First BanCorp. (NYSE:FBP) Q4 2022 Earnings Call Transcript

First BanCorp. (NYSE:FBP) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good morning. Thank you for attending today’s First BanCorp 4Q 2022 financial results conference call. My name is Alexis, and I’ll be your moderator for today’s call. . I’ll now like to pass the conference over to the Corporate Strategy and Investor Relations Officer. Ramon Rodriguez. You may proceed.

Ramon Rodriguez: Thank you, Alexis. Good morning, everyone and thank you for joining First Bancorp’s conference call and webcast to discuss the company’s financial results for the fourth quarter and full year 2022. Joining you today from First Bancorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today’s call, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company’s business. The company’s actual results could differ materially from the forward-looking statements made due to the important factors described in the company’s latest SEC filings.

The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I’d like to turn the call over to our CEO, Aurelio Aleman.

Aurelio Aleman: Thanks, Ramon. Good morning to everyone and thanks for joining our earnings call today. Please turn to page four to discuss the highlight for the quarter. We got a solid return of 158%. We earned $73.2 million or $0.40 per share in net income achieve, or $122.2 million in pretax provision income and reached an efficiency ratio of 48% even lower than the prior quarter. The margin expanded by 6 basis points, while on the other hand, net interest income decreased by $2.3 million primarily related to increasing in the interest expense portion. A stable credit trends continue, supporting asset quality improvement with non-performing assets decreasing by $14.1 million to $129.2, which is a decade low at 69 basis point of total assets.

Also good news from the early delinquency side which also improved during the quarter and still below pre pandemic levels. In terms of capital deployment, we continue our plan. During the fourth quarter we repurchased 3.5 million shares of common stock for the total purchase price of $50 million and paid $22 million in common stock dividends. Our consistent earning generation capacity discipline and sales management have definitely allowed us to continue returning capital while allocating resources to organically grow. Let’s move on to the balance sheet Page 5, to discuss on deposit trends. On the asset side, total loan leases grew by $254 million. Now the portfolio stands at $11.6 billion during the quarter. And this really happened across all business segments commercial consumer and actually residential.

This was actually our strongest quarter in terms of loan portfolio performance. Excluding PPP belongs which are almost finished now. Commercial and construction grew by $141 million or 3% linked quarter. Total originations, including renewals and credit card related activities was very healthy at $1.4 billion up 15% versus the prior quarter. That is our priority deployed capital to achieve profitable loan growth and capitalize on market share across all the lending segments, is really the core principle of our plan. We’re encouraged by the trends that we see in the main market and also by the pipeline that we have today for 2023. In line with industry trends, core deposits decreased by $250 million or 2.3% during the quarter, which was actually slightly better than the local market trend for the quarter.

I suspect that we continue to see excess liquidity gradually tapering off within household balance sheet. However, our deposit balances for both retail and commercial customer remain above pre pandemic levels. We are focused on leveraging our expanded sales distribution channels and digital channel to grow our market share on the deposit market and the products and services related to it. That said, liquidity levels remain high with a ratio of cash plus liquid securities to total assets above 19%. Let’s move to page six to discuss the high level the full year. You know, we’re really very proud of the work that the team performed during 2022, over the course of 2022 that teams work very hard to deliver outstanding results for the franchise. We raised our organic loan growth of $762 million when we have two PPP loans on the strategic reduction of residential mortgage, earned 5 million in net income and achieved a record pretax pre-provision income of 475.3 which is up 21% when compared to 2021.

And reach a decade low non-performing asset ratio of 0.69%. In terms of the franchise, we continue our investments in people, technology, process improvement. We made great progress by moving forward our omni channel outreach strategy with investment in data service self-service platforms to optimize the execution capabilities and products. When we look at some of the metrics, continue to improve data engagement, retail banking, registration were up 4% during the quarter, 17% during the year. Offshore of our newly launched business digital banking applications continue to increase. Our new Visa digital lending functionality has improved our penetration to a smaller medium business and SBA segments. And also we continue to capture over 40% of all deposits to this channel.

