First BanCorp. Q1 2024 Earnings Call Transcript

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April 23, 2024

There are 6 speakers on the call.

Operator

Hello, everyone, and welcome to the First Bancorp First Quarter 20 24 Financial Results Call. My name is Seb, and I'll be the operator for your call today. I will now hand the floor over to Ramon Rodriguez to begin the call. Please go ahead when you're ready.

Speaker 1

Thank you, Seth. Good morning, everyone, and thank you for joining FirstBank Corp's conference call and webcast to discuss the company's financial results for the Q1 of 2024. Joining you today from FirstBank Corp are Ariel Eman, President and Chief Executive Officer and Orlando Vergas, 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.

Speaker 1

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 fppinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Speaker 2

Thank you, Ramon. Good morning to everyone and thanks for joining our earnings call today. Let's move to Page 4 of the slide to discuss the highlights. We're definitely very pleased to start the year with another quarter of strong operating results. We posted a strong return asset of 1.56%, increased pretax pre provision income to 111,000,000 dollars and we continue to do what I consider a nice job managing our expenses, resulting in an efficiency ratio of around 52%.

Speaker 2

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 their continued support. Consistent with guidance, we grew loans by 4% on a linked quarter basis, mostly driven by healthy commercial and our 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 $47,000,000 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 rates.

Speaker 2

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, which should be margin accretive for the year like in the case of this quarter, those cash flows were reinvested into a loan portfolio. NPAs were slightly up by $4,000,000 to 69 basis points of total assets, primarily due to negative migration of the $10,000,000 case in the U. S. Operation, partially offset by decreases in the OREO balances. We continue to have a high demand.

Speaker 2

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 the for our main core businesses. During the quarter, we did increase our quarterly dividend by 14% to $0.16 per share and they repurchased $50,000,000 in common share. We still have $100,000,000 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 Q2 earnings during July.

Speaker 2

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 is driving economic and construction activity in the island. For the 1st couple of months of the year, about EUR 800,000,000 of disaster relief funds were dispersed. When we look at the overall economy, labor market remains in good shape.

Speaker 2

Consumer sentiment is positive. Business activity is very stable or increasing and tourism continues at record levels. In terms of the franchise, we continue to make our progress in our omnichannel strategy by levering the size 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 franchisee investment will be broad 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 partner with cloud banking pioneer Encino to deliver a more modern and convenient commercial banking experience to our clients.

Speaker 2

This deployment will be complemented by efforts that I mentioned before, multiyear 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 detail. Thank you.

Speaker 3

Good morning to all. Well, as Aurelio mentioned, we started the year posting strong operating results. We earned $73,500,000 for the quarter, which is $0.44 per share. That compares to $79,500,000 last quarter or $0.46 a share. This, as he also mentioned, translates into a $1.56 return on average assets, which strong return.

Speaker 3

Our adjusted pretax pre provision increased slightly to $110,500,000 from $110,000,000 we had last quarter. The provision for credit losses on the quarter was $12,200,000 that's $6,600,000 lower than last quarter and that's largely driven by $9,500,000 in recoveries we achieved on the sale of previously charged off consumer loans. Also during the quarter expenses were down $5,700,000 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 Q1 was 24.3%, which is very similar to the 23.5 percent we achieved for 2023. In terms of net interest income, we saw a quarter where net interest income reached $196,500,000 which is relatively flat, just slightly down from last quarter.

Speaker 3

But this quarter had one less pay that represented $1,100,000 reduction in net interest income otherwise we would have been up from last quarter. The loan portfolios grew $200,000,000 on average and the yields on the portfolio also improved. That led to a $5,000,000 increase in net interest income, which was offset obviously by a number of days, which impacted by 1,800,000 the interest income on the loan portfolios. For a net increase in the portfolios of $3,200,000 The yield on earning assets went up 10 basis points during the quarter. Part of it is that change in mix as Aurelio was mentioning.

