Earnings Call Transcript
First Bancorp /Pr/ (FBP)
Earnings Call Transcript - FBP Q4 2023
Operator, Operator
Good morning, everyone, and welcome to First Bancorp's Fourth Quarter and Full Year 2023 Financial Results. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. I would now like to turn this conference call over to our host, Ramon Rodriguez, Senior Vice President of Corporate Strategy and Investment Relations. Please go ahead.
Ramon Rodriguez, Senior Vice President of Corporate Strategy and Investment Relations
Thank you, Candice. 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 2023. 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.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Thanks, Ramon. Good morning to everyone and thanks for joining our earnings call today. I will begin by briefly discussing our business performance for the fourth quarter first, then we'll move on to provide some high-level highlights for the full year, and then share with you some of our priorities for 2024. Our fourth quarter results were highlighted by strong profitability and loan growth. We earned $79.5 million or $0.46 per share and generated a 1.7% return on assets. Our expenses for the quarter were impacted by a $6.3 million FDIC special assessment expense. Excluding the special item, the adjusted efficiency ratio was 52.2% for the quarter. The quarter also reflected higher provision expense and some incremental operating expenses which Orlando will cover both in detail later. The loan portfolio expanded by $233 million or 7.8% linked quarter, annualized driven by growth across all business segments, particularly the strong commercial and auto loan origination, as we continue to deepen our share in those markets. Core deposits contracted slightly by 2%, as we continue to see a gradual erosion of excess liquidity in our market and NPAs decreased again to just 67 basis points of total assets. We said for some time that credit metrics will gradually move closer to historical levels as the positive impact of excess liquidity related to the pandemic stimulus on the consumer decreases. We saw earlier a little bit of that in the fourth quarter, actually also in the third quarter with the charge-off rate and loans in early delinquency for the consumer book registering a slight increase when compared to previous quarters. That said, our NPA and classified asset levels remain at multiyear lows and our reserve coverage ratio is also very solid and we continue to sustain and enforce our proactive risk management culture. Definitely, we're ready to withstand any additional deterioration as those rates move closer to the norm. Finally, it was a great quarter in terms of our capital position; our tangible book value per share increased by 19% and the TCE ratio improved to 7.7%, mostly driven by the favorable variance in the value of our bond book, given the reduction in market rates during the quarter. This was accomplished even while repurchasing $75 million in common shares as we have indicated and paying $24 million in dividends. Let's move to Slide 5 to provide some highlights on the full year. Definitely, the 2023 performance showcased our attractive profitability and improved risk profile, even in what we all know is a challenging rate environment for our industry. Most importantly, it highlights our capital management discipline and return flexibility. We generated a 1.62% return on assets for the year and a 41% return on equity, adjusted for the impact of the AOCL. We added $628 million or 5.4% to the loan portfolio in the year, while deposits other than broker contracted were up by 1.7%. Our strong and diversified deposit franchise is evident by a still healthy non-interest-bearing ratio of 34% at the end of the year and a loan to deposit ratio of 77%. These achievements support our goal of delivering close to 100% of annual earnings to shareholders in the form of buybacks and dividends for the third consecutive year. As we mentioned before, this year marked our 75th anniversary. We are very pleased with how our franchise has supported businesses, households, and ultimately the Puerto Rico economy and our market during this period by how we continue investing in our people, upgrading our product offerings and services, investing in technology, operations and infrastructure, and improving our operating leverage in loan growth. I want to thank all my colleagues for their valuable contributions and dedication during the years and also our customers that we serve on a daily basis, our communities, and our shareholders for their support. As we look forward to 2024, we expect to continue our loan growth momentum, continue gaining market share and improving our loan book in what we consider to be a stable economy across our markets, including Miami, Puerto Rico, and the Virgin Islands. Our goal is to again achieve mid-single digit loan growth for the year organically. However, we do continue to expect that average deposit balances will gradually come down in line with recent trends in the market as excess liquidity in the system decreases during the year. Our top priority for the year, number one will be to leverage the short duration of the investment portfolio to redeploy low-yielding maturing securities cash flow into higher yielding assets. Also actively and proactively managing credit, particularly on the consumer lending businesses. Finally, we continue to be very well positioned to deploy our capital, based on our healthy capital levels and our ability to consistently generate organic capital. We still have ample buyback capacity with $150 million in buyback left on our current authorization. We will continue to monitor the general macro outlook and continue to execute the remaining buyback authorization during the year, beginning in the first quarter of this year. Now I will turn the call over to Orlando to go over the financial results in more detail and will come back for questions later.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
