Earnings Call Transcript - FBP Q3 2024

Operator, Operator

Good morning all. And thank you all for attending the First BanCorp Q3 2024 Financial Results Conference Call. My name is Brica and I will be your moderator for today. I would now like to pass the conference over to your host, Ramon Rodriguez, Investor Relations Officer at First BanCorp. Thank you. You may proceed, Ramon.

Ramon Rodriguez, Investor Relations Officer

Thank you, Brica. Good morning, everyone. And thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the third quarter of 2024. Joining me 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, CEO

Thank you, Ramon. And good morning, everyone, and thank you for joining our call today. This morning, we reported another strong quarter for our franchise, earning $73.7 million in net income or $0.45 per share, which resulted in a solid return on assets of 1.55%. Adjusted pretax pre-provision was slightly down to $112 million, mostly due to an increase in expenses as we have discussed before. Still, the organization continues to operate in the 52% efficiency ratio range in line with our guidance. Credit demand continues to be healthy in our environment, resulting in actually our strongest quarter of commercial loan originations for the year. Our loan portfolio grew by $63 million despite higher levels of unexpected commercial prepayments that amounted to approximately $102 million in the third quarter. Even though we continue to see a very strong pipeline, we continue to work towards our 5% loan growth guidance, but we now expect our loan portfolio to grow closer to 4% in 2024, and that’s primarily driven by the higher than forecasted prepayments that I just referred to. In terms of deposits, market dynamics seem to be behaving as expected at the start of this easing cycle. Core deposits, other than broker and government deposits, remained at $12.7 billion. We did prepay some broker CDs, with most of the decline coming from noninterest-bearing deposits. We're proactively monitoring deposit flows and potential deposit pricing opportunities as we capitalize on the expected rate environment, which started and will continue in 2025 with our target of achieving NII improvement over the period. Asset quality also improved during the quarter with nonperforming assets coming down to just 63 basis points of total assets. We think the coming rate environment should be favorable to commercial customers and bodes well for additional asset quality improvement. Finally, our liquidity and capital position remain quite strong. This quarter, we were able to sustain our commitment to deliver 100% of earnings in the form of capital actions by redeeming $50 million of our outstanding debentures and paying $26.3 million in common dividends. Even accounting for these actions, our capital ratios improved during the quarter, and our tangible book value per share grew by 15%, benefiting from the rate backdrop and the short duration of our bond book. We enjoy a nice degree of capital flexibility and expect to deploy it in a market that best suits the long-term interest of the franchise. Let's turn to Page 5 to talk a little about the environment. We continue to experience what we consider a stable and positive economic backdrop; it’s reflected in a good quarter of originations and also in the trends of asset quality. September employment in Puerto Rico just came out at 5.5%, the historical lowest in 1976, and also reflecting year-over-year payroll employment improvement of 1.6%. Our team remains focused on expanding executive relationships, building the commercial loan pipeline, and our new platform technology. We launched in September our nCino platform, which provides a completely digital experience in the commercial lending workflow. We continue to generate a lot of organic capital and our priority is to fund loan growth and continued franchise investment in technology to better serve our customers while deploying excess capital into ongoing accretive balance sheet managing opportunities. We are proud of our third quarter results. We thank all our employees and we look forward to updating you in January on what to expect in 2025. I will now turn the call over to Orlando, and we'll be back to answer some questions. Thank you.

