First Bancorp /Pr/ Q4 FY2024 Earnings Call

Hello, everyone. And thank you for joining the First BanCorp. Fourth Quarter 2024 and Full Year Financial Results. My name is Becky, and I’ll be your operator today. I will now hand over to your host, Ramon Rodriguez, Investor Relations Officer to begin. Please go ahead.

Thank you, Becky. Good morning, everyone. And thank you for joining First BanCorp.’s conference call and webcast to discuss the company’s financial results for the fourth quarter and full year 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 filing. 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. I will begin by briefly discussing the business performance for the fourth quarter, then we’ll move on to provide some high-level highlights of how we performed during the full year. We’re quite excited about how we closed 2024 and with another quarter of consistent execution and strong financial performance, we earned $76 million in net income and grew pre-tax pre-provision income by 5% to $117 million, primarily driven by net interest margin income expansion and our disciplined expense management process. Return on average assets was again strong at 1.56%, and the organization continued to operate at an efficiency ratio close to 52%, which is in line with our guidance. Turning to the balance sheet, the quarter was strong. Total loans grew by $310 million or 9.7% in the quarter annualized, driven by growth across all business segments: Consumer, Commercial, and Mortgage, particularly in Puerto Rico and the Florida region, especially within the Commercial and Construction Lending segments. However, we anticipated some portfolio repayments in the quarter, which came in a little lower than expected. We anticipate that some of that will come in between the first quarter and second quarter of this year in the range of probably $50 million to $100 million. In terms of deposits, core deposit trends were also encouraging, with total deposits, excluding broker and government, up 2% sequentially from the prior quarter and 4% when including government deposits. As we have seen in prior quarters, we can see some seasonality in deposit inflows during the quarter; these trends are temporary in nature or related to the variability of government sector funding for reconstruction activities. Credit performance was relatively stable during the quarter, with non-performing assets hitting another record low of 61 basis points of total assets. On the capital front, our liquidity and capital position remain very strong. We sustained our commitment to deliver over 100% of earnings in the form of capital actions by redeeming $50 million of our outstanding junior debentures and paying $26.3 million in common dividends. Even when accounting for these actions, our regulatory capital ratios increased during the quarter and remained significantly above the required levels. We still have $200 million left in our capital plan authorization, which we expect to continue deploying through 2025 in a manner that best suits the long-term interests of the franchise. Please let’s turn to Slide 5 to provide some highlights of the year. The solid performance of the quarter capped a year of record results for the franchise, supported by a positive economic backdrop in our operating markets. Total revenue grew, with a 6% increase in earnings per share, achieving a multi-year low in non-performing assets. The loan portfolio expanded by 4.7% or $569 million. We added $267 million in core customer deposits and distributed 100% of earnings to shareholders. Loan growth was in line with our guidance of mid-single-digit growth. Consistent with our strategy, our well-positioned balance sheet allows us to capitalize on bond book and non-repricing opportunities under the current rate environment while proactively managing funding costs, which will continue through 2025. We’re considering stable deposits going forward. Our asset mix will continue to skew towards higher yielding assets, which, coupled with gradually declining funding costs, should drive additional net interest income expansion in 2025. Over the course of 2024, our franchise made significant progress advancing technology initiatives to improve our interaction with customers through both the convenience of digital channels and service-focused relationships with our officers. We are achieving the targets we set to measure the success of our strategy and are seeing the benefits of the investment we made in technology to accelerate our growth and improve how we serve our communities and customers. As we look ahead to 2025, the operating environment seems conducive to another year of positive performance and organic capital generation. If we look at the key economic metrics, during the fourth quarter, employment continued to improve, tourism metrics and passenger activity at our main airport reached record levels, and disaster relief fund disbursement rates registered another year of sequential increments in 2024. We do expect this trend to continue, as the Puerto Rico Planning Board is forecasting another year of economic growth in 2025. Given this backdrop for 2025, we’re sustaining our mid-single-digit loan growth guidance and our 100% net payout ratio of our capital. This includes redeeming the remaining $61 million of our junior subordinated debentures and executing reasonable share repurchase opportunities while definitely maintaining a sustainable dividend payout policy. In line with this guidance, we’re very pleased to announce that our Board approved a 13% increase in our quarterly cash dividend, raising it to $0.18 per share. We will continue to monitor the general macroeconomic environment and how it develops, along with any political changes as we execute our strategy and capital deployment plan. In closing, I have to say that I’m truly proud of what our teams have accomplished so far. We are very optimistic and look forward to a positive 2025 with excitement about what lies ahead. Now, I will turn the call over to Orlando to provide more details, and we will be back for questions. Thanks to all.