Good morning, everyone. As Aurelio mentioned at the beginning of the call, we reported a $75.5 million gain for the fourth quarter. This is $2.5 million lower than the third quarter. However, earnings per share for the quarter were $0.46, which is the same as we had in the third quarter. This result includes a $6.3 million charge for the one-time FDIC assessment, as well as a $3 million gain on the sale of our banking facility in our Florida region. The provision expense for the quarter increased to $18.8 million as compared to $4.4 million in the last quarter. As you may recall from last quarter's earnings call, the lower provision in the third quarter reflected the benefit of what we define as a less severe economic outlook in the third quarter than the one we had forecasted in the second quarter. This quarter the outlook remains similar, so the increase was mostly related to the larger loan portfolios and the higher level of consumer charge-offs to some extent. The income tax expense for the quarter was $5.4 million, which compares to the $27 million we had in the third quarter. The effective tax rate came down from 28.2% in the third quarter to 23.5%. As we ended the year conducting several activities during the fourth quarter that were not previously forecasted and which have tax advantages under the Puerto Rico code, we had a lower pretax income for the quarter, which translated into a reduced tax. Looking forward, based on our current strategies, we expect that the effective tax rate for 2024 will be around that 24% range, slightly under, slightly over, but somewhere in that range. For the full year, net income for 2023 was $303 million. This is pretty much in line with the $305 million we had in 2022, but earnings per share were higher at $1.71 compared to the $1.59 we had the prior year. This is a direct result of the benefit of the lower share count due to share buybacks we have been executing over the year and also in 2022. Also, as Aurelio mentioned, we delivered a strong return on average assets, again at 1.62%, and ROE with a return on average equity of 23.7%, which we adjusted to eliminate the other comprehensive loss to represent 14.1%, both solid numbers. In terms of net interest income, the quarter shows $196.7 million of net interest income, which is $3 million below the third quarter. However, the third quarter did include $1.2 million we collected on a construction loan that had been charged off in prior years. Therefore, the real reduction was $1.8 million. The interest income from loans increased by $6.1 million in the quarter, which was somewhat offset by a $3.9 million decrease in other earning assets, mostly cash and securities, but interest expense grew by $5.4 million. In the lending side, the interest income grew by $2.9 million in consumer and $2.1 million in commercial, most of the growth within those two portfolios. Overall, however, even though loans increased during the quarter, total average earning assets did decrease by $269 million. During the quarter, we continued to see funding cost pressures, as the excess liquidity in the market has continued to decline, which resulted in decreases in retail and commercial core deposits, excluding public funds. We also continue to see the impact of the shift from non-interest-bearing deposits to interest-bearing deposits. Even though when looking at the quarter, non-interest-bearing deposits declined by only $36 million, and had impacted significantly the funding costs for the fourth quarter. These deposits have been moving into time deposits or other interest-bearing options. To put this in perspective, over the last six months of 2023, time deposits grew by $153 million. On the other hand, during the quarter, we saw that the trend in the pace of core deposit cost increases has slowed down as market interest rates have stabilized. The average cost of interest-bearing checking and savings accounts, other than public funds, remained stable at 73 basis points when compared to the prior quarter. Additionally, we have seen deposit price repricing pressures on the government deposits easing now. The cost of these deposits increased only 14 basis points in the quarter, compared to our 54 basis points increase we had in the third quarter. The increase in this quarter was mostly a lag effect from the last quarter repricing since short-term market interest rates on average did not increase this quarter, which is an indicator of how government deposits are priced. That said, we did have a $6.1 million increase in interest expense on broker and time deposits during the quarter as we increased average broker deposits by $253 million and average time deposits by $85 million. The yield or the cost of non-brokered time deposits increased by 26 basis points. In the quarter, a lot has to do with the maturing time deposits that get issued at new rates. The overall funding cost impact has been influenced by the increase on the yields from the growth in the loan portfolios, which, as you saw in the release, grew by $233 million in the fourth quarter and have grown by $459 million since the end of the second quarter. Looking specifically at the yield in the fourth quarter, the