First Bancorp /Pr/ Q1 FY2024 Earnings Call

Hello everyone and welcome to First BanCorp's First Quarter 2024 Financial Results Call. My name is Seth and I'll be your operator today. I will now turn the call over to Ramon Rodriguez to begin. Please proceed when you're ready.

Thank you, Seth. Good morning everyone and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the first quarter of 2024. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Thank you, Ramon. Good morning to everyone and thanks for joining our earnings call today. Let's move to Page 4 of the slide to discuss the highlight. We're definitely very pleased to start the year with another quarter of strong operating results. We posted a strong return asset of 1.56%, increased pre-tax pre-provision income to $111 million, and we continue to do what I consider a nice job managing our expenses, resulting in an efficiency ratio of around 52%. These results reflect the hard work and dedication of our colleagues, and more importantly, the trust placed by our clients in all institutions as we continue to support their growth and progress. I would like to thank all of them for the continuous support. Consistent with guidance, we grew 4% on a linked-quarter basis, mostly driven by healthy commercial and auto loan production. We do remain encouraged by commercial activity and loan opportunities available within both the Puerto Rico and the Florida regions for the year. Total deposits were up by $47 million. We saw stabilization in overall core deposit balance during the quarter, but we did continue to see internal migration of customers seeking higher yields to time deposits, as expected into day rates. We do believe, however, that our balance sheet is very well-positioned to benefit from a higher for longer environment. As we redeploy lower yielding maturities investments into higher yielding assets, we should see margin-accretion for the year, like the case of this quarter, those cash flows were reinvested into a loan portfolio. MPAs were slightly up by $4 million to 269 basis points of total assets, primarily due to a negative migration with a $10 million case in the U.S. operation, partially offset by decreases in the OREO balances. We continue to have high demand. In terms of capital, our game plan continues. We expect to return over 100% of earnings in the form of buybacks and dividends during the year while registering mid-single-digit loan growth for our main core businesses. During the quarter, we did increase our quarterly dividend by 14% to $0.16 per share and repurchased $50 million in common shares. We still have $100 million left in our current authorization. We are currently in the cycle of updating our capital plan and we expect to provide more color regarding additional future capital actions once we report our second quarter earnings in July. Let's turn to Slide 5 to provide some additional highlights of the franchise. It's clear that our financial result is a function of the positive economic backdrop that we continue to experience on the island and our disciplined execution of our strategic plan. As we said in the past, the unprecedented level of investments continues and is driving economic and construction activity on the island. For the first couple of months of the year, about $800 million in disaster relief funds were dispersed. When we look at the overall economy, the labor market remains in good shape, consumer sentiment is positive, business activity is very stable or increasing, and tourism continues at record levels. In terms of the franchise, we continue to make progress in our omnichannel strategy by lowering our size and the relationship-centric business model which will achieve ideal balance between providing value-added advice to our clients while enabling the most convenient digital and self-service options. We believe that to continue growing our fair share of the market we serve, the franchise investment must be broad and continue with the goal of providing the best client experience, whether it's on-site delivery or through the retail channels, in which we are investing in both. In terms of priorities, over the coming months, we are very excited to partner with a cloud banking pioneer to deliver a more modern and convenient commercial banking experience to our clients. This deployment will be complemented by multiyear efforts that we began in 2023 to migrate our core systems and mainframe to a cloud-based and open systems environment. It's part of our technology modernization progress, which we feel very proud about. Our ample capital position and disciplined expense management framework will continue to enable us to deliver value to our shareholders by investing wisely in the franchise, responsibly lowering our market share, and returning excess capital when warranted. With that, I will turn the call over to Orlando to go over more financial details. Thank you.