Good morning, everyone. As Aurelio mentioned, we recorded very strong results during the quarter, earning $75.7 million in net income or $0.46 a share, compared to $0.45 a share in the third quarter. The results for the quarter showed improvements in net interest income, which were partially offset by the higher provision for credit losses. The provision for the fourth quarter was $5.7 million higher than last quarter, but this was mostly related to a $5.5 million release we had in the allowance for Residential Mortgage loans during the third quarter based on the consistent positive outlook on macroeconomic variables. This quarter, we also provided for the higher loan portfolios we achieved at the end of the quarter. In general, the economic outlook remained fairly consistent going forward from what we had in the third quarter in terms of estimating the allowance. The income tax expense for the quarter was $20.3 million, which is $2.3 million lower than last quarter. In the end, we ended up with a higher proportion of exempt income for the year, resulting in a slightly lower effective tax rate. The effective tax rate was just under 24% for the year 2024, and we’re expecting that tax rate for 2025 to be in the same range, from 24% to 24.5%. For the full year 2024, net income was $299 million, very similar to the $303 million we achieved in 2023. However, earnings per share were $1.81 for this year, which is $0.10 higher than we had in 2023, a benefit of the share count reduction based on the buybacks we have done over the last few years. Return on average assets for the year was 1.58%, and return on equity was 19.1% on a GAAP basis. If we eliminate the impact of other comprehensive loss from the capital on a non-GAAP basis, the adjusted return on equity would be 13.6%. As I mentioned, net interest income for the quarter was $7.2 million higher than last quarter, reaching $209.3 million. You might recall from last quarter’s earnings call that we had mentioned we were expecting the net interest margin for the fourth quarter to be similar to the third quarter. However, we were able to achieve an 8 basis points improvement in margin from 4.25% to 4.33% in this fourth quarter. At that time, we anticipated that loan repricing impacts would offset some of the other improvements. Even though we did see that repricing impact on the floating rate Commercial loans, the Commercial portfolio grew by $192 million, more than compensating for the pricing reduction, while we achieved $37 million in growth in the Residential and Consumer portfolios. Also, growth in deposits for the quarter allowed us to reinvest about $220 million of maturing investment securities at a rate of 5.40%. We look at cash flows during the quarter; cash flows for the investment portfolio were $470 million, including $367 million in securities that mature with an average yield of 65 basis points. The pickup in margin yield was quite significant compared to those 65 basis points. Deposits on interest for Retail and Commercial transaction accounts grew by $348 million on average for the quarter. On the other hand, higher cost time deposits and brokered CDs decreased by $130 million. During the quarter, junior subordinated debentures with a cost of 0.78% decreased by $50 million on average, and we did redeem an additional $50 million at the end of the fourth quarter. The impact will be seen in 2025. The reduction in borrowings and brokered CDs resulted in an interest expense reduction of $2.8 million for the fourth quarter. Looking ahead into 2025, we still see opportunities for both net interest income and margin expansion as we redeploy what we estimate to be between $1.5 billion to $1.6 billion of investment portfolio cash flows in 2025, which are currently yielding about 1.25%, towards either loans, higher yield securities, or paying down some of the higher cost borrowings. Assuming a normal flow of deposits, we expect that margin could improve by around 20 basis points by the end of 2025. In terms of other income, it was fairly in line, down a bit mostly from a decrease in insurance income due to lower production. On the expense side, expenses totaled $124.5 million, which was a $1.6 million increase from the third quarter. OREO gains this quarter were $1 million, or $300,000 less than last quarter. Excluding OREO, expenses for the quarter were $125.6 million, which is $1.3 million higher than last quarter and higher than the top range guidance we had provided. The increase was partially related to business promotion initiatives that took place at the end of the year and were a bit higher than we originally anticipated. However, we did register operating leverage, as the increase in net interest income was enough to offset increases in expenses, resulting in a lower efficiency ratio of 51.6% for the quarter. Based on the current stage of several ongoing technology projects and branch network expansions planned for 2025, we estimate that our expense base for the next couple of quarters will be in the range of $125 million to $126 million, excluding any OREO gains. We continue to estimate our efficiency ratio will be around 52%, considering the changes in expenses and income components. In terms of asset quality, NPAs decreased by $800,000, representing 61 basis points of assets. Most of the reduction was attributable to a repayment of $1.8 million on a Commercial loan. Inflows for the quarter were $1.6 million lower than last quarter, mostly in Consumer, even though we have seen some early delinquency increases. The macro environment is fairly stable, and the market is healthy, but Consumer credit continues to show weaknesses. Overall loans in early delinquency increased by $9.6 million from last quarter, with Consumer loans increasing by $14 million, offset by a decrease of $5.4 million in Commercial loans. We continue to proactively manage this credit cycle on the Consumer side, and we estimate that towards the middle to the end of the year, we will achieve the stability we anticipated on the Consumer. The allowance for credit losses decreased by $3.1 million to $244 million during the quarter, mostly from a $4 million reduction in the allowance for Commercial loans. Based on improvements in both the financial condition of borrowers and the macroeconomic forecast, particularly on the Consumer Real Estate indexes, which have continued to show improvement, the allowance for the Consumer portfolios increased by $1 million due to recent loss trends. Overall, the allowance decreased to 1.91% of loans from 1.98% as we continue to see positive credit trends in the Commercial and Residential Mortgage portfolios. However, the allowance on Consumer loans increased to 3.85% of loans due to losses we have seen in that portfolio. Net charge-offs for the quarter were $24.6 million or 78 basis points of average loans, in line with the prior quarter. Consumer charge-offs increased by $1.3 million, but we experienced a $1.2 million decrease in Commercial charge-offs. On the capital front, regulatory ratios increased during the quarter, and we continue to operate significantly above the well-capitalized levels. We deployed, as Aurelio mentioned, 100% of our quarterly earnings to redeem $50 million in junior subordinated debentures and $26 million in common dividends, consistent with the guidance provided earlier. The tangible value per share decreased to $9.91, and TCE went down to 8.4%, primarily due to an $82 million decrease in the fair value of the available-for-sale investment portfolio. The remaining comprehensive loss we have on the books still represents $3.41 in tangible book value per share and over 258 basis points in tangible common equity ratio. As Aurelio mentioned, we will continue to deploy excess capital thoughtfully, always looking for the long-term best interest of our franchise and shareholders. This concludes our remarks, and Operator, please open the call for questions.