loan yields increased by 7 basis points. Margin for the quarter was relatively flat at 4.14%, almost the same as last quarter, which was 4.15%. We have seen a change in the mix of earning assets resulting in higher yields but this has been offset by an increase in the cost of funds. As we discussed last quarter with the assumption that the market interest rate would stabilize or start to come down, we expect that the inflection point for net interest margin would happen somewhere between the end of 2023 and the first quarter of 2024. We see that happening already and, assuming no meaningful changes to deposit balances, the net interest income should improve in 2024 as higher yielding loans will be funded with the cash flows that are coming from the investment portfolio, which is at a much lower yield. We estimate those cash flows for 2024 to be around $1 billion throughout the year, with a significant portion coming in the second half due to maturities, but still throughout the full year. Our interest rate forecast is fairly consistent with the forward yield curve, and our planning assumption is that future fed funds rate cuts will begin in April. That's what we've been using for the assumptions in the net interest margin and in the net interest income projections. Looking at other income, we had a $3.3 million increase to $33.6 million during the quarter, which was driven by a $3 million gain on the sale of the banking facility in Florida. If we exclude this item, the other income was essentially flat compared to the prior quarter. Expenses increased by $10 million during the quarter, but that was largely driven by the $6.3 million one-time FDIC special assessment. Excluding this item, adjusted expenses were $120.3 million, which results in an efficiency ratio of 52.2% during the quarter. Business promotion increased by $2 million for the quarter, which related to year-end marketing efforts and completion of some activities for our 75th anniversary celebration, including some customer activities. You also saw that OREO gains decreased by $1 million for the quarter. In terms of expenses over the last few quarters, we have been guiding expenses to fall within $118 million to $120 million, excluding the benefit of the OREO gains. Looking at the fourth quarter, excluding OREO, expenses fell above that range at $121.3 million. Considering the current pace and some of the strategies while accounting for some seasonality and things like payroll taxes, we believe that expenses for the first couple of quarters of 2024 will be in the range of $120 million to $122 million per quarter, and the efficiency ratio should hover around that 52% that we just had. In terms of asset quality, NPAs decreased by $4.3 million to $126 million, representing 67 basis points of total assets. Most of the reduction relates to $7.7 million in collections and loans returning to accrual status in the commercial loan portfolios, which includes a $2.7 million commercial real estate loan that accrued during the quarter. This reduction was partially offset by a $3.3 million increase in consumer non-accrual loans. Total inflows to non-accrual during the quarter were $35 million, just $5 million less than last quarter, with the net impact of some increases in consumer and decreases in the commercial portfolio. However, loans in early delinquency, those financing from 30 to 89 days, did increase by approximately $14 million, mostly driven by a $15 million increase in the consumer portfolios that we had in the quarter. Regarding the allowance, it ended up at $269 million, which is $1.8 million less than the prior quarter. The coverage decreased slightly to 2.15%. However, given the rise in the consumer loan delinquency and some of the charge-off impact, the ACL on just consumer did increase to $3 million during the quarter, reaching 3.64% of loans. Overall charge-offs for the quarter were 69 basis points as you saw in the release. The allowance for credit losses is consistently estimated using a combination of a baseline and a downside economic scenario. Therefore, we see that we are providing very adequate coverage for any possible losses. In terms of capital, our ratios remain very strong, significantly above well-capitalized, with most of the ratios either showing a slight decrease or a small increase as the earnings generated in the quarter mostly compensated for the $75 million in share buybacks we executed during the fourth quarter and the $24 million in common dividends that were paid. Total GAAP equity increased to $1.5 billion. Basically, the improvement in interest rates and the overall environment resulted in a $212 million increase in the fair value of available-for-sale securities and therefore reduced the other comprehensive loss adjustment. As a result, the tangible book value per share increased by 19% to $8.54, and the tangible common equity ratio increased to 7.7%. It's important to note that when looking at the remaining other comprehensive loss adjustment, it represents approximately $3.74 in tangible book value per share and over 300 basis points in the tangible common equity ratio. Assuming rates remain stable, we will continue to recover this other comprehensive loss based on the short duration of our investment portfolio. As we have mentioned in prior calls, we continue to reiterate our intention and our ability to retain this investment until maturity. With that, I would like to open the call for questions. Thanks.
Operator, Operator
Thank you. Our first question comes from Timur Braziler of Wells Fargo. Your line is now open. Please go ahead.
