First BanCorp - Q1 2024

Transcript

Operator (participant)

Hello everyone and welcome to the First BanCorp first quarter 2024 financial results call. My name is Seb and I'll be the operator for your call today. If you would like to ask a question during the call you can do so by pressing *1 on your telephone keypad or press *2 if you would like to withdraw your question. I will now hand the floor over to Ramón Rodríguez to begin the call. Please go ahead when you're ready.

Ramón Rodríguez (Head of Investor Relations)

Thank you Seb. 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 Alemán, 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 Alemán.

Aurelio Alemán (CEO)

Thank you Ramón. Good morning to everyone and thanks for joining our earnings call today. Let's move to page 4 of the slide to discuss the highlights. We're definitely very pleased to start the year with another quarter of strong operating results. We posted a strong return on assets 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 obviously the hard work and dedication of our colleagues and more importantly the trust placed by our clients in our institutions as we continue to support their growth and progress. I'd like to thank all of them for the continued support. Consistent with guidance we grew loans by 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 region 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 in today's 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 maturity investment into higher yielding assets. We should be margin accretive for the year like in the case of this quarter those cash flows were reinvested into the loan portfolio.

NPAs were slightly up by $4 million to 69 basis points of total assets primarily due to a negative migration of the $10 million case in the US operation partially offset by decreases in the OREO balances which continue to have a 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 the 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 did repurchase $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 during July.

Let's turn to slide 5 to provide some additional highlights of the franchise. Well, it's clear that our financial results are a function of a positive economic backdrop that we continue to experience in the island and our disciplined execution of the strategic plan. As we said in the past, the unprecedented level of federal support continues and it's driving economic and construction activity in the island. For the first couple of months of the year, about $800 million of disaster relief funds were disbursed. When we look at the overall economy, labor market remains in good shape, consumer sentiment is positive, business activities is very stable or increasing, and tourism continues at record levels.

In terms of the franchise we continue to make our progress in our omnichannel strategy by leveraging our size and the relationship-centric business model to achieve ideal balance between providing value-added advice to our clients while enabling the most convenient digital and also self-service options. We believe that to continue growing our fair share of the market we serve the franchise investments must be brought and continue with the goal of continuing to providing the best client experience whether it's on-site delivery or the digital channels which we are investing in both. In terms of priorities over the coming months we're very excited to have partnered with cloud banking pioneer nCino to deliver a more modern and convenient commercial banking experience to our clients.

This deployment will be complemented by efforts that I mentioned before, multi-year efforts that we began in 2023 to migrate our core systems and mainframe to cloud-based and open systems environment. It's part of our technology modernization progress which we feel very proud about it. 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 growing our market share, and returning excess capital when warranted. With that, I will turn the call now to Orlando to go over more financial details. Thank you.

Orlando Berges (CFO)

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 as he also mentioned translates into a 1.56% return on average assets which is 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. That's $6.6 million lower than last quarter and that's largely driven by a $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 the FDIC deposit special assessment that was recorded in the prior quarter as 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, but this quarter had one less day that represented $1.1 million reduction in net interest income. Otherwise we would have been up from last quarter. The loan portfolios grew $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 obviously by a number of days which impacted by $1.8 million the interest income on the loan portfolios. For a net increase in the portfolios of $3.2 million. The yield on earning assets went up 10 basis points during the quarter.

Part of it is that change in rates as Aurelio was mentioning. In the case of interest expense the increase of expenses was $5 million based on average balances and the 10 basis points increase in cost but that was also offset by $800,000 impact on the number of days in the quarter. If we look at that increase in interest expense it's mostly related to $178 million higher average balances of brokered deposits. That increased expenses by $2.2 million. Also customer time deposits grew on average $100 million and the cost increased 22 basis points for a $2.1 million increase in interest expense. Time deposits as Aurelio also mentioned we expect to continue to increase. However brokered deposits are already down $58 million at the end of March as compared to where we were in December.

During this quarter we did experience a mild easing on the pricing pressure on customer deposits. The cost of public funds increased 4 basis points during the quarter and the cost of other interest-bearing deposits excluding broker and time decreased 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 but not at the beginning of the year like we had assumed originally. That suggests that the cumulative deposit beta are at or very near what their peak levels should be assuming rates don't start to go up again. 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 also 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 investment portfolio cash flows over the next quarter to be approximately in the second quarter about $150 million and through the end of the year another $750 million most of it being maturities which happened in the second half of the year of $483 million. In terms of non-interest income it was fairly flat. We did have $3.1 million that we collected on annual contingent insurance commission this quarter but last quarter we had a $3 million gain we achieved on the sale of a bank premises in the Florida region so they offset each other. So we had slight increase on fee-based income on other transactions.

Operating expenses for the quarter are $5.7 million lower. The fourth quarter expenses were $126.6 million and now it's first quarter expenses are $120.9 million. Last quarter did include the $6.3 million special assessment from the FDIC that I mentioned before while this quarter included an additional $900,000 related to the assessment. If we were to exclude the assessment expenses were $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 $3.9 million. Basically the typical increase in payroll taxes at the beginning of each year and also the impact of stock-based compensation in the first quarter. On the other hand however business promotion was down $2.9 million based on projected business promotion activities. The quarter did see we did see additional gains on OREO. We achieved $1.5 million gain on OREO.

If we exclude these OREO gains, expenses for the quarter were within the $120 million-$122 million guidance that we had provided in the prior quarter and we continue to maintain such guidance for the second quarter. As Aurelio mentioned, the efficiency ratio for the quarter was 52.5% but if we exclude the special assessment, the FDIC special assessment, it would have been 52.1%, which is also in line with our guidance of 52% and we assume that no meaningful changes on net interest income, the efficiency ratios should continue to hover around the 52% target. In terms of asset quality, NPAs increased $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.