All these milestones have been achieved within the context of a more efficient traditional branch network. During 2022 we also consolidated five additional branches, including two during the fourth quarter. Moreover, our efficiency ratio reached a historic low of 48.3 during the year, highlighting our ability to execute ongoing capital investments in technology, improve digital channels, best in class talent, all without compromising the operating leverage of the organization. Definitely these all translated into one of our best performing years on record for the franchise, while you know strongly supporting our communities, our colleagues, and returning approximately 363 million or 119% of €˜22 earnings to our shareholders, to both common stock buybacks and the payment of a very competitive common dividend.

Our strong capital position enable us to continue delivering value to our shareholders while at the same time providing poor loss absorption capacity in the event of an economic downturn. Please, let’s move to Page seven, to discuss some highlights on the outlook of our macroeconomic environment? Definitely, global expectations points to our economic slowdown in the U.S. But we remain cautiously optimistic on economic conditions in our main market in Puerto Rico. Labor market performance continue to sustain on our trend based on employment reaching a decade high in November 22 or 4% year over year. And economic activity index, our only indicator of that tracks the economy closest a quarter 2021 levels, even when accounted for the impact of in September, which disrupted the market for a couple of weeks.

Most importantly, our growth thesis continued to be sustained by the large amount of Federal disaster relief funds, still planning to be disbursed. Over 45 billion disburse obligated funds have been earmarked to support broad based economic development and rebuilding initiative designed to improve the airline infrastructure and overall capital stock. Public data showed that disbursement reached $3.2 billion during the 11-month period ending in November. With this actually 96% above what was raised during 2021. The rollout respond of the fund is expected to gradually increase over the next decade, with the most recent estimates reflecting approximately 5 billion are the estimates for 2023. That will be great. The timely disbursement of these funds coupled with a government improvement fiscal position.

A focus on economic development is really what is driving the tailwind that we’re seeing. Finally, and most importantly, this year we commemorate our 75th anniversary for the institution, proud of our people and all that we have accomplished over this period. I look forward to many more years of collaborating to protect our clients and communities and growing their franchise. We do have multiple initiatives to celebrate this accomplishment and show our gratitude to the community’s employees customers. I will now turn the call to Orlando to go more detail on the financials results. Thanks to all for your support.

Photo by engin akyurt on Unsplash

Orlando Berges: Thanks, Aurelio. And good morning, everyone. As Aurelio mentioned net income for the quarter was 73.2 million. That compares with 74.6 million last quarter. Our earnings per share in the quarter were $0.40, which is the same as we had last quarter. What we saw in the quarter its benefit on interest income from the increase associated with the award repricing or variable rate loans, along with the higher average balances in the loan portfolios for the quarter. But as anticipated, we have also continued to see an acceleration on deposit betas, which is driving deposit costs higher. In addition, we did increase the level of wholesale funding in the quarter, which combined with an increase in the cost, it’s ultimately resulted in a reduction in net interest income.

The provision for credit losses in the quarter was 15.7 billion, which is basically the same that we had last quarter. But our allowance for credit losses increased by 2.5 million. And I will touch upon that a little bit later. Just to mention for allowance, we continue — for determining the allowance we continue to use two scenarios, we weighed them baseline scenario, and a downside economic . In terms of net interest income, which as you all know it’s a challenge this time with interest rate movement. The net interest income was down 2.3 million from 207.9 million in the third quarter to 205.6 million this quarter. Interest income was up $11 million, but interest expense grew by $13 million. In interest income, commercial loan interest income grew $8.2 million, $8 million resulted from repricing during the quarter and we also had about $1.1 million associated with higher loan balances.

But on the other hand, we had a $20 million reduction in average balance on PPP loans, which resulted in a reduction of $1.3 million on interest income on loans. The yield on the commercial and construction loans grew by 63 basis points in the quarter. In the case of the consumer portfolio, interest income grew by $3.7 million, mostly related to the increase of average balances, we had $111 million increase in average balances. The yield on this portfolio grew 11 basis points as you know that it’s basically a fixed portfolio. So yield improvement comes in — pricing on new originations. On interest expense. Just looking at the balance sheet, interest expense grew $11 million, 45 basis points increase from 37 basis points we had last quarter to 82 basis points this quarter.

Approximately 60% of this increase in interest expense was related to public fund, deposit costs increases. Deposit betas for the quarter for the dollar portfolio was approximately 32%. Core deposits was about 18%, but this increase in betas was mostly driven by the betas on public deposits, which was about 75% for the quarter. We do expect that betas on public deposits to remain high. And these rates obviously are going to move up or down depending on where the market is moving. In addition, in the quarter we did have $2 million increase in cost of borrowings, $700,000 relates to repricing of loan great debentures and the other 1.4 million it’s basically increasing and the size of the borrowing portfolio FHLB advances and repose. Margin increased six basis points in the quarter from 431 to 437.

