First Bancorp

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

First Bancorp is a diversified financial holding company operating primarily in Puerto Rico, with branches also in the Virgin Islands, and Florida, offering commercial, consumer, and mortgage banking, insurance, and other financial services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

  • The information in this analysis is based on the provided text, including the latest 10-Q report from September 30, 2024, and some older information.
  • Some historical financials include 2020 and 2021, which are less relevant than the more current results.
  • The analysis may also be limited by the absence of information that is usually available in a full annual 10-K report.

Business Overview

First Bancorp (FBP), operating primarily in Puerto Rico, is a regional bank offering a diversified array of financial services. Here’s a breakdown:

  • Regional Focus: While predominantly serving Puerto Rico, FBP also has operations in the US Virgin Islands, and a small presence in Florida
  • Core Services: FBP’s revenue is mainly derived from its various banking activities, including interest on loans, deposits, and fee income.
  • Business Segments: The company has several business segments including Commercial and Corporate Banking, Mortgage Banking, Consumer/Retail Banking, and Treasury and Investments.
    • Commercial and Corporate Banking: Offers lending and other financial services for large and medium-sized corporations, real estate developers, and institutions across Puerto Rico.
    • Mortgage Banking: The origination and servicing of residential mortgage loans, mainly in Puerto Rico
  • Consumer/Retail Banking: Includes branch services to retail customers, such as deposits, checking, credit cards, car loans, and more.
  • Treasury and Investments: Includes investment securities activities and the management of financial assets. * Other Includes corporate level expenses and other non-reportable activity

The company operates primarily in Puerto Rico, a market with unique economic challenges and dependencies. This results in a more complex and volatile operating environment than a typical US mainland bank.

Moat Analysis: Rating 2/5

FBP’s “moat” is relatively narrow, which means it has some competitive advantages, but they aren’t particularly strong or enduring over a long period. Here’s a breakdown:

  • Limited Geographical Advantage: Operating primarily in Puerto Rico gives FBP some regional advantages in terms of local knowledge and a customer base that is difficult for mainland US banks to replicate. However, this also limits their growth opportunities and expose the business to high risk depending on the economic conditions of Puerto Rico. The economic situation in Puerto Rico is still unstable.
  • Switching Costs: There may be some switching costs due to customer relationships and the inconvenience of switching banks, but these are likely low, particularly for customers looking for the best interest rates or fees. A regional bank will be generally easy to replace.
  • Cost Advantages: FBP likely has a few cost advantages in their local market, but not at a national scale, so is unlikely to be protected by those

    • Management has been able to decrease expenses and is trying to improve efficiencies. However, there are always local competitors that are trying to do the same.

    • Regulatory Moat: The bank has to comply with both the FDIC and the Puerto Rico regulators, which has increased regulatory barriers for foreign competitors.

The limited scale, geographical focus, and intense competition of regional banking leads to a lower moat.

Risks to the Moat & Business Resilience

FBP faces several risks that could erode its competitiveness and impact its resilience:

  • Economic Conditions in Puerto Rico: FBP is heavily dependent on the economy of Puerto Rico which presents a significant risk. This area has higher risk and higher vulnerability to outside problems. The company’s 10Q reflects that the management team is aware of the financial and economic difficulties in Puerto Rico, and trying their best to increase the company’s stability through this crisis.
    • The island’s economy is still facing difficulties, and there are risks in further natural disasters that may have a significant impact on the economy.
    • Puerto Rico’s debt and municipal finances are fragile. They are undergoing restructuring and have a lot of outstanding debt. If this situation goes bad, then the company and all its assets may be exposed.
  • Competition: The banking industry is highly competitive. Both local and national banks try to attract customers, reducing the advantages that any regional bank may have.
  • Interest Rate Sensitivity: Changes in interest rates can affect both its lending and deposit businesses. The 2023 rates hikes by the fed have had major impacts on the bank and it is unlikely that this will end anytime soon.
    • This is especially true for a bank like FBP which has a negative liability spread, meaning that they are paying more on deposits that they are getting on loan rates.
  • Regulatory Changes: The company is subject to the regulations of both the Federal Banking system, and the banking regulations of Puerto Rico which is extremely complex, and adds risk for the company. In this industry regulations can suddenly change.
  • Credit Risk: While the company has improved its non-performing loans in recent quarters, they still represent a risk, specifically in the commercial loan portfolio. This area has a lot more potential for losses if there are issues within the economy or individual business finances.
  • Technological Disruption: Banks are experiencing a technological disruption from fintech companies. If FBP does not invest enough into the company’s tech, then it risks losing its market share and profits.
  • Operational Risk: Operational risks remain an important factor for financial institutions, ranging from management failures to data and system disruptions to a lack of compliance with various laws.
  • Concentrated Market: FBP operates primarily in the island of Puerto Rico and the local economy has a high degree of influence on the company’s performance. The company is not diversified geographically, therefore putting all their eggs into one basket

Financial Analysis

FBP’s financials show a mixed picture of stability and vulnerability.

