FBP - NYSE

Good morning, everyone, and welcome to First Bancorp's Fourth Quarter and Full Year 2023 Financial Results. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. [Operator Instructions] I would now like to turn this conference call over to our host, Ramon Rodriguez, Senior Vice President of Corporate Strategy and Investment (ph) Relations. Please go ahead.

Thank you, Candice. 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 2023. 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.

Thanks, Ramon. Good morning to everyone and thanks for joining our earnings call today. I will begin by briefly discussing our business performance for the fourth quarter first, then we'll move on to provide some high level highlights for the full year, and then share with you some of our priorities for 2024. Our fourth quarter results were highlighted by strong profitability and loan growth. We earned $79.5 million or $0.46 (ph) per share and generated a 1.7% return on assets. Our expenses for the quarter were impacted by $6.3 million FDIC special assessment expense. Excluding the special item, the adjusted efficiency ratio was 52.2% for the quarter. The quarter also reflected higher provision expense and some incremental operating expenses which Orlando will cover both in detail later. The loan portfolio expanded by $233 million or 7.8% linked quarter, annualized driven by growth across all business segments, particularly the strong commercial and auto loan origination, as we continue to deepen our share in those markets. Core deposits contracted slightly by 2%, as we continue to see a gradual erosion of excess liquidity of our market and NPA decreased again to just 67 basis points of total assets. We said for some time that credit metrics will gradually move closer to historical levels as the positive impact of excess liquidity related to the pandemic stimulus on the consumer decreases. We saw earlier a little bit of that in the fourth quarter actually also in the third quarter with the charge-off rate and loans in early delinquency for the consumer book registering a slight increase when compared to previous quarters. That said, our NPA and classified asset levels remain at multiyear lows and our reserve coverage ratio is also very solid and we continue to sustain and enforce our proactive risk management culture. Definitely, we're ready to withstand any additional deterioration as those rates move closer to the norm. Finally, it was a great quarter in terms of our capital position, our tangible book value per share increased by 19% and the TCE ratio improved to 7.7%, mostly driven by the favorable variance in the value of our bond book, given the reduction in market rates during the quarter. This was accomplished even while repurchasing $75 million in common shares as we have indicated and paying $24 million in dividends. Let's move to Slide 5 to provide some highlights on the full year. Definitely, the '23 performance showcase our attractive profitability and improved risk profile. Even when -- as we all know, operator in a challenging rate environment for our industry. Most importantly it highlights our capital management discipline and return flexibility. We generated 1.62% return on assets for the year and 41% return on equity, adjusted for the impact of the AOCL. We added $628 million or 5.4% to the loan portfolio in the year, while deposits other than broker contracted were up by 1.7%. Our strong and diversified deposit franchise is evident by a still healthy non-interest bearing ratio of 34% at the end of the year and a loan to deposit ratio of 77%. These achievements support our goal of delivering close to a 100% of annual earnings to shareholders in the form of buybacks and dividends for the third consecutive year. As we mentioned before this year marked -- 2023 marked our 75th anniversary. And we are very pleased on how our franchise has supported businesses, households and ultimately the Puerto Rico economy and our market during this period by how we continue investing in our people, upgrading our product offerings and services, investing in technology, operations and infrastructure, and improving our operating leverage in the loan growth. I want to thank all my colleagues for their valuable contributions and dedication during the years and also our customers that we serve on a daily basis, our communities and our shareholders for their support. As we look forward to 2024, we expect to continue our loan growth momentum, continue gaining market share and improving our loan book on what we consider is a stable economy across our markets, including Miami, Puerto Rico, and the Virgin Islands. Our goal is to again achieve mid-single digit loan growth for the year organically. However, we do continue to expect that average deposit balance will gradually come down in line with recent trends in the market as excess liquidity in the system decreases during the year. Our top priority for the year, number one will be to leverage the short duration of the investment portfolio, to redeploy low yielding maturing securities cash flow into higher yielding assets. Also actively -- proactively managing credit, particularly on the consumer lending businesses. Finally, we continue to be very well positioned to deploy our capital, based on our healthy capital levels and our ability to consistently generate organic capital. We still have ample buyback capacity with $150 million in buyback left on our current authorization. We will continue to monitor the general macro outlook and continue to execute the remaining buyback authorization during the year, beginning in the first quarter of this year. Now I will turn the call over to Orlando to go over the financial result in more detail and will come back for questions later.