The change was primarily a change in asset mix. The average balance of cash and investment securities which are lowered yielding decreased by $600 million. While loans increased $146 million for the quarter. Looking forward, we see interest income growing from the repricing of loans that will happen during the year and from loan growth. For example, you look at balance as at the end of the year loans were $187 million higher than the average balances for the quarter. So that should give us a pickup in the first quarter on interest income. And we also have approximately $130 million in commercial loans that reprice now in January. Some of them are quarterly repricing loans. However, we do expect net interest income pressure to continue in the near term as rates on deposits continue to increase.

With some normalization later in the year based on the expectation that rates will start to come down towards the middle of the year. If you just look at our current balance sheet structure, our expectation is that net interest income for the next couple of quarters should remain at close to current levels, with improvements in net interest income coming from the growth in future growth in the loan portfolios. In terms of non-interest income, it remained relatively similar to last quarter. The improvement — we had improvements in credit and debit card transaction fee based on seasonality, but that was offset by lower mortgage banking income. We also during the quarter — we also reverse our $700,000 of previously recognized fees on non-sufficient funds as far as some changes on fee structure that are being implemented just towards the end of the year.

In terms of expenses for the quarter $112.9 million which compared to $115.2 million in the third quarter, a $2.3 million decrease. The decrease primarily reflects a $1.5 million increase in net gains on OREO operation. Excluding OREO expenses for the quarter were $115.5 million which compared to $116.3 million last quarter, also excluding the OREO impact. This reduction includes reduction — $700,000 reduction in occupancy, mainly energy costs, and $700,000 decrease in payroll expenses as all bonus accruals and incentives were finalized based on results. These reductions were partly offset by some increase — $500,000 increase in business promotion, sponsorship and public relation activities that we had during the quarter. The expenses in the quarter were very much in line with our estimates of $115 million and $116 million, which excluding OREO obviously.

And our efficiency ratio, the efficiency ratio continues to be very low at 48%. Looking at the first quarter, we do expect some increases in expenses. Payroll taxes go up in the first quarter as all limits are reset. That increases payroll expenses by good clip in the first quarter. Also, during the quarter we during the at the end of the year, we have seen significant increases in — or some increases in contract renewals, with inflation glasses, some of the removals are coming up. And there are several technology improvement projects that we have on the way that are picking up speed in this quarter. Based on this, if we exclude OREO expenses, we believe expenses for the quarter for the first couple of quarters should be closer to the $120 million range.

In terms of asset quality, as Aurelio made reference, we continue with a very stable asset quality, non-performing decrease $14 million in the quarter, stand at $129 million which is 69 basis points of assets. That reduction, included $9.3 million non-accrual commercial loan reductions, $5 million loans that was restored to accrual status. And we also had a $7 million, that’s what drove mostly the reduction in the commercial side. And we had a $5 million reduction in OREO properties based on increase in sales of repossessed residential properties in the Puerto Rico market. Inflows for the quarter increased $3.8 million to $24 million, mostly consumer portfolio that grew $2.6 million based on size. Early delinquencies, again defined as 30 to 89 days continues to be good by $9 million in the quarter with reductions across all portfolios, basically.

In terms of net charge offs for the quarter were $13 million, which is 46 basis points of loans compared to 31 basis points last quarter, mostly related to a consumer portfolio. We also had a $1.7 million charge off that we took on in the fourth quarter on the sale of anniversary classified commercial loan participation in the quarter. Consumer loan charge offs were 144 basis points of loans in the quarter, and 107 basis points for the year and this figures are significantly lower than pre pandemic levels. As you can see on prior filings. The allowance for credit losses at the end of 2022, was $273 million, which is $2.5 million higher than the third quarter. And it’s about $7 million lower — I mean, I meant to say $2.5 million lower than the third quarter — higher than the third quarter and $7 million lower from last year.