Timur Braziler, Analyst
Hi. Good morning.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Good morning, Timur.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
Good morning.
Timur Braziler, Analyst
Starting on the deposit side, I'm just wondering how the cost trend that the lag effect of public funds is in the rear view? You mentioned excess liquidity in your prepared comments a couple of times. I'm just wondering, can you frame what you consider excess liquidity remaining on your deposit base as that exists, is the expectation that it's backfilled with brokered deposits, and then all in all what does that mean for deposit pricing and cost as we go through the first couple of quarters of 2024?
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
In terms of cost, clearly what I mentioned in the call is that with rates being stable, as we have seen over the last couple of months and the possibility of rates coming down, we believe that we're going to start seeing cost reductions in the market in terms of deposits. The only question continues to be still there could be some shift. We have a strong 34% non-interest bearing ratio to total deposits, non-interest-bearing deposits to total deposits. We could still see a little bit of that migrating to higher cost. That said, market contracted overall by about 3% in the first three quarters. In 2023, deposit contracts were about 7% in the Florida market. So when we say excess liquidity, we really talk about there was significant incremental liquidity during the pandemic in 2021 and 2022, which started normalizing in 2023. We probably expect a few more quarters of that normalization on deposits, with customers utilizing that liquidity that they had in their accounts.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Overall market contracted about 3% in the first three quarters. In 2023, deposits contracted by about 7% in the Florida market. When we say excess liquidity, we really talk about there was a significant incremental liquidity that took place during the pandemic in 2021 and 2022, which started normalizing in 2023. We probably expect a few more quarters of that normalization on the deposit as customers utilize that liquidity.
Timur Braziler, Analyst
Okay. Thanks for that. And then maybe pulling it all together and looking at NII trajectory in anticipation of the forward yield curve. You mentioned an inflection point in Q1 and you're assuming rate cuts begin in Q2. Can you give us a sense of what NII trajectory looks like as we go through the year?
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
In terms of actual percentages, we haven't given specific guidance but we're assuming that there is going to be a pickup on the margin going up, considering the market rates move. Again, it goes back to the $1 billion in securities cash flows that will come in 2024. Those securities are yielding less than 1.5% and are expected to be replaced with higher-yielding loans. The consumer lending portfolio is a fixed-rate portfolio, as well as most of the CRE portfolio, so those will continue to remain in place. However, assuming rates move as expected, conversations of four to five rate cuts in the year should also lower the cost of deposits to compensate for that. Therefore, we are expecting net interest margin to start picking up going forward.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Actually, the other component is that we have a larger portfolio starting the quarter than we had in the prior quarter in terms of the loan portfolio size.
Timur Braziler, Analyst
Got it. That's a good color. Thank you. And just last for me, looking at credit, we're continuing to see a normalization of the consumer. It seems like from a charge-off standpoint. I guess, how close are we to reaching what you ultimately expect to be a normalization in net charge-offs? And then, looking at the allowance ratio that's moved lower every quarter in 2023, is that a sign of confidence around broader credit and could it ultimately get back to a level of pre-pandemic in the high teens again?
Aurelio Aleman-Bermudez, President and Chief Executive Officer
I think we will probably have a couple of more quarters of this consumer normalization closer to mid-year. Charge-offs on consumer loans tend to cycle quickly, so the ACL, the allowance you see is a function of what remains in the portfolio. The mortgage business is showing much better metrics than pre-pandemic. Consumer loans still show better performance in terms of charge-off rates than we had pre-pandemic.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
What you're seeing is the commercial side behaving very well, with some of that reduction coming in the commercial portfolios. The consumer side has increased in the allowance coverage only because of this trend. We haven't done a projection on that matter, but we expect to assess the overall charge-offs as we progress through the year.
Timur Braziler, Analyst
Great. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Alex Twerdahl of Piper Sandler. Your line is now open. Please go ahead.
Alexander Twerdahl, Analyst
Hey, good morning.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Good morning, Alex.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
Good morning, Alex.
Alexander Twerdahl, Analyst
Orlando, regarding your NII and NIM guidance, which I think you said is inclusive of rate cuts, what if we don't get rate cuts? Is the repricing on the asset side you think sufficient to fully offset deposit pressure?