Good morning, everyone. As Aurelio mentioned at the beginning of the call, we reported $75.5 million gain for the fourth quarter. This is $2.5 million lower than the third quarter. However, earnings per share for the quarter were $0.46, which is the same we had on the third quarter. This result include a $6.3 million charge for the one-time FDIC assessment, as well as $3 million gain on the sale of our banking facility in our Florida region. The provision expense for the quarter increased to $18.8 million as compared to $4.4 million last quarter. As you may recall from last quarter's earnings call, the lower provision in the third quarter reflected the benefit of what we define as a less severe economic outlook on the third quarter that the one we had forecasted on the second quarter. This quarter the outlook remains similar, so the increase was mostly related to the larger loan portfolios and the higher level of consumer charge-off to some extent. The income tax expense for the quarter was $5.4 million, which compares to the $27 million we had in the third quarter. The effective tax rate came down from 28.2%, we had as of the third quarter to 23.5%. As we ended up the year conducting -- during the fourth quarter several activities that were not previously forecasted and which have tax advantages under the Puerto Rico code. Also we had a lower pretax income on the quarter, which also translated into a reduced tax. If we look forward, based on the current strategies that we have, we expect that the effective tax rate for 2024 will be around that 24% range, slightly under, slightly over, but it should be somewhere in that range. For the full year, net income was – full year '23, I mean, the net income was $303 million. It's pretty much in line with the $305 million we had in 2022, but earnings per share were higher at a $1.71 compared to $1.59, we had a prior year. This is directly a result of the benefit of the lower share count due to share buybacks we have been executing over the year and also in 2022. Also as Aurelio mentioned we delivered a strong return on average assets, again 1.62% and ROE with return average equity was 23.7%, which we adjust to eliminate the other comprehensive loss would represent 14.1%, both solid numbers. In terms of net interest income, the quarter shows $196.7 million of net interest income, which is $3 million below the third quarter. However -- the third quarter, however, did include $1.2 million, we collected on a construction loan that had been charged off in prior years. Therefore, the reduction -- the real reduction was $1.8 million. The interest income loans increased $6.1 million in the quarter, which was to some extent offset by $3.9 million decrease in other earning assets, mostly cash and securities, but interest expense grew by $5.4 million. The lending side, the interest income grew $2.9 million in consumer and $2.1 million in commercial, most of the growth within those two portfolios. Overall, however, it even though loans increased during the quarter, total average earning assets did decrease by $269 million. The quarter we -- in the quarter, we continued to see funding cost pressures, the excess liquidity in the market has continued to decline, which resulted in decreases in retail and commercial core deposits, that excludes public funds. We also continue to see the impact of the shift from non-interest bearing deposits into interest-bearing deposits. Even though when looking at the quarter, non-interest bearing deposits declined only $36 million. In reality, the former (ph) $100 million decline we had in the third quarter, impacted significantly the funding costs for the fourth quarter. These deposits have been moving into time deposits or other interest-bearing options are ultimately we have been replacing some of them with wholesale funding sources. To put in perspective, over the last six months of '23 time deposits grew $153 million and a large portion came from these deposits. On the other hand, during the quarter, we saw that the trend in the pace of core deposit cost increases has slowed down as market interest rates have stabilized. The average cost of interest-bearing checking and savings accounts other than public funds remained stable at 73 basis points when compared to the prior quarter. Also we have seen deposit price re-pricing pressures on the government deposits easing now. The cost of these deposits increased only 14 basis points in the quarter, which compares to our 54 basis points increase we had in the third quarter. The increase in this quarter in reality was mostly a lag effect from last quarter repricing since short-term market interest rates on average did not increase this quarter, which is an indicator of the structure used for pricing government deposits. That said, we did have a $6.1 million increase in interest expense on broker and time deposits during the quarter as we increased average broker deposits by $253 million and average time deposits by $85 million. The yield or the cost of non-brokered time deposits increased 26 basis points. During the quarter, a lot has to do with also with the maturing time deposits that gets -- get issued at new rates. The overall funding cost impact has been impacted by the pickup on the yields from the growth in the loan portfolios, loans as you saw in the release grew $233 million in the fourth quarter