First BanCorp. Q3 2023 Earnings Call Transcript

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October 20, 2023

There are 5 speakers on the call.

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. During this presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad. I will now hand over to your host, Ramon Rodriguez, Investor Relations Officer. Please go ahead.

Speaker 1

Thank you, Bruno. Good morning, everyone, and thank you for joining FirstBank Corp's conference call and webcast to discuss the company's financial results for the Q3 of 2023. Joining you today from FirstBank Corp are Aurelio Aleman, President and Chief Executive Officer and Orlando Verrejes, 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 fbbinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Pariman.

Speaker 2

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 $82,000,000 in net income or $0.46 per share, which translated into a fairly strong Return on asset of 1.72 percent. Net interest income registered a slight decrease during the quarter, mainly due to expected upward pressure on The pricing and the increase in the mix of interest bearing deposits to total deposits.

Speaker 2

Expenses were quite in line with guidance at 160,000,000 And the efficiency ratio reached 50.7% during the quarter, continued 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 $9,000,000 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 your 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 the liquidity trends.

Speaker 2

However, they're still way below pre pandemic levels. On the capital front, we Continue the repurchase plan and we repurchased 75,000,000 in common shares during the quarter. That finalizes the remaining of the authorization under the 2022 And given strong capital position, liquidity and outlook for the remainder of the year, we do expect to continue Repurchasing share of common stock during the Q4, 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 divisions, total loan increased by 6% on a linked quarter annualized basis and reached EUR 12,000,000,000 Healthy levels of both commercial and consumer loan origination.

Speaker 2

The loan portfolio has been expanding since the Q1 of 2022, Reflecting organic growth of over $850,000,000 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 three regions. Going forward, we expect Long Road to remain in line with our mid single digit growth guidance As we continue to redeploy the portion of the investment portfolio cash flows into higher yielding assets in the loan portfolio. Also, we do expect that the facilities of the construction loan that were approved this year begin to accelerate 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 by the FDIC as of June Shows an overall contraction in total deposit in Puerto Rico as of June 2023.

Speaker 2

And our reserves 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 €159,000,000 or 1.2%. Again, this reduction primarily Meant by erosion of liquidity in the euro market and migration to of retail customer to higher rate options Actually outside the traditional banking sector, I will say particularly credit unions and the U. S. Treasury market.

Speaker 2

On the other hand, that was offset by stabilization in commercial deposit balances. Still representing 34% of our deposit base being non interest bearing deposits. Again, we remain focused on retaining our market share in the 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, it's key to the strategy. From the profile of the institution do remain very attractive.

Speaker 2

It's a very well diversified deposit base, Composed of a balanced mix of core and retail customer, 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 We'll continue to strategically manage our balance sheet growth plans. Just move to Page 7 to over the macro. We continue to see the Puerto Rico economy very stable, performing fairly well considering the inter rate environment and the emerging Geopolitical events, economic activity index of Puerto Rico reached its highest level in 8 years during the Q3. Passenger traffic at the main airport continues to hit all time highs.

Speaker 2

Consumers continue to be adapting to the rising rates And prices as evidenced by retail sales, household spending, auto sales and more importantly, labor market remains stable With unemployment around 6.2%. The base of this asset relief funding For the 1st season 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 concession of the South Expressway, under a P3 structure total concession, which a recent investor allocated $2,900,000,000 Plus there would be an additional $2,400,000,000 in improvements.

Speaker 2

That's a 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. Thanks to all.

Speaker 3

Thanks, Aurelio, and good morning, everyone. As you saw in the release, the results for the Q3 show an increase of $11,400,000 in net income, Which is primarily associated with the lower provision and a lower effective tax rate. We earned $82,000,000 for the 3rd quarter or 0.4 dollars a share which compares to $70,700,000 in the Q2 or $0.39 per share. Adjusted pretax pre provision did come down by CAD4,600,000 to CAD113.4 million. The provision for credit losses in the quarter decreased to $4,400,000 Which compares to the $22,200,000 we had in the second quarter.

