key Financial Metrics as of December 31, 2022 | Metric | Amount (USD Billions) | | :--- | :--- | | Total Assets | $18.6 | | Total Loans | $11.6 | | Total Deposits | $16.1 | | Total Stockholders' Equity | $1.3 | - The Corporation operates through its main office in San Juan, Puerto Rico, and a network of 59 branches in Puerto Rico, 8 in the USVI and BVI, and 9 in Florida[18] - As of December 31, 2022, the company employed 3,133 regular employees, a 2% increase from 2021. Women comprised approximately 67% of the total workforce and 57% of top and middle management[36] Business Segments The Corporation operates through six distinct segments, including Commercial, Mortgage, Consumer, Treasury, and U.S./Virgin Islands Operations, each focusing on specific banking activities - The Corporation has six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations[20] - The United States Operations segment provides consumer and commercial banking services primarily in southern Florida through nine branches[27] - The Virgin Islands Operations segment conducts all banking activities in the USVI and BVI regions through eight branches[29] Supervision and Regulation The Corporation and FirstBank are subject to extensive federal and Puerto Rican regulatory oversight, covering capital requirements, dividend restrictions, consumer protection, and anti-money laundering laws - Capital Ratios as of December 31, 2022 | Ratio | First BanCorp. | FirstBank | Well-Capitalized Minimum (Bank) | | :--- | :--- | :--- | :--- | | Total capital to risk-weighted assets | 19.21% | 18.90% | 10.00% | | CET1 Capital to risk-weighted assets | 16.53% | 16.84% | 6.50% | | Tier 1 capital to risk-weighted assets | 16.53% | 17.65% | 8.00% | | Leverage ratio | 10.70% | 11.43% | 5.00% | - The Corporation and its banking subsidiary, FirstBank, elected to phase in the full effect of the Current Expected Credit Losses (CECL) accounting standard on regulatory capital over a five-year transition period starting January 1, 2022[65] - The principal source of funds for the Corporation is dividends from its subsidiary, FirstBank. The ability of FirstBank to pay dividends is regulated by the Puerto Rico Banking Law and the FDIA, with restrictions based on capital levels and earnings[70][71] - The FDIC adopted a final rule to increase initial base deposit insurance assessment rates by 2 basis points, beginning in the first quarter of 2023. The Corporation estimates this will increase its deposit insurance expense by approximately 56% for 2023 compared to 2022[97] Risk Factors The Corporation faces significant risks from rising interest rates, economic conditions in Puerto Rico, LIBOR transition, funding reliance, credit losses, cybersecurity threats, and evolving regulatory requirements - Rising interest rates and inflation may reduce demand for new loans, increase competition, and reduce net interest income. The Federal Reserve raised the federal funds rate seven times in 2022[138] - The Corporation has significant exposure to the transition away from LIBOR, with $1.4 billion in variable-rate loans, $124.4 million in held-to-maturity securities, and $183.8 million of junior subordinated debentures tied to the rate as of December 31, 2022[144][147] - A significant portion of the business is concentrated in Puerto Rico, which has experienced a prolonged economic and fiscal crisis. As of December 31, 2022, the Corporation had $338.9 million of direct exposure to the Puerto Rico government and its entities[157][161] - Non-performing assets, while decreasing, remain a risk. As of December 31, 2022, non-performing assets were $129.2 million, a decrease of 18% from $158.1 million at year-end 2021[190] Properties As of December 31, 2022, First BanCorp. owns three main buildings and 22 other properties, while leasing 89 premises across its operating regions - The Corporation owns its headquarters building in San Juan, a Service Center in Hato Rey housing over 1,000 employees, and a Consumer Lending Center in Hato Rey[245][248] - In total, the Corporation owns 16 retail branches and 6 office centers, and leases 89 branch premises and other facilities across its operating regions[245] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 29, "Regulatory Matters, Commitments and Contingencies," in the audited consolidated financial statements included in Item 8 of this report - Details on legal proceedings are available in Note 29 of the financial statements[246] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities First BanCorp.'s common stock trades on the NYSE, with the company consistently increasing dividends and executing significant stock repurchase programs, including $275 million in buybacks during 2022 - The quarterly cash dividend was increased from $0.10 to $0.12 per share in Q2 2022, and a further increase to $0.14 per share was declared in February 2023[252] - The Board of Directors has authorized two repurchase programs totaling up to $650 million. In 2022, the Corporation repurchased 19.4 million shares for $275 million[259][279] - Stock Repurchases in Q4 2022 | Period | Total Shares Purchased | Average Price Paid | Approx. Dollar Value Remaining Under Program (in thousands) | | :--- | :--- | :--- | :--- | | Oct 2022 | 1,649,963 | $15.18 | $150,000 | | Nov 2022 | - | - | $150,000 | | Dec 2022 | 1,902,468 | $13.14 | $125,000 | | Total Q4 | 3,552,431 | $14.09 | $125,000 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2022, First BanCorp. reported $305.1 million net income, driven by higher net interest income, while total assets decreased to $18.6 billion and loans grew, reflecting a shift in balance sheet composition - Key Performance Indicators | Indicator | 2022 | 2021 | | :--- | :--- | :--- | | Net Income (in millions) | $305.1 | $281.0 | | Diluted EPS | $1.59 | $1.31 | | Return on Average Assets | 1.57% | 1.38% | | Return on Average Total Equity | 18.66% | 12.56% | | Efficiency Ratio | 48.25% | 57.45% | - Net interest income increased to $795.3 million in 2022 from $729.9 million in 2021, driven by a 39 basis point increase in net interest margin to 4.12% due to the higher interest rate environment[291][335] - The provision for credit losses was an expense of $27.7 million in 2022, compared to a net benefit of $65.7 million in 2021, reflecting loan portfolio growth and macroeconomic uncertainty[291] - Total assets decreased by $2.2 billion to $18.6 billion as of year-end 2022, mainly due to a $2.1 billion decline in cash and cash equivalents. Total loans grew by $469.3 million[291][374] - Stockholders' equity decreased by $776.2 million