That 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 a lot driven by that $10.5 million case I just mentioned on the Florida region. We also had some increases of $3.1 million in consumer inflows consumer loan inflows. On the other hand loans in early delinquency declined $17.1 million to $133.7 million with reductions of $15.5 million in consumer loans mostly auto and $4 million in residential mortgage reductions in residential mortgage delinquencies. The allowance stood at $263 million at the end of the quarter which is up $1.8 million versus prior quarter but the coverage remained relatively flat at 2.14% just 1 basis point lower than last quarter.

Net charged-off were $11.2 million which is 37 basis points of average loans obviously net of the $9.5 million recovery from the sale of the fully charged-off consumer loan. If we were to exclude this recovery the annualized net charged-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. Our regulatory ratios remain strong significantly above well-capitalized levels and we have continued with our capital distribution plans through 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 an increase on the adjusted other comprehensive loss component from the fair value of the securities.

As of March, the adjusted other comprehensive loss represents $3.88 of tangible book value and over 300 basis points on the tangible common equity ratio. As we have mentioned before, assuming stable rates, we will continue to recover the adjusted losses based on the short duration that we have on the portfolio. With this, I would like to open the call for questions.

Operator (participant)

Thank you. If you would like to ask a question please press star one on your telephone keypad or press star two if you'd like to withdraw your question. Our first question comes from Alex Twerdahl from Piper Sandler. Please go ahead.

Orlando Berges (CFO)

Hey, good morning.

Alexander Twerdahl (Analyst)

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

Orlando Berges (CFO)

Yeah, the expectation, assuming rates don't start going up again, which it's not the expectation we have, 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. So the net result would be some additional pickup on the margin. As we had mentioned before, we were expecting that inflection point to happen as towards the end of last year, beginning of this year, and we're starting to see a bit of that based on the way rates are moving.

Alexander Twerdahl (Analyst)

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 distributions or disbursements this year. Is that still the case?

Orlando Berges (CFO)

Yeah that is still the case. Yeah.

Alexander Twerdahl (Analyst)

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

Aurelio Alemán (CEO)

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 mortgage flat, and some of the other unsecured consumer products probably yielding down. Yeah.

Alexander Twerdahl (Analyst)

Okay. And then I just wanted to ask one of the concerns here 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 years of loans going from three handles up to seven or eight handles. When in 2020, 2021 when you guys were putting on commercial real estate loans were there loans going on with three handles? Were they pretty comparable to here or were there just structurally just higher yields and therefore less repricing risk on the island?

Aurelio Alemán (CEO)

I will say that there is less repricing risk. I don't remember booking loans fixed rate loans at 300. I don't see we competed on that market. We decided not to compete on that market so I think we had a slight prior slide in the presentation or in the investor deck that talks about that described the repricing risk. I'm not sure that slide is pulled back into it but we consider that repricing risk fairly low and manageable.

Alexander Twerdahl (Analyst)

Good. Thank you for taking my questions.

Aurelio Alemán (CEO)

Thank you Alex.

Operator (participant)

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

Alexander Twerdahl (Analyst)

Hi, thank you so much for the question. One bright spot this quarter, it looks like net interest non-interest-bearing deposits has stabilized somewhat. As you look ahead, do you think there's 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 wondering if we're seeing a slowdown in the mix shift that should help somewhat.

Orlando Berges (CFO)

Yeah, definitely. What we saw, Kelly, this quarter—if you look at the mix—customer deposits, meaning retail and commercial, excluding including time deposits, were slightly down $25 million. 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. The public funds did increase this quarter $73 million, more or less. A stable kind of a size of the portfolio—a little bit up, a little bit down—every month depending on the operations of the different entities. But our expectation is that there is going to be stability in the deposit side this year as compared to what we saw 2022 and 2023 where we saw a lot of money going into the Treasury markets and so.

Alexander Twerdahl (Analyst)

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

Orlando Berges (CFO)

Okay. Well I mean the largest component this quarter of change was obviously the insurance contingent commission. That happens in the first quarter of each year. It doesn't repeat through the year. It's a function of volumes originated through the year. Based on that there is always a level of contingent commissions that are paid at the beginning of the following year from the different insurance companies. So that $3 million is not something that we're going to see in every quarter but we saw more originations with rates being at a better level in terms of conforming paper that could be sold. So the expectation is sort of a stable kind of thing. Obviously we need to see what's happening with this recent spike in rates.

We don't know if that's going to affect a little bit the conforming market but other than that the expectation is sort of a continuation of what we saw in the quarter.

Alexander Twerdahl (Analyst)

Got it. Super helpful. Maybe last question for me. I feel like after last quarter there was an investor focus on particularly consumer in Puerto Rico with you and your peers talking about some normalization there. But it looks like you guys were able to realize a nice recovery on some previously charged-off loans. Just 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?

Aurelio Alemán (CEO)

Yeah, I think we've been covering this topic since last year, actually expecting that to happen early last year as the excess liquidity provided by the pandemic into the consumer accounts was moving out or being utilized. So that started to happen more in the second half of last year. Still normalization 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 it's very similar to what happened in the U.S. industry banks, which is driven by what we believe utilization of liquidity by score levels that were artificially higher or underwriting in some of the cases. So we expect that to continue. I think it's important to understand in 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 see also in the recovery in a very short term.

Alexander Twerdahl (Analyst)

Got it. Helpful. I'll step back. Thank you so much for the time.

Aurelio Alemán (CEO)

Thank you.

Operator (participant)

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

Ramón Rodríguez (Head of Investor Relations)

Thank you to everyone for participating in today's call. We will be attending 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.

Operator (participant)

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