Speaker 3

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 needs in the quarter. This quarter, The projection still shows 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 Slower pace of the duration and those slower a lower reserve impact. Also, this quarter, we booked 1 point $4,000,000 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 sell 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 impacting the quarter came down to 28.2 From 30.1 percent, as a result of a higher proportion of tax exempt income to total income and additional business activities We did under tax advantage under the Puerto Rico code.

Speaker 3

Looking at that interest income For the quarter, it was $199,700,000 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 point 2,000,000 for 12 basis points improvement in yields on interest earning assets, but interest expense grew 11,300,000, Representing 28 basis points increase in cost, offsetting the growth in interest income. On the commercial loans, interest income grew $6,100,000 which reflected loan repricing based on Great changes, higher yielding new loans as well as an increase of $104,500,000 in average balances. The increase also includes a $1,200,000 in interest collected on the previously charge off loan that I mentioned before.

Speaker 3

Commercial loan yields for the quarter are up 24 basis points compared to last quarter. In the case of consumer loans, interest income was Of BRL4 1,000,000, again higher yields on new loans and we grew the portfolio on average BRL94,500,000. Overall yields on the consumer portfolio increased 6 basis points during the quarter. The other hand interest expense on interest bearing deposits It's BRL12,700,000 higher this quarter than last quarter. Most of this increase is driven by a combination of higher rates On checking and savings accounts, mostly public sector deposits, migration that we have Been facing over the last few quarters on net from non interest bearing to interest bearing, especially on time deposits.

Speaker 3

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 is Now on average, EUR 187,000,000 more than we had in the Q2. On the chart on the top right And you can see the cumulative betas on deposits since September of 2022.

Speaker 3

However, Due to the repricing lag, the public sector deposits had a much higher betas this quarter than what we had in overall Cumulative since September of 2022. 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 2024. 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.

Speaker 3

We project that investment portfolio cash flows over the next Quarter will be approximately EUR 160,000,000 and looking through the middle of 2025, It's about a year and a half more. It's about EUR 1,600,000 more. EUR 1,600,000. EUR 1,000,000,000, I'm sorry. The look, What this is going to do is we have a yield of $1.33 in the investment portfolio.

Speaker 3

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 have said any impact we had on migration to the time deposit side. In terms of other income, This quarter, we had $6,000,000 less in other income, but that was mostly related to certain non recurring gains we had in the 2nd quarter Amounted to $5,200,000 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 $3,700,000 It was mostly driven by $2,200,000 in additional payroll expenses as We implemented our merit increases and salary adjustments in July of this year.

Speaker 3

We did you can see that we did continue to achieve some gains on the disposition of OREO Properties, When we include these gains, operating expenses for the quarter were $118,800,000 which fall within the Guidance of $118,000,000 to $120,000,000 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 Q2 efficiency ratio was actually 48.9% if we exclude those non recurring gains that I mentioned. Again, Magnino, as we have mentioned, we continue to maintain a very disciplined expense management framework and our target is NPAs increased $9,100,000 during the quarterly and that was primarily $9,500,000 commercial case, one case That went into non performing this quarter. On the consumer side, we had $2,900,000 increase in And NPAs, but that was offset by 3 million reduction in OREOs and lower residential mortgage NPLs.

Speaker 3

Even with this increase, our NPA levels remained at 70 basis points of total assets. In terms of inflows, They are up EUR 15,600,000 compared to the prior quarter, which includes EUR 8,000,000 increase in commercial, which is the case I just mentioned And $6,000,000 increase in consumer. Also early delinquency in the quarter, which is defined as 30 to 89 days for this purpose, $18,500,000 Mostly, it's consumer. However, I'd like to point out that September 30 was the last day of 3rd quarter felt on a weekend and affects collections and approximately $11,500,000 of this delinquency Had been collected by October 2, so the increase was much less than reflected. We have mentioned in prior calls that we anticipate delinquency levels in consumer should eventually start behaving more like historical trends.