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
I believe so. Remember that a significant portion of the pressure was on repricing, and the market was on foregone deposits. If rates stay where we are, it shouldn't be similar to what we faced in the past. Repricing on deposit side would definitely come from the maturing time deposits. That said, it is manageable. The lending portfolio has an ample yield. The investment portfolio continues to run off and is low yielding. We should definitely be able to increase margins, which will depend mostly on those components.
Alexander Twerdahl, Analyst
Okay. And you kind of alluded a little bit to sort of the yield on commercial loans. Can you just give us a sense for what sort of spreads are like down there right now? We've seen a pretty big pullback in the five-year, and I think some bank managements are saying that customers are demanding that and others are saying that they've got pricing power. I'm just kind of curious, where you're able to put on new production in Puerto Rico?
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
The overall yields on the commercial portfolio, on the portfolio in general, are about 7.73% as of the third quarter. We continue to price similarly based on market rates and try to sustain a spread in line with our internal profitability models. Depending on the loan type and pricing, we see spreads somewhere between 2.5% and 3.5%. For consumer loans, we continue to see yields above 8% on the auto sector and credit cards priced off of prime rates, falling between 16% and 18%. Overall, the average yields on residential portfolios are around 5.70% or 5.80%, which should hold steady due to market movements.
Alexander Twerdahl, Analyst
Great. Thanks. And then, I guess, just a final question for me, just as I think about capital generation and really your intention of a third-year 100% payout. With the growth in Puerto Rico appearing to be positive, it seems like the available growth may not fully utilize the capital you generate every year. So is it fair to assume that a 100% payout regarding dividend buybacks in the near term should continue?
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Yes, it's a fair assumption. Yes, that's correct.
Alexander Twerdahl, Analyst
Perfect. Thanks for taking my questions.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
We...
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from Kelly Motta of KBW. Your line is now open. Please go ahead.
Kelly Motta, Analyst
Hi. Good morning. Thanks for the question. I may circle back to the loan growth side of things. I appreciate the color that you are budgeting or looking for mid-single-digit growth, but it sounded like you were optimistic that perhaps you could do more, can you? One is that was that the right interpretation? And two, where could you see opportunities to do better, or conversely where might there be more pressure?
Aurelio Aleman-Bermudez, President and Chief Executive Officer
The mix of prior years has seen double-digit growth in the consumer segment. We expect demand to reduce gradually. Obviously, the larger the portfolios, the repayments are larger too. So, we don't see double-digit growth in the consumer world this year. However, we do have the construction portfolio, and we see mid-single-digit growth in the commercial side. The pipeline is healthy and projects for housing supported by CDBG and expansion of businesses are promising. We hope to sustain last year's commercial levels using these factors.
Kelly Motta, Analyst
Got it. That's helpful. And clearly, this quarter growth was impacted by larger pieces. Just wondering, I appreciate the color overall about where new commercial production yields are coming on. Just to be mindful of modeling it as we head into Q1.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
It was on the same level, in fact, probably toward the high side of the range that Orlando mentioned. The commercial mix is very healthy. We observe ample activity in the reconstruction side for housing and some acquisitions of businesses. We see enough volume to sustain commercial levels from last year.
Kelly Motta, Analyst
Got it. And maybe a last housekeeping question from me. It seems like the repricing of the securities is going to be a big part of the story as we head through this year. Can you remind us about where those securities are rolling off at similar to where average security yields are now?
Aurelio Aleman-Bermudez, President and Chief Executive Officer
The average yield on those securities is about 1.5% on a non-taxable equivalent basis. That's basically the average of what's rolling off, which should be close to that.
Kelly Motta, Analyst
Appreciate it. I'll step back. Thank you so much for the color.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
Thank you, Kelly.
Operator, Operator
As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Ramon Rodriguez for closing remarks.
Ramon Rodriguez, Senior Vice President of Corporate Strategy and Investment Relations
Thanks to everyone for participating in today's call. We will be attending the KBW Financial Services Conference in Boca on February 15, Bank of America's Conference in Miami on February 21, and Raymond James Institutional Investor Conference in Orlando on March 5. Looking forward to seeing a number of you at these events as we greatly appreciate your continued support. Have a great day. Thank you.
Aurelio Aleman-Bermudez, President and Chief Executive Officer
Thank you.
Orlando Berges-Gonzalez, Executive Vice President and Chief Financial Officer
Thank you, all.
Operator, Operator
Ladies and gentlemen, thank you for joining us on today's call. Have a great rest of your day. You may now disconnect your lines.