Thank you. Our first question is from Frank Schiraldi from Piper Sandler. Frank, your line is now open. Please go ahead.

Thanks. Good morning.

Good morning.

Good morning, Frank.

On the 52% efficiency ratio for 2025, I guess, that’s just sustaining where you are, right? I mean, I believe that’s a non-FTE NII that is in that calculation. But then can you just remind us, are OREO gains assumed in that calculation, or could OREO gains move that even lower?

No, it’s included in that. The numbers have been coming down, as we’ve mentioned. We expect to still achieve probably OREO gains in the first half of the year, but that’s significantly going to decline by the second half of 2025. So it’s mostly the other expense components and obviously the income side, as you mentioned.

Okay. And it’s pretty consistent there around that 52% level. How focused are you, I guess, in 2025 on that? Do you see opportunities to ramp up or delay investments depending upon the revenue outlook to really hone in on that 52%?

Well, in reality, we see consistency on the revenue side, and we’re counting on some of the opportunities we’re executing. As Orlando mentioned, we expect some margin improvement. You have the reinvestment on the portfolio or the cash flows, and we have a mid-single-digit target for growing the portfolio again. So those components bring some revenue. We’re not really stopping investments; we are including significant investment in technology to continue, which is bringing other benefits that may be more long-term, but they are. We also have branch openings planned that are part of that number and will start happening during the year. We’re moving branches into areas where we don’t have a presence, where there are deposit opportunities and Commercial Bank opportunities on the small and medium market side. So, we’re not really halting those investments.

Okay. And then just a point of clarification, Orlando, I heard you mention the NIM. I think you said NIM could be up 20 basis points year-over-year. Is that the number you gave?

Based on the quarterly peak we expect, it would be like the margin at the end of the fourth quarter of the year because we’re talking about margin. It’s like, with the reinvestment of the portfolio and considering expected deposit flows and new loan productions, we believe margin will continue to pick up based on that. As I mentioned, the cash flows that are coming due from the investment portfolio are estimated to be around $1.5 billion to $1.6 billion in 2025, with an average yield of 1.25%. It’s not equally distributed; the amounts that mature in the first half of the year are around 1.50%, and the other half has a lower yield. But still, we expect good take-up on the reinvestment or the amounts that could be channeled to loan portfolios. Obviously, we’re still dealing with expectations on rates. We had initially assumed 100 basis points would happen in 2025, but now we feel it’ll probably be 25 to 50 basis points, so we will see that part. But still assuming these rates along with the pickup on those components, we’ll have a good push on the margin.