Speaker 3

In the case of interest expense, the increase of expenses was $5,000,000 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 $178,000,000 higher average balances of broker seat deposits. That increased expenses by $2,200,000 Also customer time deposits grew on average $100,000,000 and the cost increased 22 basis points for a EUR 2,100,000 increase in interest expense. Time deposits, as Aurelio also mentioned, we expect to continue to increase. However, broker deposits are already down $58,000,000 at the end of March as compared to where we were in December.

Speaker 3

During this quarter, we did experience an easing 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 betas are at or very near what their peak level 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.

Speaker 3

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 Q2 about $150,000,000 and through the end of the year another 7 $50,000,000 most of it being maturities, which happened in the second half of the year of $483,000,000 In terms of non interest income, it was fairly flat. We did have $3,100,000 that we collected on annual contingent insurance commission this quarter. But last quarter, we had a $3,000,000 gain we achieved on the sale of a bank premise in the Florida region, so they offset each other.

Speaker 3

So we had slight increase on fee based income on other transactions. Operating expenses for the quarter are 5 point $7,000,000,000 lower. The 4th quarter expenses were 126,600,000 and now it's 3rd 1st quarter expenses are $120,900,000 Last quarter did include the $6,300,000 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 $120,000,000 in the Q1 of 2024, which is $300,000 higher than last quarter. What we had in the quarter was employee compensation increasing $3,900,000 basically a typical increase in payroll taxes at the beginning of each year and also the impact of stock based compensation in the Q1.

Speaker 3

On the other hand, however, business promotion was down $2,900,000 based on projected business promotion activities. The quarter did see we did see additional gains on OREO. We achieved $1,500,000 gain on OREO. We exclude these OREO gains expenses for the quarter were within the $120,000,000 to $122,000,000 guidance that we had provided in the prior quarter and we continue to maintain such guidance for the 2nd quarter. As Aurelio mentioned, efficiency ratio for the quarter was 52.5%, but if we exclude the special assessment, the AVEVA special assessment, it would have been 52.1%, which is also in line with our guidance of 52%.

Speaker 3

And we assume that no meaningful changes on net interest income and efficiency ratios will continue to hover around the 52% target. In terms of asset quality, NPAs increased $3,700,000 during the quarter to 129,600,000 dollars which represents 69 basis points on total assets. The increase was driven by the migration of a 10 $500,000 commercial loan participation in the Florida region. That was offset by reductions of $3,800,000 in OREO and $1,900,000 in repossessed autos. The inflows were up $11,900,000 to $46,800,000 a lot driven by that $10,500,000 case I just mentioned on the Florida region.

Speaker 3

We also had some increases of $3,100,000 in consumer inflows consumer loan inflows. On the other hand, loans in early delinquency declined $17,100,000 to 133,700,000 with reductions of $15,500,000 in consumer loans, mostly auto and $4,000,000 in residential mortgage reductions in residential mortgage delinquencies. The allowance stood up at $263,000,000 at the end of the quarter, which is up $1,800,000 versus prior quarter, but the coverage remained relatively flat at 2.14%, just one basis point lower than last quarter. Net charge offs were CAD 11,200,000, dollars which is 37 basis points of average loans. Obviously, net of the 9,500,000 recovery from the sale of the fully charge off consumer loan.

Speaker 3

If we were to exclude this recovery, the annualized net charge off rate for the quarter was 68 basis points versus 69 basis points in the 4th quarter. On the capital front, Aurelio made reference already, regulatory ratios remain strong, significantly above well capitalized level. 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, dollars 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 intangible book value and over 300 basis points on the tangible common equity ratio.

Speaker 3

And as we have mentioned before, assuming stable rates, we will continue to recover the adiocerra losses based on the share duration that we have on the portfolio. With this, I would like to open the call for questions.

Operator

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

Speaker 4

Hey, good morning.

Speaker 2

Good morning, Alex.