I’m sorry about that. The ACL was — on just loans was $260 million, which is $2.6 million higher than last quarter. The ACL reflects the increase in the portfolio’s we had in the quarter as well as some less favorable outlook that we have on the models for several macroeconomic components. The ratio of the allowance for credit losses on loans and finance leases to total loans held for investment was 2.25% as of the end of the year compared to 2.28% on the third quarter. On the capital just stay with what Aurelio mentioned already. We continue with the execution of the plan. We repurchase during the year 19.4 million shares for $275 million and we paid during the year $88 million in dividends. Our capital ratios continue to be very strong again, basically a small reduction in Tier-1 and an improvement in the leverage ratio.

Tangible book value per common share increase from 6.46 to 6.93 in the fourth quarter related to $60 million or so improvement in the other comprehensive loss adjustments as the fair value of the investment portfolio improved in the quarter. And our tangible common equity ratio stands at 6.81 compared to 6.55 last quarter. If we were to adjust for the OCI impact, our non-GAAP tangible book value per share would be about 11.30. And tangible common equity ratio would be approximately 10.6%. So, those were — those are strong numbers. And again, as we have mentioned in the past, we believe this impact is temporary since we do have the ability to hold the securities through the end of the maturity process. Securities continue at similar pace, we have approximately $40 million to $50 million cash flow coming from the investment portfolio.

So we will continue to see some of that cash flow redeployed to the lending side or compensating for funding needs. With that, I would like to open the call for questions.

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Q&A Session

Operator: . The first question comes from the line of Timur Braziler with Wells Fargo. You may proceed.

Timur Braziler : Hi, good morning. Thanks for the questions. I wanted to follow up on the NII guidance, just to make sure I got it clear. Did you say that you’re expecting some level of pressure here in the near term, but for to remain your current levels?

Aurelio Aleman: Yes, there will be some pressure is still on deposit pricing. And that’s going to offset some of the impact from loan growth and or loan already on the portfolio and repricing of loans already in the portfolio. So with those two components, we were expecting net interest income to be sort of similar to this quarter, and improvements will come from the movement in the loan portfolio going forward for the growth on the portfolio. That’s what’s going to drive improvements in net interest income in the near term.

Timur Braziler: Okay, understood. And then just looking again at the balance sheet in the third quarter securities, cash flows were used to fund deposit outflows and some loan growth in the fourth quarter, you opted to go with borrowings and assets actually increase for the first time and over a year. How should we think about the funding of future deposit outflows to the extent that there’s any and the funding of 2023 loan growth? Are you going to be looking to lean on borrowings a little bit more heavily in support of the balance sheet? Or should we still expect much of that funding to come from the bond books?

Aurelio Aleman: Well, again, the securities portfolio, it’s given us somewhere approximately $150 million per quarter in cash flows. So that clearly it’s going to be used for funding growth and or deposit implications. We — during the fourth quarter, we lost deposits at a higher clip than the $150 million. And we did grow the loan portfolio so we ended up taking some additional funding. So clearly, it’s a function of what happens on those two components, how much we originate with based on the pipeline, we feel strong about it. And the trends in deposits going forward, which have been a little bit more inconsistent, we — obviously we see rates, changes in 2023 probably being or we expect them to be less than the significant 2022.

So that is create some stability on deposit movement. But there is still volatility in the market that we need to be cautious. So there could be some increases in wholesale funding based on that. I’m sorry, sorry, I can see you’re saying that. We do have the cash flow coming from the management portfolio, but we also can use the portfolio for repos or advances.

Timur Braziler : Right. Okay. And then just looking at deposits and understanding that it’s hard to put a number on the remaining balances of commercial accounts or dollars that are potentially at risk for leaving for higher rates, but can you try and kind of ring fence, the remaining deposits that are still at risk? And then as we think about the overall size of the balance sheet, are you expecting to keep it here at current levels, again using a wholesale to kind of bridge the gap? Or could we still see some decline in the balance sheet here over the first half of 2023?

Aurelio Aleman: No, we feel the balance sheet, it should stay at similar levels. In reality, we do expect growth in the loan portfolios going forward. And again, that’s going to be offset with some reductions on the investment portfolio side. We don’t it’s tough to answer that one of the positives. Clearly there was excess liquidity that has been redeployed for different things people are using, and obviously the market rate movement, move some, disposable money into very high cost kind of treasury or high yielding kind of treasury securities. And so, with rate expectations movements are being lower now for the first half of the year. That should slow down. But it’s tough to say.