Orlando Berges, CFO

Good morning, everyone. As Aurelio mentioned, we reported $74 million in net income for the quarter, $0.45 a share, which compares to $76 million or $0.46 a share last quarter. The provision for the quarter increased $3.6 million to provide for increases required in the allowance for credit losses on the consumer loan portfolios based on charge-off trends and the size of the portfolio. We also had slight reductions in the effective tax rate; the relationship of predicted taxable income versus income changed a bit from what we had before. Net interest income for the quarter was $202.1 million, which increased $2.5 million as compared to last quarter. This quarter, we did have an additional day, resulting in approximately $1.2 million improvement in net interest income. We also had increases of $3.8 million in interest income on loans. However, on the other hand, the investment portfolio income was down $1 million as we continue to see repayments and maturities coming in. Loan yields were down 1 basis point. We did have a small impact from the 50 basis point reduction in September. Obviously, the lower yields will affect the deals on the floating rate component of the portfolio. Overall, cost of funds, however, remained flat in the quarter. Net interest margin expanded 3 basis points to 4.25%, mostly reflecting the change in the asset mix from the deployment of the cash flows from the lower yielding investment securities to fund higher yielding loans and bring down the wholesale funding cost. Regarding net interest margin going forward, we expect the margin to be flat, similar to this quarter, in the fourth quarter of '24 with improvements going into '25. Our expectation is that rates will come down an additional 50 basis points this year and probably 125 basis points in 2025. However, the impact of the downward repricing of the commercial floating rate portfolio will be compensated by the repricing of the cash flows from the lower yielding investment portfolio and the repricing of deposits, which typically have a lag in the repricing component. Additionally, we have been repurchasing subordinated debentures with higher costs, and we have let some broker CD maturities go. Those are higher cost funding, as well as any new renewals would be done at a lower cost. This will improve the margin. In terms of the securities, our estimates indicate that we will see another $480 million of repayments and maturities in the portfolio in the fourth quarter of '24 and approximately $350 million in the first quarter of '25. The repricing of these cash flows, either through loans or securities, will be evident in the first half of 2025. Other income was fairly flat this quarter. We did collect an older insurance claim for $100,000 and entered it into other income. Otherwise, our performance remained fairly stable. Expenses were $122.9 million, which is $4.3 million higher than last quarter. OREO gains this quarter were $1.3 million compared to $3.6 million last quarter. Last quarter, we sold a large commercial OREO that had been on the books for a while, realizing a $2.3 million gain on that sale, which was not replicated this quarter. If we exclude OREO, expenses for the quarter were $124.3 million, which compares to $122.3 million last quarter. This increase includes about $1.6 million in higher personnel costs related to merit increases and the additional payroll day in the quarter. We also saw increases in consulting costs related to some of the technology projects like the nCino project Aurelio just discussed. We had higher electricity costs and higher rental expenses because we're charging to expense over the last four months of the year the remaining rental agreement of one branch that will close at the end of December. As Aurelio mentioned, our efficiency ratio continues to hover around 52%. Based on the current stage of several ongoing technology projects, we estimate that our expense base for the next couple of quarters will be in the $123 million to $124 million range, slightly higher than before, but we will provide more guidance for 2025 as the year ends and we report our full-year results. In terms of asset quality, we had a reduction in nonperforming loans of $7.8 million, which now represents 63 basis points of total assets. The reduction was mostly due to the sale of an $8.2 million accrual commercial loan that we had in Puerto Rico. Inflows to nonperforming loans were down $5.3 million. Commercial loan inflows were $17 million lower, but consumer loans increased by $10.5 million. You might remember that the second quarter inflows included a $16.5 million commercial relationship in Puerto Rico that was migrated to nonperforming. On the other hand, loans in early delinquency registered a decrease of $4 million. The decrease in the consumer loan portfolio was almost $8 million, exactly $7.9 million, while the commercial portfolio increased by $4 million. However, this increase in commercial loans was mainly due to a case that matured at the end of the quarter and was in the process of renewal but was up to date in payments, so it will come out from early delinquency now in October. In terms of the allowance for credit losses, it's down $7.5 million to $247 million, with most of the reduction coming from the residential and commercial allowances that declined by $12.9 million thanks to improvements in the macroeconomic forecast and improved financial conditions of several of our commercial borrowers. The allowance on the consumer portfolio did increase by $5.4 million due to recent loss trends. Overall, the ACL ratio is down to 1.98 from 2.06 over the quarter, as we continue to see good credit trends in the commercial and residential mortgage portfolios. Net charge-offs for the quarter were $24 million or 78 basis points of average loans, which compares to 69 basis points last quarter. Included in the charge-offs is $1.2 million from the sale of the commercial nonaccrual loan previously mentioned, representing approximately 4 basis points of the increase. Consumer net charge-offs increased by $1 million over the quarter compared to the third quarter. On the capital front, regulatory ratios increased, and we continue to remain significantly above the well-capitalized levels. We did deploy, as Aurelio mentioned, 100% of earnings into the junior subordinated debenture repurchase we executed this quarter, as well as the payment of common dividends. However, capital did increase due to the excess of earnings over the dividends. The tangible book value per share increased by 15% to $10.09, and the TCE ratio reached 8.79%, mostly a combination of the $160 million increase in the fair value of the securities alongside the earnings for the quarter. Still, we have remaining AOCL on the books, representing around $2.92 of tangible book value and over 230 basis points of the TCE ratio. We will continue with our capital deployment in a manner that serves the best interests of franchises, shareholders, and in accordance with our capital plans. This concludes our prepared remarks. Operator, would you please open the call for questions? Thank you.

