First Bancorp

NYSE:FBP

Earnings Call Analysis

First BanCorp Q3 2023: Stable Growth & Efficient Operations

First BanCorp reported a solid third quarter in 2023, with net income rising to $82 million, translating to a robust 1.72% return on assets. While net interest income saw a slight dip, costs were well managed with total expenses at $160 million, resulting in an industry-leading efficiency ratio of 50.7%. Loan portfolio growth was sturdy at an annualized rate of 6%, reaching $12 billion, reflecting both a vibrant economic environment and focused sales execution, with mid-single-digit growth anticipated. The bank's total deposits decreased modestly, impacted by external factors such as the migration to higher-rate options, yet commercial deposit balances stabilized. The Puerto Rican economy displayed vigor, marked by a peak in the Economic Activity Index over eight years and robust consumer adaptation despite a challenging rate environment. Looking ahead, the bank projects to sustain share buybacks and capitalize on its resilient risk framework to support customers.

Stable Quarter Amidst Market Shifts

In the latest quarter, the company has maintained a robust stance, realizing a net income of $82 million, translating to $0.46 per share, and posting an impressive return on asset of 1.72%. Despite some upward pressure on deposit pricing leading to a slight decrease in net interest income, expenses hewed closely to guidance at $160 million. The company's efficiency ratio, an indicator of its cost management performance, stood at a competitive 50.7%.

Asset Quality and Loan Growth

Nonperforming assets (NPA) saw a marginal uptick due to a single commercial loan, but remain at multiyear lows at 70 basis points of total assets, reflecting solid asset quality. Concurrently, the loan portfolio grew by 6%, driven by sound commercial and consumer loan origination, which aligns with the mid-single-digit growth guidance. This growth is a reflection of increased business and economic activity on the island and successful regional sales strategy implementation.

Share Repurchases and Capital Management

The company continued its share repurchases, buying back $75 million in common shares, which finalized the 2022 capital plan's authorization. Displaying strength in capital and liquidity, they anticipate further repurchases under the 2023 capital plan, affirming the company's commitment to shareholder returns.

Deposit Mix and Strategy

The deposit base, excluding broker and government deposits, saw a decrease, primarily attributed to market liquidity erosion and customer migration to higher yielding options. Nevertheless, this was balanced by stable commercial deposit balances, which still make up 34% of the deposit base in non-interest-bearing deposits, underscoring the company's focus on retaining market share in its core segments.

Yield Changes and Net Interest Margin

Commercial loan yields improved by 24 basis points, partly offset by a rise in interest expense on interest-bearing deposits—a consequence of shifting savings and checking accounts to higher rates and from noninterest-bearing to interest-bearing accounts. The net interest margin decreased slightly to 4.15%, a trend anticipated to normalize moving forward.

Expense Control and Credit Quality

Operational expenses grew modestly by $3.7 million, due largely to salary adjustments. Despite this, the company maintained an efficiency ratio of 50.7%, indicative of its continued discipline in expense management. Credit quality remains robust, with consumer delinquency levels staying below pre-pandemic levels, and an anticipation that delinquency trends will re-align with historical norms as pandemic-induced liquidity recedes.

Capital Ratios and Tangible Common Equity

The tangible common equity ratio witnessed a slight decline to 6.74%, and tangible book value per share decreased to $7.16. However, regulatory capital ratios remained significantly above the threshold for being well-capitalized, attesting to a prudent capital management approach.

Forward-Looking Statements and Economic Context

Management projected stability in net interest margin beginning 2024, leveraging cash flows from their investment portfolio to boost higher-yield loan assets. Puerto Rico's economic indicators, such as the Economic Activity Index reaching an eight-year high, point to a resilient economy, bolstering the prospect of continued loan growth and business expansion. An imminent highway development deal, with local banks financing around $600 million, underscores the positive outlook for 2024 and beyond.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, everyone, and welcome to the First BanCorp Third Quarter 2023 Financial Results. My name is Bruno and I'll be operating your call today. [Operator Instructions]I will now hand over to your host, Ramon Rodriguez, Investor Relations Officer.