Okay. And then just lastly, I think you said there’s about $60 million in redemption left, so is it a fair expectation that stock buyback is probably another quarter to go before you get back into the market and repurchases will be the return to capital story more for the last three quarters of the year?

Yes. I think your assessment is the most probable scenario right now as we speak.

Yeah.

Okay. All right. Great. Thank you.

Thank you. Our next question is from Timur Braziler from Wells Fargo. Your line is now open. Please go ahead.

Hi. Good morning.

Good morning, Timur.

Looking at the linked-quarter deposit growth, particularly on the public fund side, what was the dynamic this quarter that drove balances higher in a period that may typically see some seasonal outflows? Was that market share gain? Is that a little bit transitory in nature? Maybe just give us some dynamic to the deposit growth forecast?

We have a strong strategy focused on cash management payment services for government entities and municipalities, alongside a parallel strategy with large participants involved in reconstruction. This resulted in inflows from both areas. It's important to note that there's often variability in the funds circulating within the infrastructure sector; this growth reflects the net movement of funds. This quarter saw significant projects and funds transferred from FEMA or CDBG to these entities for project completion. Our core strategy revolves around providing services to municipalities and other entities while also supporting those engaged in reconstruction phases. However, we do see some seasonal trends in the latter part of the year.

Okay. For the loan growth, the U.S. mainland loan growth was strong in 4Q. It looks like C&I on the Virgin Islands is also pretty strong in 4Q. Can you just give us a little color on where you’re seeing growth on the mainland and is that primarily where you were expecting some elevated payoff activity that didn’t come to bear in the fourth quarter?

When you look at the core strategy in Florida, it’s Commercial in all segments: small, medium, and large with the larger corporation’s balance sheet, which is part of the region. Throughout the year, there were also good quarters and active quarters. Some cases that closed and were pending finally concluded the year. There were some large deals and construction activities that also occurred in the quarter. Some moved ahead or were completed. So, it’s tough to predict the pace. That’s why we focus on mixing and digging when we add and subtract. We do expect more growth in Commercial this year. Growth in the Mortgage segment was not part of earlier plans, and we anticipate continued growth in the Consumer segment, albeit at a lower growth rate than in the last five years. It’s just different cycles of each business and portfolios.

And then just last for me, looking at the allowance, A, what gives you greater confidence that Consumer credit begins to stabilize in the middle of 2025? And B, as we look at all the different components of the allowance, it’s come down now for six straight quarters. Are we nearing a plateau there for allowance or do you foresee continued mix shift and continued ability to perhaps release some reserves throughout the year?

We need to divide it by portfolio. The Residential Mortgage portfolio has continued to perform extremely well, resulting in some releases. The Home Price Index has been strong, and home sale prices we see—even on the OREOs we sold—are definitely robust. That helps. However, there is likely not much potential for large reductions based on the size of the portfolio. The portfolio has been growing a little bit compared to previous decreases. On the Commercial side, we’re probably stable; it’s performed well for a long time. For the Consumer side, there is still volatility. The allowance for the Consumer side has increased about 20 basis points from the end of 2023 to the end of 2024, while the growth primarily has been in auto portfolios, which entail lower losses. But I do foresee a little bit of noise on the allowance. Overall, I would expect we’re sort of at these levels for the next couple of quarters.

Great. Thank you.

Thank you. Our next question is from Kelly Motta from KBW. Your line is now open. Please go ahead.

Hey. Good morning. Thanks for the question. I was hoping to dig into...

Good morning.

... a bit more on expenses. I appreciate the outlook of $125 million to $126 million per quarter. However, looking at the fourth quarter, can you remind us? It looks like you’ve had a larger increase in business promotion expenses in the fourth quarter over the past two years. Can you remind us of the seasonality of that and if that had any relation to the significant increase in deposits you saw this quarter?

The end of the year typically combines several factors. We have events we conduct for customers as part of year-end celebrations and recognition of customer loyalty. We also have trends in campaigns we’d like to start early in 2025 that begin towards the end of the year. These are mainly on the lending side, not so much on the deposit side. In addition, we push for digital participation initiatives that occur towards year-end. The relationship isn’t direct, but our marketing teams would argue their efforts played a role in the deposit growth.