Good morning to all. Well, as Aurelio mentioned, we started the year posting strong operating results. We earned $73.5 million for the quarter, which is $0.44 per share. That compares to $79.5 million last quarter or $0.46 a share. This translates into a 1.56% return on average assets, which is a strong return. Our adjusted pre-tax pre-provision increased slightly to $110.5 million from $110 million we had last quarter. The provision for credit losses on the quarter was $12.2 million, which is $6.6 million lower than last quarter and that is largely driven by $9.5 million in recoveries we achieved on the sale of previously charged-off consumer loans. Also, during the quarter expenses were down $5.7 million, mostly due to the FDIC deposit special assessment that was recorded in the prior quarter compared to what we booked this quarter related to the same assessment. The effective tax rate for the first quarter was 24.3%, which is very similar to the 23.5% we achieved for 2023. In terms of net interest income, we saw a quarter where net interest income reached $196.5 million, which is relatively flat, just slightly down from last quarter. This quarter had one less day, which represented a $1.1 million reduction in net interest income; otherwise, we would have seen an increase from last quarter. The loan portfolios grew by $200 million on average and the yields on the portfolio also improved. That led to a $5 million increase in net interest income, which was offset by the number of days, impacting this by $1.8 million, for a net increase in the portfolios of $3.2 million. The yield on earning assets went up by 10 basis points during the quarter. In the case of our interest expense, the increase was $5 million based on average balances and the 10 basis points increase in cost. However, that was also offset by an $800,000 impact due to the number of days in the quarter. We experienced an easing — a mild easing of the pricing pressure on customer deposits this quarter. The cost of public funds increased 4 basis points during the quarter while the cost of other interest-bearing deposits, excluding brokered and time, decreased by 1 basis point. We are now working under the assumption that interest rates will stay higher for longer and will start to gradually come down in the latter part of the year, not at the beginning of the year as we had originally assumed. As a result of all these changes, net interest margin for the quarter was 4.16%, which is up 2 basis points from last quarter. That's consistent with our guidance. We see margins starting to normalize as interest rates stabilize and deposit pricing stabilizes while we continue to redeploy the cash flows from the investment portfolio into attractive spreads that will improve the margin. Our most recent estimates show that some portfolio cash flows over the next quarter will be approximately $150 million and through the end of the year, another $750 million, most of it being maturities, which will occur in the second half of the year, totaling $483 million. In terms of non-interest income, it was fairly flat as we had $3.1 million collected on annual continuing insurance commissions this quarter. Last quarter, we had a $3 million gain we achieved on the sale of a bank premise in Florida, making them offset each other. Operating expenses for the quarter were $5.7 million lower. The fourth quarter expenses were $126.6 million and our first quarter expenses are $120.9 million. Last quarter did include the $6.3 million special assessment from the FDIC, while this quarter included an additional $900,000 related to the assessment. If we were to exclude the assessment, expenses would have been $120 million in the first quarter of 2024, which is $300,000 higher than last quarter. What we had in the quarter was employee compensation increasing by $3.9 million, primarily due to the typical increase in payroll taxes at the beginning of each year and also the impact of stock-based compensation in the first quarter. Conversely, business promotion was down $2.9 million based on projected basic promotion activities. We did see additional gains on OREO, with a $1.5 million gain on OREO. If we exclude these OREO gains, expenses for the quarter were within the $120 million to $122 million guidance that we had previously provided. We continue to maintain such guidance for the second quarter. As Aurelio mentioned, the efficiency ratio for the quarter was 52.5%. However, if we exclude the special assessment, the FDIC special assessment, it would have been 52.1%, which is in line with our guidance of 52%. We assume that no meaningful changes occur on net interest income; the efficiency ratios will continue to hover around the 52% target. In terms of asset quality, NPAs increased by $3.7 million during the quarter to $129.6 million, which represents 69 basis points on total assets. The increase was driven by the migration of a $10.5 million commercial loan participation in the Florida region, which was offset by reductions of $3.8 million in OREO and $1.9 million in repossessed autos. The inflows were up $11.9 million to $46.8 million, largely driven by that $10.5 million case I just mentioned regarding the Florida region. We also had some increases of $3.1 million in consumer loan inflows. Conversely, loans in early delinquency declined by $17.1 million to $133.7 million with reductions of $15.5 million in consumer loans, mostly auto, and $4 million in residential mortgage delinquencies. The allowance stood at $263 million at the end of the quarter, which was up $1.8 million versus the prior quarter, but the coverage remained relatively flat at 2.14%, just 1 basis point lower than last quarter. Net charge-offs were $11.2 million, which is 37 basis points of average loans, net of the $9.5 million recovery from the sale of previously charged-off consumer loans. If we were to exclude this recovery, the annualized net charge-off rate for the quarter was 68 basis points versus 69 basis points in the fourth quarter. On the capital front, Aurelio made reference already that our regulatory ratios remain strong, significantly above well-capitalized levels. We have continued with our capital distribution plans to share buybacks and common stocks. Our tangible book value per share increased slightly to $8.58, but the tangible common equity ratio decreased slightly to 7.6%, primarily due to an increase in the other comprehensive loss component from the fair value of the securities. As of March, the adjusted comprehensive loss represents $3.88 of tangible book value and over 300 basis points on the tangible common equity ratio. Assuming stable rates, we will continue to recover the adjusted losses based on the duration that we have in the portfolio. With this, I would like to open the call for questions.

Thank you. Our first question comes from Alex Twerdahl from Piper Sandler. Please go ahead.

Hey, good morning.

Morning, Alex.

It sounds, Orlando, from your prepared remarks, like you're saying that the expectation from here is for deposit costs and funding costs to be pretty flat or close to their ceiling. But a good amount of mix shift—almost $1 billion of lower yielding securities mixing either into loans or cash or high yielding securities over the next year. So, it's pretty safe to say that the NIM trajectory from here is going to be a bit higher, assuming that higher for longer narrative that you alluded to earlier?