[Ramon Rodriguez, executive]

Thank you, Bruno. 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 2023. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; 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 Alemán-Bermúdez, executive]

Thank you, Ramon. Good morning to everyone, and thanks for joining the call today.Please let's turn to Page 4 to go over the financial highlights. We posted another good quarter with $82 million in net income or $0.46 per share, which translated into a fairly strong return on asset of 1.72%. Net interest income registered a slight decrease during the quarter, mainly due to the expected upward pressure on deposit pricing and increase in the mix of interest-bearing deposits to total deposits.Expenses were quite in line with guidance at $160 million, and the efficiency ratio reached 50.7% during the quarter, continue to be very, very top of the industry. These variances were mostly offset by a lower provision for credit losses during the quarter.In terms of asset quality, NPA increased slightly by $9 million during the quarter, primarily attributed to the inflow of a single commercial loan in Puerto Rico. Notwithstanding NPA levels remain at multiyear lows and now represent just 70 basis points of total asset. As anticipated, we believe excess liquidity in the market has continued to taper off, and we're starting to see normalization in delinquency trends. However, they are still way below pre-pandemic levels.On the capital front, we continue the repurchase plan, and we repurchased $75 million in common shares during the quarter. That finalizes the remaining of the authorization under the '22 capital plan. And given strong capital position, liquidity, and outlook for the remainder of the year, we do expect to continue repurchasing shares of common stock during the fourth quarter, but now under the 2023 capital plan authorization.Please let's move to Slide 5 to go over the portfolio. This quarter, we were really pleased with the loan production activity that we experienced across the 3 regions. Total loan increased by 6% on a linked quarter annualized basis and reached $12 billion, healthy levels of both commercial and consumer loan origination.The loan portfolio has been expanding since the third quarter of 2022, reflecting organic growth of over $150 million or 8% increase during this period. Again, our loan growth strategy is supported by the increased business activity and economic activity that we see in the island, particularly in this market, coupled with timely focused execution of the sales teams across the 3 regions.Going forward, we expect loan growth to remain in line with our mid-single-digit growth guidance as we continue to redeploy a portion of the investment portfolio cash flows into higher-yielding assets in the loan portfolio. Also, we do expect the facilities of the construction loan that were approved this year begin to accelerate into disbursements.Let's go over to Page 6 to go over the funding. We're moving in line with industry trends. The recently released deposit market assessment of the FDIC as of June shows an overall contraction in total deposit in Puerto Rico as of June 2023. And our refers are basically reflecting that we are retaining our market share. So we're basically remaining flat to the market.This quarter, other than broker and government deposits, it decreased $159 million or 1.2%. Again, this reduction primarily driven by erosion of liquidity in the overall market and migration to -- of retail customer to higher rate options actually outside the traditional banking sector, I would say, particularly credit unions and the U.S. treasury market. On the other hand, that was offset by stabilization in commercial deposit balances. It's still representing 34% of our deposit base in non-interest-bearing deposits.Again, we remain focused on retaining our market share in this segment we serve, pricing our products competitively. Again, it's a function of the market environment and the rates and definitely retaining our most valuable relationships is key to the strategy. Funding profile of the institution do remain very attractive. It's a very well-diversified deposit base, composed of a balanced mix of core and retail customers. When we combine average balances of these accounts, it's really -- it's around $19,000. So it's fairly granular. And again, we have ample liquidity available to various funding options that allow us to continue to strategically manage our balance sheet growth plans.Just move to Page 7 to go over the macro. We continue to see the Puerto Rico economy, very stable, performing fairly well considering the interest rate environment and the emerging geopolitical events. Economic activity index of Puerto Rico reached its highest level in 8 years during the third quarter. Passenger traffic at the main airport continues to hit all-time highs. Consumers continue to be adapting to the rising rates and prices as evident by retail sales [indiscernible] spending, auto sales. And more importantly, labor market remained stable with unemployment around 6.2%.The pace of this disaster relief funding for the first 8 months of the year, it's 72% above the same period last year, which is definitely driving construction activity in the island. We started to see additional number of low-income housing projects and obviously, rebuilding of important infrastructure. In addition, we continue to see private investors continue to allocate support to the island. There is a recently announced transactions where private investor, a concession of [indiscernible] Expressway on the P3 structure total concession, which a recent investor allocated $2.9 billion, plus there would be an additional $2.4 billion in improvements. That's -- I think that is a good example of what are we seeing.We said in the past, we have the experience to continue operating under this challenging market and changing market, and we continue to leverage our proven risk framework and franchise to supporting the customers through the cycle.Now I will turn the call to Orlando to go over the financials in more detail. Thanks to all.