  • Net Interest Income (NII): A major factor driving the company’s profitability, net interest income is the revenue from interest charged on loans less the cost of interest on their own debts. In the first three quarters of 2023, FBP’s NII has been $535M, a increase from $461M in 2022 and $459M in 2021.
    • The net interest margin is hovering around 4.0% but can change as interest rates are expected to decline.
  • Non-Interest Income: Includes things like income from insurance premiums or asset management. These contribute to around $100 million each quarter.
  • Provisions for Credit Losses: This accounts for their expected losses in the loan portfolio. These numbers have improved over the past year and are now a benefit for the company
    • In 2023 they have seen a net benefit after having to account for larger losses in the previous years

  • Loan Growth: Has been relatively stable over the past few quarters, with an average of 2% growth each quarter for loans.

  • Return on Average Assets (ROAA): Is a good measurement of how efficient the company is at using its assets to generate profits. In the latest 10-Q they have an ROAA of 1.36, this is higher than other local banks.
  • Return on Equity(ROE): Is another way to measure profitability, and was around 12% in 2023 for FBP

  • Efficiency ratio: Measures operating expenses relative to revenue. Lower efficiency ratios are good. FBP’s efficiency ratio was around 57.9%, this is slightly higher than its historical averages.

    • They are making efforts to improve efficiency and reduce non-interest expenses.
  • Capital Ratios: FBP is consistently well-capitalized with Tier 1 capital ratio hovering around 16% which is much higher than what regulators require of 8-10%.
  • This high capital ratio gives the company a margin of safety, but might make it hard for the company to use that capital for better expansion projects.
  • Tangible Book Value (TBV): Is a measure of the value of the business if it were to be liquidated, excluding intangible items. As of 2024, FBP’s TBV is $10.45 per share.
    • While the TBV is currently good, it is sensitive to market interest rates. Any fluctuation of rates might increase or decrease the value of their assets and thus their TBV.
  • Net Loans: Total outstanding loans are around 14.4B
  • Total Assets: Total assets are around 21.3B
  • Total Liabilities: Total liabilities are around 19.3B
  • Total Equity: Total equity is around 2B

Overall, First Bancorp seems to be doing well despite its volatile region. They are consistently improving their key metrics and are maintaining a good level of capital.

Understandability: Rating 2/5

The business model of a bank is generally quite simple to understand, they earn money via interest margin and lending. However, banks tend to become very complex in practice as they have different segments, all with their own set of accounting and reporting practices. They have a lot of hidden risks that aren’t easily visible in the income statement. Here’s why FBP gets a 2/5 score:

  • Complexity of Operations: Banking is a complex industry with many moving parts. There are multiple types of loans, several income channels, and multiple kinds of assets. It takes a while to fully understand the company.
  • Financial Jargon: Banking often uses highly specialized terms and ratios, like risk-weighted assets, core capital, loan-to-value, tier 1 capital, etc. The use of such terms can complicate understanding of their business.
  • Geographical & Regulatory Factors: Understanding the impact of the Puerto Rico economy, government, and regulation adds more confusion.
  • Hidden risks: As previously stated, banks often tend to have hidden risks that aren’t easily available for an outside observer. It takes a while to understand all of it.

Balance Sheet Health: Rating 3/5

FBP’s balance sheet is not very strong but not too weak either. It has a good amount of equity and good capital ratios. But the company is also vulnerable to various factors and relies on short term funding for its operations, which represents a lot of risk.

  • High loan portfolio While they have improved their credit quality, it represents a significant risk, as these loans depend on the Puerto Rico economy to repay
    • The mortgage portfolio has high rates of government loans, which have additional risks.
  • Stable Equity: Their tangible equity is around $2B which is considered an acceptable amount
  • Debt: Has a lower than average leverage for their industry. Also includes a lot of long term debt.
  • Liquidity: The bank maintains a fairly reasonable level of liquidity, which allows it to operate without issues.
  • Asset Quality: Their nonperforming loans have been trending downwards which is good. This is also tied to the Puerto Rico economy.
  • Capital Adequacy: Tier 1 Capital ratios are far above the regulatory limits, and are well within expectations. FBP is a very well capitalized bank.
  • Short-Term Financing: FBP funds much of its operation from deposits, which are a short term funding mechanism. If people stop using the bank, they might find themselves in a liquidity problem.

Recent Concerns & Controversies

The main problems have been:

  • Impact of the Puerto Rico Economy: The bank has been impacted by economic factors including high levels of unemployment, inflation and outmigration
  • Loan Portfolio Risks: Many loans in their portfolio are under water due to changes in values and interest rate hikes.
  • Regulatory and Compliance Changes: FBP has to deal with the burden of both federal and local regulation agencies. Any change to those regulations could potentially impact the business.

Management has acknowledged these risks in their most recent report and have stated that they are looking for measures to mitigate them. They believe that the recent positive trend they have seen will help them become more stable in the future. They have also expressed that the new strategies that have been implemented will help them better navigate any difficult times.