to $1.3 billion, primarily driven by a $718.6 million decrease in the fair value of available-for-sale debt securities (AOCI loss) and capital returns to shareholders[292][482] Critical Accounting Estimates Management's critical accounting estimates include the Allowance for Credit Losses, financial instrument valuation, and income taxes, all requiring significant judgment and forward-looking assumptions - The determination of the Allowance for Credit Losses (ACL) is a critical estimate, involving quantitative models, forward-looking macroeconomic scenarios (e.g., unemployment rates, real estate prices), and qualitative adjustments[299][300][302] - Valuation of financial instruments, especially Level 3 assets like private label MBS, requires significant judgment using discounted cash flow models with unobservable inputs such as prepayment and default rates[305][309] - Accounting for income taxes is complex, requiring estimation of the realizability of a net deferred tax asset of $155.6 million (net of a $185.5 million valuation allowance) as of December 31, 2022, which depends on generating sufficient future taxable income[316][317] Financial Condition and Operating Data Analysis As of December 31, 2022, total assets decreased to $18.6 billion due to lower cash, while the loan portfolio grew to $11.6 billion, and investment securities declined due to unrealized losses - Loan Portfolio Composition as of December 31, 2022 | Loan Type | Amount (USD Billions) | % of Total | | :--- | :--- | :--- | | Commercial & Construction | $5.4 | 46% | | Residential Real Estate | $2.8 | 25% | | Consumer & Finance Leases | $3.3 | 29% | - Total loans increased by $469.3 million to $11.6 billion in 2022, driven by a $439.5 million increase in consumer loans and a $184.3 million increase in commercial and construction loans, while residential mortgage loans decreased by $154.5 million[376] - The available-for-sale debt securities portfolio decreased by $854.2 million to $5.6 billion, primarily due to a $718.6 million decrease in fair value from changes in market interest rates[398] - The held-to-maturity debt securities portfolio increased to $437.5 million from $178.1 million in 2021, mainly due to purchases of GSE MBS[400] Risk Management The Corporation manages liquidity, interest rate, credit, and operational risks, maintaining a $3.5 billion core liquidity reserve and reducing non-performing assets, while managing $338.9 million exposure to Puerto Rico government entities - The core liquidity reserve was $3.5 billion, or 19.0% of total assets, as of December 31, 2022, a decrease from $5.6 billion, or 27.0% of total assets, at year-end 2021[439] - The Corporation's tangible common equity ratio decreased to 6.81% as of December 31, 2022, from 9.81% a year prior, largely due to the impact of unrealized losses on available-for-sale securities[487] - Non-performing assets decreased by $28.9 million to $129.2 million as of December 31, 2022. The ratio of ACL for loans to nonaccrual loans improved to 289.61% from 242.99% in 2021[292][513][532] - Direct exposure to the Puerto Rico government, its municipalities, and public corporations was $338.9 million as of December 31, 2022, down from $360.1 million at year-end 2021[591] Financial Statements and Supplementary Data This section presents the Corporation's audited consolidated financial statements for 2022 and prior years, including the independent auditor's report and detailed notes on accounting policies and financial health - Consolidated Statement of Financial Condition Highlights (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $18,634 | $20,785 | | Total Loans, net | $11,305 | $10,827 | | Total Deposits | $16,143 | $17,785 | | Total Liabilities | $17,309 | $18,684 | | Total Stockholders' Equity | $1,326 | $2,102 | - Consolidated Statement of Income Highlights (in millions) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $795.3 | $729.9 | | Provision for Credit Losses | $27.7 | ($65.7) | | Non-interest Income | $123.1 | $121.2 | | Non-interest Expenses | $443.1 | $489.0 | | Net Income | $305.1 | $281.0 | - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2022[609] Controls and Procedures As of December 31, 2022, management and the independent auditor concluded that the Corporation's disclosure controls and internal control over financial reporting were effective - Management, including the CEO and CFO, evaluated and concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2022[1146] - Management's report on internal control over financial reporting concluded that controls were effective as of December 31, 2022, a conclusion supported by the independent auditor's report[1147] PART III Directors, Executive Officers and Corporate Governance The required information regarding directors, executive officers, corporate governance, delinquent Section 16(a) reports, and the Audit Committee Report is incorporated by reference from the company's definitive Proxy Statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[1153] Executive Compensation The required information regarding executive compensation, including the Compensation Discussion and Analysis and related tables, is incorporated by reference from the company's definitive Proxy Statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[1154] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans, with 791,923 outstanding and 3,830,165 available for future issuance as of December 31, 2022 - Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans, approved by stockholders | 791,923 | 3,830,165 | Certain Relationships and Related Transactions, and Director Independence The required information regarding certain relationships, related person transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[1158] Principal Accountant Fees and Services The required information regarding principal accountant fees and services is incorporated by reference from the sections titled "Audit Fees" and "Audit Committee Report" in the company's definitive Proxy Statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[1160] PART IV Exhibits and Financial Statement Schedules This section lists documents filed with the Annual Report on Form 10-K, including consolidated financial statements and the independent auditor's report, with financial schedules omitted as information is provided elsewhere - The consolidated financial statements of First BanCorp. are included in Item 8 of this report[1163] - All financial schedules have been omitted because the required information is provided within the financial statements or notes[1166]