[Orlando Berges-González, executive]

Thanks, Aurelio, and good morning, everyone. As you saw in the release, the results for the third quarter show an increase of $11.4 million in net income, which is primarily associated with the lower provision and a lower effective tax rate. We earned $82 million for the third quarter or $0.46 a share, which compares to $70.7 million in the third -- in the second quarter or $0.39 per share. Adjusted pretax pre-provision did come down by $4.6 million to $113.4 million.The provision for credit losses in the quarter decreased to $4.4 million, which compares to the $22.2 million we had in the second quarter. When we look at the components, the projected macroeconomic variables last quarter deteriorated, especially in the commercial real estate side and some on the unemployment side, which resulted in additional provisioning mix in the quarter. This quarter, the projection still shows a deterioration on the longer term. But current values of some of these variables are more favorable than they were originally estimated, which led to a lower pace -- slower pace of deterioration and thus a lower reserve impact.Also, this quarter, we booked $1.4 million in recoveries on a commercial loan that was previously charged off a few years ago and was collected. And there was -- we did a refinancing of municipal bond that we sold in our held-to-maturity securities portfolio, which resulted in some reserve releases since the new structure is that of a commercial loan, which has a much shorter timeframe.The estimated tax rate for the quarter came down -- estimated tax rate for the year, but impact in the quarter came down to 28.2% from 30.1% as a result of a higher proportion of tax-exempt income to total income and additional business activities we did under tax advantages under the Puerto Rico code. Looking at that interest income for the quarter was $199.7 million, relatively flat when we compare it to prior quarter.As we have discussed in prior calls, deposit pricing pressures, especially on the public sector have offset the improvement in interest income resulting from loan growth and loan repricing. Total interest income for the quarter grew $11.2 million for 12 basis points improvement in yields on interest-earning assets. But interest expense grew $11.3 million, representing 28 basis points increase in cost, offsetting the growth in interest income.On the commercial loans, interest income grew $6.1 million, which reflected loan repricing based on rate changes, higher yielding new loans as well as an increase of $104.5 million in average balances. The increase also includes $1.2 million in interest collected on the previously charged-off loan that I mentioned before.Commercial loan yields for the quarter are up 24 basis points compared to last quarter. In the case of consumer loans, interest income was up $4 million, again, higher yields on new loans and we grew the portfolio on average $94.5 million. Overall, yields on the consumer portfolio increased 6 basis points during the quarter.On the other hand, interest expense on interest-bearing deposits, it's $12.7 million higher this quarter than last quarter. Most of this increase is driven by a combination of higher rates paid on checking and savings accounts, mostly public sector deposits, migration that we have been facing over the last few quarters from noninterest-bearing to interest-bearing, especially on time deposits.And if we exclude broker deposits, the average cost of deposits increased 37 basis points this quarter. However, the average cost of interest-bearing checking and savings accounts other than public deposits increased by only 7 basis points. Time deposits did increase by 41 basis points, overall time deposits from the prior quarter. This -- the portfolio -- the time deposit portfolio, it's now on average $197 million more than we had in the second quarter.The -- on the chart on the top right hand, you can see the cumulative betas on deposits since September of '22. However, due to the repricing lags, public sector deposits had a much higher betas this quarter than what we had in overall cumulative period since September of '22. Net interest margin for the quarter was down to 4.15% from 4.23% last quarter.As we mentioned last quarter, we expect somewhat normalization in the margin towards the beginning of '24 based on the expectation that our interest rate increases will stabilize, thus normalizing some of the deposit pricing pressures we've had. Also, we continue to redeploy the cash flows from the investment portfolio into either higher yielding loan growth or in some cases, reduction of wholesale funding.We project that investment portfolio cash flows over the next quarter will be approximately $160 million and looking through the middle of 2025, let's say, about 1.5 years more, it's about $1.6 billion more.Look, what this is going to do is we have a yield of $133 million in the