Operator, Operator

We have the first question on the line from Timur Braziler with Wells Fargo.

Timur Braziler, Analyst

My first question is around the balance sheet. Just wondering what your thoughts are around when the balance sheet can actually start increasing here. And then as it relates to NII, in the release, it sounded a little cautious for NII growth in '25 being driven by bond and cash flow reinvestment. I'm just wondering what the correlation is between the ability to grow the balance sheet and grow NII in '25 is?

Orlando Berges, CFO

There are two aspects to consider. The cash flows will continue to come from the investment portfolio and will continue to reprice. As of now, most of that cash flow has been reinvested in loans or remains in cash; that's why the balance sheet is not necessarily growing. We will continue to allocate funds into loans. As Aurelio mentioned, we're expecting around 4% growth this year, which will keep the balance sheet stable until we determine that the investment portfolio size is at a level that meets our liquidity needs and for collateral purposes. At that point, we will start reinvesting some of that money, leading to growth on the balance sheet. As I mentioned, some broker CDs that we had on the books that mature are being rolled off because they represent high-cost funds. Currently, we still have good liquidity coming from the investment portfolio, so we don't necessarily need to increase the balance sheet to maximize earnings, but that's something we should start witnessing in the latter part of 2025.

Timur Braziler, Analyst

So that latter part of 2025, is that kind of corollary to when you're expecting that deposit growth as well, or could we see some incremental deposit growth here in the near term?

Orlando Berges, CFO

Yes, deposit growth has been somewhat flat, either a little bit up or a little bit down. When I talk about deposit flow, I typically exclude broker and government deposits. Brokers we decide when we want a little bit more or less. Some of it is being utilized to fund the Florida operations. So we manage that, and government deposits form a stable base. So it fluctuates a little. Overall, looking at the other deposits, there was a slight decline this quarter of around $36 million to $37 million. We had a slight shift between interest and noninterest-bearing accounts. We feel that the market, in general, will remain mostly unchanged but may grow a bit. However, we do not expect significant growth in the deposit portfolios. The reinvestment of the interest component typically increases the portfolios in the market, but clearly, the market has diminished in terms of liquidity, with most of the funds that were allocated now depleted. What remains are various programs we've discussed related to FEMA aid and certain pandemic-driven infrastructure funds, which are still entering the market and contributing to construction-related funding.

Timur Braziler, Analyst

And then just last for me, it looks like although Puerto Rican banks this quarter had an uptick in some consumer credit. I'm just wondering about the broader health of the consumer there. Have we kind of troughed out from some of the pandemic benefits? And I guess what are we looking at now for general consumer trends on the island?