I appreciate that. The deposit growth is obviously strong, and I understand it’s partly seasonal and partly due to unique flows occurring with government deposits. But regarding the core Puerto Rico deposit base, I was hoping you could provide an update on the competitive environment. Are you seeing any ability to lower core deposit costs, which are already pretty low compared to mainland banks?

To be honest, if rates don’t move lower than they are today, we don’t see many opportunities in what is considered core. Core competition seems reasonable, but the movement in rates isn’t supporting the expectation that any other competitor operates under the assumption of lowering rates. We’ll have to wait and see what happens with the Fed and the potential additional moves. Meanwhile, a lot of funding is maturing, and it’s either been eliminated or is being renewed at lower rates.

There are opportunities on the brokered CDs. If we renew anything, rates will be lower than the current due rates. We also see opportunities in some advances taken from the FHLB. As some government deposits have been repriced as Treasury rates have come down, I still feel, like Aurelio, that core accounts aren’t going to come down much assuming rates remain at these levels.

Got it. Maybe just one last question for me regarding balance sheet size. I believe you touched on this sufficiently, but just to clarify, earning assets for the quarter were just over $19 billion. It sounds like based on the cadence of investment portfolio maturities ($1.5 billion to $1.6 billion) coupled with your mid-single-digit loan growth guidance, the balance sheet likely remains flat to slightly down over 2025. Is that the right way to think about it as we look ahead, assuming positive growth in NII is driven by the remix into higher-yielding assets?

The cash flows from the investment portfolio are not necessarily going to reduce the size of the balance sheet because we’ll be reinvesting primarily into other investments or loans. There’s a level of investment we need to maintain for collateral for public funds, as well as our other activities. We’ve taken significant amounts out of that portfolio on all the excess we had, and we’re currently reaching a level where we’ll be either moving to loans or slightly increasing securities. This will keep the balance sheet somewhat at our current level. If we grow the investment loan portfolio as expected, the balance sheet is likely to see a slight increase. Of course, deposits are influential in this as well. So the assumption of being flat to slightly higher, around the range of $18.8 billion to $19.3 billion or $19.4 billion, is probably a reasonable estimate of the balance sheet size.

Awesome. Thank you for all the color. I’ll step back.

Thank you, Kelly.

Thank you. Our next question is from Steve Moss from Raymond James. Your line is now open. Please go ahead.

Hi. Good morning.

Good morning, Steve.

Good morning, Steve.

Just on loan pricing, I apologize if I missed it, but given the rate volatility we’ve seen over the last couple of months, what are you seeing for loan pricing these days?

It hasn’t changed much in terms of what you’d call the spread. Pricing has come down a bit because most of the pricing is either LIBOR-based or SOFR-based. SOFR is down, and Prime is down. This means that pricing on some portfolios have been down but doesn’t necessarily mean that the spread has decreased from prior levels. Speaking about Commercial loans primarily, on the Consumer side, things have changed a bit, but we adjust credit card rates based on Prime. Some other portfolios have remained fairly consistent, yielding down about 20 to 10 basis points compared to last quarter.

Actually, it’s down about 12 basis points. When we look at the overall loan portfolio yield on Page 8 of the presentation, it’s a combined number.

The yield has been primarily impacted by the floating components, which represent around 50% to 53% of our Commercial side, reprice with Prime and SOFR, with a minor effect from Treasury rates. Overall, I would say it’s a similar pricing strategy.

Great. Appreciate that. And in terms of just the $1.5 billion in cash flows, is it fair to say it’s somewhat evenly distributed over the four quarters?

No. It is not. Let me give you more color on that. For Q1, it’s projected to be between $325 million and $375 million, around $240 million to $260 million for Q2, about $400 million for Q3, and finally, around $525 million to $550 million for Q4.

Okay. Great. Appreciate all that. Most of my questions have been addressed at this point. Thank you very much.

Thank you, Steve.

Thank you. We currently have no further questions. So I’ll hand back to Ramon for closing remarks.

Thanks to everyone for participating in today’s call. We will be attending BofA’s Conference in Miami on February 11th, KBW’s Conference in Boca on February 13th, and the Raymond James Conference in Orlando on March 4th. We look forward to seeing many of you at these events and greatly appreciate your continued support. Have a great day. Thank you.

Thank you.

This concludes today’s call. Thank you for joining. You may now disconnect your lines.