investment portfolio. In essence, we would be replacing through these cash flows either into loans that are going to yield around 600 basis points more or reductions in wholesale funding or cash -- keep it in cash, which would yield around 400 basis points more than we have on the investment portfolio. So that would offset any impact we had on migration to the time deposit side.In terms of other income, this quarter we had $6 million less in other income, but that was mostly related to certain nonrecurring gains we had in the second quarter, amounted to $5.2 million that were on legal settlements and a couple of other items. If we exclude these gains on a non-GAAP basis, net interest income decreased $700,000 in the quarter.Expenses increased in the quarter by $3.7 million. It was mostly driven by $2.2 million in additional payroll expenses as we implemented our merit increases and salary adjustments in July of this year. We did -- you can see that we did continue to achieve some gains on the disposition of OREO properties, but we include these gains, operating expenses for the quarter were $118.8 million, which fall within the guidance of $118 million to $120 million we have provided.The efficiency ratio for the quarter was 50.7%, slightly higher as expenses grew and some of the other income came down, which compares to 47.8% in the last quarter. However, the second quarter efficiency ratio was actually 48.9% if we exclude those nonrecurring gains that I mentioned. Again, as we have mentioned, we continue to maintain a very disciplined expense management framework and our target is to remain close to that 50% efficiency ratio in the near term.In terms of credit quality, as Aurelio mentioned, NPAs increased $9.1 million during the quarter, and that was primarily $9.5 million commercial case, one case that went into nonperforming this quarter. On the consumer side, we had $2.9 million increase in NPAs, but that was offset by $3 million reduction in OREOs and lower residential mortgage NPLs. Even with this increase, our NPA levels remain at 70 basis points of total assets.In terms of inflows, they're up $15.6 million compared to the prior quarter, which includes $1 million increase in commercial, which is the case I just mentioned, and $6 million increase in consumer. Also, early delinquency in the quarter, which is defined as 30 to 89 days for this purpose, increased $18.5 million, mostly it's consumer. However, I'd like to point out that September 30 was, the last day of third quarter, fell on a weekend and effects collections, and approximately $11.5 million of this delinquency had been collected by October 2. So the increase was much less than reflected.We have mentioned on prior calls that we anticipate delinquency levels in consumer should eventually start behaving more like historical trends, obviously, as excess liquidity from the pandemic-related funds decreased. However, so far, delinquency -- consumer delinquency as a percentage of loans remains below pre-pandemic levels.In terms of the allowance, we get about $271 million, a decrease of $10 million from prior quarter. $6 million of the reduction relates to lower reserve from HTM, of held-to-maturity securities due to the refinancing of the $46 million long-term municipal bond I mentioned, went into a shorter-term loan structure and also, there were significant improvement or there were improvements in the underlying financials of certain Puerto Rico government municipalities that are held in the held-to-maturity portfolio.Looking at the reserve on just loans and leases, was down $3.5 million, which mostly reflect that projected a slower deterioration on the macroeconomic variables, as I previously mentioned. The reserve stands at 2.21% of the portfolio compared to 2.28%, still a healthy reserve coverage in our portfolio.In terms of capital, regulatory capital ratios continue to be significantly above, well capitalized, at the end of the quarter. The tangible common equity ratio did decrease in the quarter to 6.74%, and the tangible book value per share decreased to $7.16. That was driven by the $79 million decrease in the fair value available for sale securities, but also the repurchase of $75 million in common shares we did during the quarter and the payment of $25 million in dividends, obviously, all compensated -- partially compensated by the earnings in the quarter.At the end of the quarter, the net unrealized securities losses, including capital, were $151 million, which is about $4.88 in tangible book value per share and also represents a reduction in the TCE ratio of approximately 409 basis points. As we have said in the past, we believe these unrealized losses are temporary in nature since we have the ability to hold the securities. The investment portfolio had a duration of 3.2 at the end of September, so it's a manageable timeframe on the portfolio.With that, operator, I would like to open the call for questions.