Aurelio Aleman, CEO

I think we talked about normalization. Early in the year, we talked about 2020, actually starting this discussion back in 2023. The post liquidity increase on the consumer side due to the pandemic has been moving forward, and we anticipated some normalization in consumer portfolio behavior starting with credit cards in 2023 and continuing into 2024. What we see now is that we're reaching a peak, and going forward, as we observe in some early delinquency metrics, there are indications of slight improvements. This is coupled with developments in demand. We are not increasing our risk appetite, and we have stringent metrics in place for each portfolio and goals for delinquency and losses tolerance. I would say we expect stability from that portfolio with some delinquency and loss improvement over 2025.

Operator, Operator

Your next question comes from Steve Moss with Raymond James.

Steve Moss, Analyst

Maybe just starting here on the securities portfolio. I heard you, Orlando, mention the $350 million maturing in the first quarter of 2025. Just wondering about expected cash flows beyond the first quarter.

Orlando Berges, CFO

The $480 million this quarter and $350 million in the first quarter, combined with projections for full 2025, we'll estimate a total cash flow from maturities and repayments at somewhere between $1 billion and $1.1 billion, including the $350 million maturing in the first quarter.

Steve Moss, Analyst

And the coupon on that, I’m assuming it's around 2% plus or minus?

Orlando Berges, CFO

The coupons are slightly lower. The maturing component is likely going to be somewhere between 150 and 160. The overall yield is around 180 to 190, but some elements will not mature until later in '26 and '27.

Steve Moss, Analyst

And then in terms of the Fed rate cut, can I get your sense on the pace of deposit repricing, particularly with the 50 basis point cut?

Orlando Berges, CFO

Deposit repricing must be analyzed in three components. For typical noninterest-bearing accounts, we expect a beta of about 13% to 14%. On the government side, we expect betas around 78%. Those are likely to decrease slightly compared to that 78% that we've seen. As for time deposits, we have already started adjusting some rates on new issuances. The repricing of terms will take effect as those terms evolve. Historically, the average time deposit fluctuated mostly between one to one and a half years, so it does not take long to start repricing, but we've already begun repricing our table rates for those terms going forward. I believe there will be a lag on the typical deposit portfolios regarding repricing. That's why I mentioned we expect the margin for the fourth quarter to be similar to that of the third quarter since some repricing on the lending side, particularly with the floating-rate portfolio, will occur quicker than on the deposit side. We are also mitigating some of those high-cost broker CDs that do not have long-term obligations being repriced at lower rates or eliminated entirely.

Steve Moss, Analyst

Regarding commercial originations, they remain quite strong. Where are you seeing the most demand? It sounds like the pipeline has improved, indicating an uptick is coming in total originations for the fourth quarter.

Aurelio Aleman, CEO

On the commercial side, there is a combination of construction deals that continue moving into the portfolio, some related to CDBG projects. There are transactions emerging from the auto industry that are also being added to the book as new deals, along with C&I components on the commercial side. We're actively looking for new clients in various sectors, including distribution and supermarkets. There is also some government activity expected during the quarter. Florida is continuing to be a significant contributor to that commercial pipeline. The consumer side, we would describe as stable rather than experiencing significant growth at this moment.

Operator, Operator

We now have Frank Schiraldi with Piper Sandler.

Frank Schiraldi, Analyst

Could you remind us about the general lag on the deposit side, particularly concerning public sector deposits, which make up a significant part of that index? Is it still reasonable to expect a one-quarter lag in the reduction of costs for those public sector deposits?

Orlando Berges, CFO

On average, yes, that's true. While some will adjust quickly, others have longer lags based on the type of account. So, the average of a one-quarter lag remains a good proxy, Frank.

Frank Schiraldi, Analyst

In terms of loan growth, you mentioned prepayments in the quarter, so close to 4% this year. With a stronger pipeline, is mid-single digits still a reasonable expectation for future loan growth in the coming quarters?

Aurelio Aleman, CEO

I would say yes. Obviously, that was our goal this year, which has been hampered by higher-than-expected prepayments. However, the origination volumes are in line with our projections for the next year. Based on our observations and the economic activity, a mid-single digit growth for next year seems reasonable.

