First BanCorp: Attractively Valued With A Stable Earnings Outlook

Summary

• The declining loan trend will most likely reverse this year due to economic factors and the anticipated reduction in prepayments and PPP forgiveness.
• High liquidity on the balance sheet will help make the top line more sensitive to interest rate changes.
• Loan growth will likely drive provisions for loan losses this year. Nevertheless, the provisioning will likely remain below the historical average.
• The December 2022 target price suggests a decent upside from the current market price. Further, FBP is offering a good dividend yield.

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Earnings of First BanCorp (NYSE: NYSE:FBP) will likely remain almost flat this year compared to last year. Improvement in the Puerto Rican economy will likely finally turn around the declining loan trend this year. Further, the rising interest-rate environment will help boost revenues. On the other hand, a higher provision expense will likely cancel out the benefit of higher revenues. Overall, I'm expecting the company to report earnings of $1.30 per share in 2022, almost unchanged from the earnings for 2021. The year-end target price suggests a decent upside from the current market price. Based on the total expected return, I'm upgrading First BanCorp to a buy rating.

Signs of a Turnaround in the Loan Portfolio Trend

First BanCorp's loan portfolio continued to decline in the last quarter of 2021, but the rate of decay decelerated during the quarter. Loan origination in the last quarter improved over the first three quarters of 2021 but was still below a year-ago period, according to details given in the earnings presentation. Part of the loan decline was attributable to the Paycheck Protection Program (“PPP”) loan forgiveness. According to details given in the 10-K filing, only $145 million worth of PPP loans remained outstanding at the end of December 2021, representing just 1.3% of total loans. Therefore, the total loan portfolio size will face lower pressure from PPP forgiveness going forward.

Further, Puerto Rico's economy has continued to strengthen in the last one year, which bodes well for loan origination in 2022. The region's unemployment rate is down to a new record low, as shown below.

Data by YCharts

Further, some agreed-upon construction loans that have not yet been funded. As mentioned in the conference call, over 75% of the construction loans made in 2021 are expected to be partially funded in 2022. Moreover, the management mentioned in the conference call that it expects the heightened prepayments in the commercial book to decline going forward. Besides, First BanCorp has some exposure to the growing market of Florida and is not just limited to Puerto Rico.

Considering these factors, I'm expecting the loan portfolio to increase by 2% by the end of 2022 from the end of December 2021. Deposits will also likely grow more or less in line with loans. However, the management foresees around $150 million of reduction in government deposits from the recent bankruptcy settlement, as mentioned in the conference call. The following table shows my balance sheet estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Financial Position
Net Loans	8,652	8,705	8,887	11,442	10,827	11,045
Growth of Net Loans	(0.9)%	0.6%	2.1%	28.8%	(5.4)%	2.0%
Other Earning Assets	2,095	2,140	2,398	4,926	6,658	6,792
Deposits	9,023	8,995	9,348	15,317	17,785	18,143
Borrowings and Sub-Debt	1,224	1,074	854	924	684	698
Common equity	1,833	2,009	2,192	2,239	2,102	2,293
Book Value Per Share ($)	8.5	9.3	10.1	10.3	9.9	10.9
Tangible BVPS ($)	8.5	9.3	9.9	9.9	9.6	10.5
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified)

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Liquidity Increases the Topline’s Sensitivity to Rate Hikes

Partly because of the loan decline, cash got built up on First BanCorp's books all through last year. Cash and due from banks surged to $2.5 billion at the end of December 2021 from $1.4 billion at the end of 2020. In fact, cash made up a whopping 12% of total assets at the end of the last quarter. Although the excess cash dragged the net interest margin last year, it bodes well for the margin going forward because it provides flexibility to shift the asset mix once the federal funds rate is increased. I'm expecting the Fed to raise the policy rate three times this year (for a total of 75 basis points) starting in March 2022.

Apart from the opportunity that liquidity presents, the balance sheet is not that well-positioned to benefit from a rate hike. The management's interest-rate sensitivity analysis given in the 10-K filing shows that a 200-basis points increase in interest rates could boost the net interest income by only 4.81% over twelve months. Considering these factors, I'm expecting the average margin in 2022 to be around seven basis points higher than the average margin for 2021.

Somewhat Excessive Reserves to Keep Further Provisioning Subdued

First Bancorp reversed a large part of its previous provisioning last year, which led to a decline in the allowances for loan losses to 2.43% of total loans at the end of December 2021 from 3.28% of total loans at the end of 2020. Further provision reversals cannot be ruled out as the credit quality has remarkably improved on the back of the strengthening Puerto Rican economy. Bankruptcies in Puerto Rico were at record lows at the end of December 2021, according to data provided by the Economic Development Bank for Puerto Rico.