[Operator]

[Operator Instructions] We do have our first question. It comes from Alex Twerdahl from Piper Sandler.

[Alexander Roberts Twerdahl, analyst]

First, I just want to, I guess, start on the last comment that you made, Orlando, on the securities portfolio. I'm just curious, I think we're going to see a lot more companies look at restructuring their securities portfolios into the next quarter, just given what's happened with rates. And obviously, the new outlook out there and I think one of the big factors is how much capital companies have with whether or not they're going to be looking at that more seriously. You guys clearly have a lot of regulatory capital. And as you think about the uses of that regulatory capital, is restructuring of the securities portfolio in these small pieces of it on that radar at all?

[Orlando Berges-González, executive]

Well, we -- obviously, we have looked into it, but in reality, we have concluded, Alex, that once you consider the tax benefit nature of the portfolio, the immediate impact, the timeframe where we feel that this is going to affect, we don't feel there is a pressure to do that immediately, and we are not considering it at this point because of that.

[Alexander Roberts Twerdahl, analyst]

And then on deposits, is it safe to say now that the government deposit piece is pretty close to having fully repriced now that the Fed is presumably done?

[Aurelio Alemán-Bermúdez, executive]

I think it is safe to say that, yes.

[Alexander Roberts Twerdahl, analyst]

And then as you think about sort of the expectations for the remaining portfolio, which has been much lower beta, maybe you can walk through some of the expectations over the next couple of quarters in terms of how you're thinking about how those betas might trend, I guess, as you see excess deposits and excess liquidity come out of the system?

[Orlando Berges-González, executive]

Yes. We don't -- the betas on the other deposits, we feel they are going to be pretty stable of what we have seen so far. There is obviously the component of the migration still into -- there could be still some migration into time deposits. And there is the component of maturing time deposits that we have that obviously are going to reprice at slightly higher rates. The average cost was about 291, the cost, obviously, it's a little bit higher now as we have repriced others. But when you look at a 1-year CDs, might be close to 3.75% to 4%. So there should be some impact in there. But that's why we mentioned that assuming your first statement that we agree that there is some stability on the government -- the public sector side in terms of cost based on where rates are, that those cash flows coming in from the portfolio, the investment portfolio, would be able to be used to generate better deals that would offset a large chunk of that. So that's why we see that stability and the margin coming in and starting on '24.

[Aurelio Alemán-Bermúdez, executive]

And that's important. Yes, I just want to add, that's very important. I think the expectation of the cash flow from the investment portfolio are going to be increasing as we go forward. And obviously, the pressure of the betas on the government was significant. So we do expect to see some of that benefit of converting those cashflows to much higher [ yielding ] portfolio, loan portfolio to benefit of 2024 to mitigate what we have seen in the NIM and the NII.

[Alexander Roberts Twerdahl, analyst]

So I guess, just boiling it down, do you expect this to sort of be the inflection point on NII and the NIM? And starting in the fourth quarter, we could start to see both of those go higher?

[Orlando Berges-González, executive]

We feel that we see the inflection point starting next year, early next year, in the first quarter where we'll see a little bit still the repricing on the time deposit side happening this quarter -- this fourth quarter of the year. So it -- again, going back to statements we have done in the past that the growth on the portfolio, on the investment portfolio could be a factor to offset some of that, helping keep that net interest income going up a bit from where we are or staying at the levels where we are.

[Alexander Roberts Twerdahl, analyst]

Okay. And then just final question from me. Just the highway deal that you alluded to in your prepared remarks, can you just talk about how that -- I'm not sure if it's been disclosed how big the bank financing piece is exactly, but just how that might actually impact your balance sheet, both in the fourth quarter when that deal is expected to close as well as if there's a piece of it that might be sort of a go-forward piece?

[Aurelio Alemán-Bermúdez, executive]

Yes. Well, it was publicly announced this week, on Tuesday, by the government and the winner of the bid. They're working together to close it close to the end of the year. So most of the benefit will come in the balance sheet for really 2024, some this year, but mostly 2024. Banks, local banks, it was publicly in the statement that local banks contributed around $600 million of the financing required of the initial payment of [ 2.850 ]. Our position, we contributed -- we committed $150 million to the transaction which will be disbursed at closing, yes.

[Operator]

[Operator Instructions] We currently have no further questions registered. So I would like to hand the call back to Ramon Rodriguez for closing remarks. Ramon, over to you.

[Ramon Rodriguez, executive]

Thanks to everyone for participating in today's call. We will be attending Hovde's financial services conference in Palm Beach on November 2 and Piper Sandler's conference in Miami, November 16. We look forward to seeing a number of you at these events, and we greatly appreciate your continued support. Have a great day. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.