Frank Schiraldi, Analyst

Lastly, Orlando, you mentioned expectations on expenses over the next couple of quarters. I want to confirm that the $123 million to $124 million is for both 4Q and beyond. When considering your targeted efficiency ratio of 52%, should we assume that it ticks up slightly in the near term given expense guidance, and then you will get back to that 52% over time?

Orlando Berges, CFO

The $123 million to $124 million range is what we estimate based on the progress of some of these projects, applicable for both the fourth quarter of '24 and the fourth quarter of '25. This, of course, excludes any OREO items. We are still seeing some positive numbers coming from the OREO portfolio, which would offset some expenses. As you observed this quarter, we reported $1.3 million in OREO gains, which would be accounted for. That’s part of the 52% target ratio. This is why we feel, with a pickup in earnings from the repricing of the investment and loan portfolios and those expense levels, we can maintain that target efficiency ratio of 52%. If you exclude OREO, it may be a bit higher in the first couple of quarters.

Operator, Operator

We have our final question on the line from Kelly Motta with KBW.

Kelly Motta, Analyst

I was hoping you could expand a bit more on capital return. I know you did the sub debt repurchase this quarter. Historically, you've paid out about 100% of earnings. Wondering your thoughts on stepping back in here with the buyback and if paying out earnings given 16% plus CET1 seems to be a reasonable expectation as we look out to next year.

Aurelio Aleman, CEO

As I mentioned earlier, Kelly, we like to keep our options open. Therefore, we still have a capital plan that supports plenty of space for execution. In the last quarter, we decided to focus on dividends. This quarter, we'll assess the situation moving forward. We aim to maintain the 100% payout goal through to 2025, but that could potentially change as we progress into 2025.

Kelly Motta, Analyst

Can you remind us what happened with the Virgin Islands? I know there was some deposit outflow, and that's where the commercial prepayment was. Just wondering if there's anything unique going on that drove that variance on both sides of the balance sheet this quarter, and how we should view that going forward?

Orlando Berges, CFO

In the Virgin Islands, there are two factors at play. We experienced a repayment on the government side, where funds were used to rebate some lines. That contributed to a decrease in deposits. Additionally, it’s worth noting a seasonality effect that typically occurs in the third quarter in the Virgin Islands; there's a slow season. If we look back at the third quarter of last year, we saw about a $60 million decline from June to September, while this quarter showed a reduction of approximately $50 million. The island's economy has a substantial tourism component, which slows down this quarter. The variations we are observing are consistent across different business sectors and retail components and do not translate to any unusual activity, similar to what we experienced last year.

Kelly Motta, Analyst

Most of my questions have been asked and answered at this point. I guess on mortgage banking, with the move in rates, do you expect that revenue line to pick up as we look ahead?

Aurelio Aleman, CEO

Yes, I believe the monthly applications reported in the market are a good proxy. The industry aligns with interest rate changes, and so do we. We maintain a solid market share concerning overall origination, and some shifts between conforming and nonconforming are taking place based on interest rates. I would characterize the portfolio as stabilized with some growth this year, driven by more nonconforming paper influenced by interest rates. Should rates decrease on the conforming side, we expect that element to increase, or conversely, should rates rise. Overall, the health of the portfolio is strong, and we have achieved the best asset quality we've ever maintained in this business line. Any opportunities to expand will likely be pursued next year.

Operator, Operator

I can confirm that has now concluded today's question-and-answer session. I would like to hand it back to Ramon Rodriguez for some final remarks.

Ramon Rodriguez, Investor Relations Officer

Thanks to everyone for participating in today's call. We will be attending Hovde Financial Services Conference in Miami on November 7th and Piper's Conference in April on November 14th. We look forward to seeing many of you at these events and we greatly appreciate your continued support. Have a great day.

Operator, Operator

Thank you all for joining today's conference call with First BanCorp. I can confirm today’s call has now concluded. Please enjoy the rest of your day, and you may now disconnect from the call.