Yes, the expectation is, assuming rates start going up again, which was not the expectation we had, it's right what you mentioned, Alex. We're going to have the benefit of repricing of the investment portfolio, either through loans or through reinvestment of the portfolio. We're going to see some further increases on time deposits. So, there's going to be some cost increases, but the other chunk of the deposits should stay at similar levels where we are now. The net result will be additional pick-up on the margin, as we previously mentioned. We were expecting that inflection point to happen towards the end of last year or the beginning of this year, and we're starting to see a bit of that based on the way rates are moving.

Great. And then just a little bit more commentary maybe on the loan pipelines. I think in the past, you've alluded to the construction portfolio being a place where you'd expect to see some additional disbursements this year. Is that still the case?

Yes, that is still the case. Yes.

Okay. And then just overall expectations for loan growth over the next couple of quarters?

We continue — we stick to what we provided at the beginning of the year, mid-single digits, primarily driven by commercial, construction, and auto, which basically includes mortgage and some other unsecured consumer loans.

Okay. And I just wanted to ask, one of the concerns we hear from a lot of banks that aren't Puerto Rican banks, is just sort of the repricing risk of commercial real estate loans over the next couple of years, loans going from three handles up to seven or eight handles. When in 2020 and 2021, when you guys were putting out commercial real estate loans, were there loans going on with three handles? Were they pretty comparable to here, or were there structurally just higher yields and therefore less repricing risk on the island?

I would say that there is less repricing risk. I don't remember fixed-rate loans having every handle. I don't see that we competed in that market. So, I think we had a slide — prior slide in the presentation or an investor deck that talks about the described repricing risk. I'll make sure that slide is put back into it. But we consider that repricing rates are fairly low and manageable.

Good. Thank you for taking my questions.

Thank you, Alex.

The next question is from Kelly Motta from KBW. Please go ahead.

Hi. Thank you so much for the question. One bright spot this quarter is that net interest — non-interest-bearing deposits have stabilized somewhat. As you look ahead, do you think the pressure from migration into higher cost deposit sources has slowed a bit? I know you mentioned that you're going to continue to be impacted by CDs repricing, but I'm wondering if we're seeing a slowdown in the mix shift that should help somewhat.

Yes, that's definitely what we saw, Kelly, this quarter. If you look at the mix, my deposits, meaning retail and commercial, excluding time deposits, were slightly down $25 million while time deposits were up $93 million. So, we have seen that shift into time deposits. But clearly, the large movement we saw into markets — we are not seeing that anymore. Public funds did increase this quarter by about $73 million, showing a stable kind of size in the portfolio a little bit up or down every month, depending on the operations of different entities. Our expectation is that there's going to be stability in the deposit side this year compared to what we saw in 2022 and 2023, where we saw a lot of money going into the treasury markets.

Got it, that's helpful. And then turning to your fee income, there was a nice uptick in mortgage banking as well as a significant increase in insurance commission income. I was wondering if there was anything unusual or not expected to necessarily be repeatable in future quarters? And if this is a good level of mortgage banking activity here.

The largest component of this quarter's change was obviously the insurance continuing commission that occurs in the first quarter of each year. It doesn't repeat throughout the year. It's a function of volumes originated through the year, based on that there is always a level of continued commissions that are paid at the beginning of the following year from different insurance companies. So, that $3 million is not something that we're going to see in every quarter. However, we saw more originations at better rates, in terms of conforming paper that could be sold. The expectation is for stable activity, but we need to see what's happening with the recent spike in rates. We don't know if that’s going to affect the conforming market.

Got it. Super helpful. Maybe the last question for me. I feel like after last quarter, there was an investor focus on particularly on the consumer in Puerto Rico, with you and your peers discussing some normalization there. It looks like you guys were able to realize a nice recovery on some previously charged-off loans. I was wondering if you could talk more about the health of the Puerto Rican consumer at this stage as well as any kind of puts and takes as we look ahead as to how we should be thinking about the normalization of credit in this environment.

Yes, I think we'll be covering this topic since last year actually expecting that to happen early last year. The excess liquidity provided by the pandemic into consumer accounts was moving out or being utilized, which started to happen more in the second half of last year. Normalization is still getting to pre-pandemic levels. We expect that to last a few more quarters, not necessarily a lot longer, primarily on the unsecured components of credit cards and personal loans, which is very similar to what happened in the U.S. industry banks, driven by what we believe were artificially higher utilization levels. We expect that to continue. I think it's important to understand the consumer side, those losses are reflected immediately. It's a very short cycle. NPAs are not accumulated. So, whatever you see in the short-term, you will also see in the recovery in a very short time.

Got it, helpful. I'll step back. Thank you so much for your time.

Thank you.

Thank you. We have no further questions on the call, so I will hand the floor back to Ramon.

Thank you to everyone for participating in today's call. We will be attending the Wells Fargo Financial Services Conference in Chicago on May 14th. We look forward to seeing a number of you at this event and we greatly appreciate your continued support. Have a great day. Thank you.

This concludes today's conference call. Thank you all very much for your participation.