Economic Development Bank for Puerto Rico

Further, the allowance appears somewhat excessive relative to the portfolio’s credit risk. Allowances made up 2.43% of total loans, while nonaccrual loans made up just 1.0% of total loans at the end of December 2021, as mentioned in the earnings release.

Loan growth will likely be the chief driver of provision expense this year. Considering these factors, I'm expecting the provision expense in 2022 to be above 2021 but below the historical average. I'm expecting the provision expense to make up around 0.18% of total loans in 2022, down from the five-year average of 0.74%.

Expecting 2022 Earnings of $1.30 per Share

Earnings will likely remain flattish this year relative to last year as the higher provision expense will likely cancel out revenue growth. The non-interest expense will likely decline on the back of improved cost discipline which was already apparent by the second half of 2021. However, the management has increased the minimum salary for several positions, which will increase the total salary cost by around $1.4 million every quarter starting from the first quarter of 2022, as mentioned in the conference call. Overall, I'm expecting the company to report earnings of $1.30 per share in 2022, almost unchanged from $1.31 per share in 2021. The following table shows my income statement estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Income Statement
Net interest income	492	525	567	600	730	757
Provision for loan losses	144	59	40	171	(66)	20
Non-interest income	62	82	91	111	121	128
Non-interest expense	348	358	378	424	489	448
Net income - Common Sh.	64	199	164	100	277	275
EPS - Diluted ($)	0.30	0.92	0.76	0.46	1.31	1.30
Source: SEC Filings, Earnings Releases, Author's Estimates (In USD million unless otherwise specified)

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The earnings estimate given above is almost unchanged from my previous estimate given in my last report on First BanCorp.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic and the timing of an interest rate hike.

Upgrading to a Buy Rating

First BanCorp is offering a dividend yield of 3.2% at the current quarterly dividend rate of $0.10 per share. The earnings and dividend estimates suggest a payout ratio of 31% for 2022, which is close to the three-year average of 29%. Therefore, I’m not expecting any change in the dividend level this year.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First BanCorp. The stock has traded at an average P/TB ratio of 1.0x in the past, as shown below.

	FY19	FY20	FY21	Average
T. Book Value per Share ($)	9.93	9.92	9.62
Average Market Price ($)	10.5	6.7	12.2
Historical P/TB	1.05x	0.67x	1.27x	1.00x
Source: Company Financials, Yahoo Finance, Author's Estimates

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Multiplying the average P/TB multiple with the forecast tangible book value per share of $10.5 gives a target price of $10.5 for the end of 2022. This price target implies a 16.3% downside from the March 4 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	0.80x	0.90x	1.00x	1.10x	1.20x
TBVPS - Dec 2022 ($)	10.5	10.5	10.5	10.5	10.5
Target Price ($)	8.4	9.5	10.5	11.6	12.6
Market Price ($)	12.6	12.6	12.6	12.6	12.6
Upside/(Downside)	(33.1)%	(24.7)%	(16.3)%	(7.9)%	0.4%
Source: Author's Estimates

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The stock has traded at an average P/E ratio of around 12.6x in the past, as shown below.

	FY19	FY20	FY21	Average
Earnings per Share ($)	0.76	0.46	1.31
Average Market Price ($)	10.5	6.7	12.2
Historical P/E	13.8x	14.6x	9.3x	12.6x
Source: Company Financials, Yahoo Finance, Author's Estimates

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Multiplying the average P/E multiple with the forecast earnings per share of $1.30 gives a target price of $16.4 for the end of 2022. This price target implies a 30.5% upside from the March 4 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	10.6x	11.6x	12.6x	13.6x	14.6x
EPS - 2022 ($)	1.30	1.30	1.30	1.30	1.30
Target Price ($)	13.8	15.1	16.4	17.7	19.0
Market Price ($)	12.6	12.6	12.6	12.6	12.6
Upside/(Downside)	9.8%	20.1%	30.5%	40.8%	51.2%
Source: Author's Estimates

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Equally weighting the target prices from the two valuation methods gives a combined target price of $13.5, which implies a 7.1% upside from the current market price. Adding the forward dividend yield gives a total expected return of 10.3%.

In my last report on First BanCorp, I adopted a hold rating on the stock as the target price was quite close to the market price at that time. First BanCorp’s stock price has declined substantially since the mid of January 2022. This decline is mostly attributable to external factors as the KBW Nasdaq Bank Index (BKX) and the Nasdaq Combined Bank Index (BANK) have undergone similar patterns in recent weeks. In my opinion, the price dip is not justified given that earnings are likely to remain stable this year. Following the price correction, First BanCorp is now offering an attractive price upside. Therefore, I'm upgrading the stock to a buy rating.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.