Speaker 4

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 $1,000,000,000 lower yielding securities mixing in either into loans or cash or high 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 longer narrative that you alluded to earlier?

Speaker 3

Yes. The expectation assuming rates on start going up, again, which is not the expectation we have, it's right what you mentioned, Alex. It's 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 is going to be some cost increases, but the other chunk of the deposits should stay at similar levels where we are now.

Speaker 3

So the net result would be some additional income on the margin. As we had mentioned before, we were expecting that inflection point to have it 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.

Speaker 4

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?

Speaker 2

Yes, that is still the case. Yes.

Speaker 4

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

Speaker 2

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 product probably yielding down, yes.

Operator

Okay.

Speaker 4

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 of years of loans going from 3 handles up to 7 or 8 handles. When in 2020, 2021, when you guys were putting on commercial real estate loans, were there loans going on with 3 handles? Were they pretty comparable to here? Or were they just structurally just higher yields and therefore less repricing risk on the island?

Speaker 2

I will say that there is less repricing risk. I don't remember booking loans, fixed rate loans at Etrihamden. I don't see we competed on that market. We decided not to compete on that market. So I think we had a slide a prior slide in the presentation or in the investor deck that talks about that describe the repricing risk.

Speaker 2

I'll make sure that slide is put back into it. But we consider that repricing risk fairly low and manageable.

Speaker 4

Good. Thank you for taking my questions.

Speaker 2

Thank you, Alex.

Operator

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

Speaker 5

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.

Speaker 5

But wondering if we're seeing a slowdown in the mix shift that should help somewhat.

Speaker 3

Yes, definitely. What we saw, Kelly, this quarter, if you look at the mix, customer deposits, meaning retail and commercial, excluding time deposits were slightly down, dollars 25,000,000 dollars Time deposits were up $93,000,000 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, dollars 73,000,000 more or less stable kind of 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 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.

Speaker 5

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?

Speaker 3

Okay. Well, I mean the largest component this quarter of change was obviously the insurance contingent commission that happens in the year. Based on that, there is always a level of continued commissions that are paid at the beginning of the following year from the different insurance companies. So that $3,000,000 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.

Speaker 3

So the expectation is sort of stable kind of thing. Obviously, we need to see what's happening with this recent spike in rates. We don't know that's going to affect a little bit the conforming market. But other than that, it's the expectation, it's sort of a continuation of what we saw in the quarter.

Speaker 5

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.

Speaker 5

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?

Speaker 2

Yes, I think we've been covering this topic since last year actually expecting that to happen earlier 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.

Speaker 2

Industry banks, which is driven by what we believe utilization of liquidity by score levels that were artificially higher at 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.

Speaker 2

So whatever you see in the short term, you will see also in the recovery in a very short term.

Speaker 5

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

Speaker 2

Thank you.

Operator

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

Speaker 1

Thank you to everyone for participating in today's call. We will be attending Wells Fargo Financial Services Conference in Chicago on May 14. 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

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

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Key Takeaways

  • FirstBank delivered strong Q1 results with a 1.56% return on assets, $111 million pretax pre-provision income, a 52% efficiency ratio, 4% linked-quarter loan growth and $47 million of deposit growth.
  • The company plans to return over 100% of earnings via dividends and share buybacks, having raised its quarterly dividend 14% to $0.16 per share, repurchased $50 million of common stock and preserving $100 million of buyback authorization.
  • Management cited a positive Puerto Rico economic backdrop—driven by $800 million of early disaster relief disbursements, stable labor markets, rising business activity and record tourism—as a catalyst for loan opportunities.
  • FirstBank is advancing its omnichannel and technology modernization strategy by partnering with Encino to deliver a cloud-based commercial banking platform and migrating core systems off the mainframe.
  • The net interest margin held at 4.16% in Q1, and management expects further margin accretion as over $900 million of maturing securities cash flows are redeployed into higher-yielding assets in a higher-for-longer rate environment.
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Earnings Conference Call
First BanCorp. Q1 2024
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