Speaker 3

Obviously, a success 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 set up a $271,000,000 decrease of $10,000,000 from prior quarter. EUR6 1,000,000 of the reduction relates to lower reserve from HTM of held to maturity securities due to the refinancing of the EUR46 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 $3,500,000 which mostly reflect that projected Slower deterioration on the macroeconomic variables as I previously mentioned.

Speaker 3

The reserve stands at $2.21 of our 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 674 and the tangible book value per share decreased to 716. That was driven by the $79,000,000 decrease in the fair value of available for sale securities, But also the repurchase of 75,000,000 in common shares we did during the quarter and the payment of 25,000,000 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 $151,000,000 which is about $4.88 intangible book value per share and also represents a reduction in the PCE 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.

Speaker 3

The investment portfolio had a duration of 3.2% in the end of September. So it's a manageable time frame on the portfolio. With that, operator, I would like to open the call for questions.

Operator

Thank you. Okay. We do have our first question. It comes from Alex Stuart O'Neill from Piper Sandler. Alex, your line is now open.

Operator

Please proceed.

Speaker 4

Hey, good morning.

Speaker 2

Good morning, Alex. Good morning, Alex.

Speaker 4

First, I just want to, I guess, start on the last Comments that you made, Aurelio or 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. As you think about the uses of that regulatory capital, is restructuring of the securities portfolio in

Operator

at least small pieces of it

Speaker 4

On that radar at all?

Speaker 3

Well, we obviously, we have looked into it. But in reality, we have concluded, Alex, that once you consider the tax benefit nature The portfolio, the immediate impact, the time frame where we feel 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.

Speaker 4

Okay. 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?

Speaker 2

I think it is safe to say that, yes.

Speaker 4

Okay. 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?

Speaker 3

Yes. We don't the betas on the other deposits, we feel they're 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 replace at slightly Higher rates, the average cost was about $2.91 The cost, Obviously, it's a little bit higher now as we have repriced others. But when you look at our 1 year CDs, it might be Close to 3.75% to 4%.

Speaker 3

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, Those cash flows coming in from the portfolio, the investment portfolio will be able to use be used to generate But our deals, I would have said a large chunk of that. So that's why we see that Stability in the margin coming in and starting on 24.

Speaker 2

And that's important. That's very yes, I just want to add that's very important. I think the expectation of The cash flow from the investor portfolio are going to be increasing as we go forward. And obviously, The pressure of the bad ass on the government was significant. So we do expect to see some of that benefit Of converting those cash flow into most higher dividend portfolio, loan portfolio to benefit us during 2020

Speaker 4

So I guess just boiling it down, do you expect this sort of the inflection point on NII and the NIM and starting in the Q4 we could start to see both those go Hi,

Speaker 3

Eric. We feel that we see the inflection point starting next year early next year in Q1, We're we'll see a little bit still the repricing on the time deposit side happening this quarter, this Q4 of the year. So 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.

Speaker 4

Okay. And then just final question for 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 impact your balance sheet both in the Q4 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?

Speaker 2

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 sheets for really 2024, some this year, but mostly 2024. Banks, local banks, it was publicly in the statement that local banks contributed around 600,000,000 Of the financing required of the initial payment of the 2.850 Our position, we contributed $150,000,000 we committed $150,000,000 to the transaction, Thanks for the comment.

Speaker 2

Thanks for the comment. We'll be dispersed at closing, yes.

Speaker 4

Thank you for taking my questions.

Speaker 2

Thank you.

Operator

Okay. 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.

Speaker 1

Thanks to everyone for participating in today's call. We will be attending Hovde's Financial Services Conference in Palm Beach On November 2nd and Piper Sandler's Conference in Miami, November 16th. 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.

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