and have grown $459 million since the end of the second quarter. And looking at specifically at the yield in the fourth quarter, the loan yields increased 7 basis points. Margin for the quarter was relatively flat at 4.14%, almost same as last quarter which was 4.15%. We have seen a change in the mix of earning assets resulting in higher yields, but has been offset by an increase in the cost of funds. As we discussed last quarter with the assumption that our market interest rate would stabilize or start to come down we expect that the inflection point for net interest margin would happen somewhere between the end of '23 and the first quarter of '24. And we see that happening already and assuming no meaningful changes to deposit balances. The net interest income should improve in 2024 as higher yielding loans will be funded with the cash flows that are coming from the investment portfolio, which is a much lower yielding. We estimate those cash flows for 2024 to be around $1 billion throughout the year. A good chunk comes in the second half because of maturity but it's still throughout the full year. Our interest rate forecast is fairly consistent with the forward yield curve and our planning assumption is that a future fed funds rate cuts will begin in April. That's what we've been using for the assumptions in the net interest margin and in the net interest income projections. Looking at other income, we had a $3.3 million increase to $33.6 million during the quarter, it was driven by a $3 million gain on the sale of the banking facility in Florida. If we exclude this item, the other income was essentially flat versus the prior quarter. Expenses increased $10 million during the quarter but was largely driven by the $6.3 million one-time FDIC special assessment. Excluding this item, adjustment expenses were $120.3 million, which results in an efficiency ratio of $52.2 million during the quarter. Business promotion increased $2 million for the quarter which related to year-end marketing efforts and completion of some of the activities of the 75th anniversary celebration, including some customer activities. And you also saw that OREO gains decreased $1 million for the quarter. In terms of expenses over the last few quarters, we have been guiding expenses to fall within $118 million to $120 million, excluding the benefit of the OREO gains. Looking at the fourth quarter, excluding the OREO, expenses fell above that range at $121.3 million. And looking at current pace and some of the strategies, accounting for some seasonality and things like payroll taxes, we believe that expenses for the first couple of quarters of 2024 to be in the range of $120 million to $122 million per quarter. And the efficiency ratio should be -- it should hover around that 52%, that we just had. In terms of asset quality NPAs decreased $4.3 million to $126 million represents 67 basis points of total assets. Most of the reduction relates to $7.7 million in collections and loans return to accrual status in the commercial loan portfolios, that includes a $2.7 million commercial real estate loan that accrued during the quarter. This reduction was partially offset by a $3.3 million increase in the consumer non-accrual loans. Total inflows to non-accrual during the quarter were $35 million, with just $5 million less than the last quarter, this net impact of some increases in consumer and decreases in the commercial portfolio. However, loans in early delinquency the finance of 30 to 89 days did increase by approximately $14 million and it was mostly $15 million increase in the consumer portfolios, that we had in the quarter. In terms of the allowance, allowance ended up at $269 million, which is $1.8 million less than prior quarter. The coverage decreased slightly to 2.15%. However, given the rise in the consumer loan delinquency and some of the charge-off impact the ACL on just consumer did increase to $3 million during the quarter to 3.64% of loans. Overall charge-offs for the quarter were 69 basis points as you saw in the release. The [indiscernible] the allowance for credit losses consistently with prior quarter it's estimated using a combination of a baseline and a downside economic scenario. Therefore, we see they're providing very adequate coverage for any possible losses. In terms of capital, our ratios remain very strong significantly above well capitalized with most of the ratios either had a small decrease or a small increase as the earnings generated in the quarter mostly compensated for the $75 million in share buybacks we executed during the fourth quarter and the $24 million in common dividends that were paid. Total GAAP equity increased to $1.5 billion. Basically, the improvement in interest rates and the overall environment resulted in $212 million increase in the fair value of available-for-sale securities and therefore reduced the other comprehensive loss adjustment. And tangible book value per share, as a result, increased by 19% to $8.54, and the tangible common equity ratio increased to 7.7%. It's still when you look at the remaining other comprehensive loss adjustment, it represents approximately $3.74 in tangible book value per share and over 300 basis points in the tangible common equity ratio. Assuming rates remain stable, we will continue to recover this other comprehensive loss based on the short duration of our investment portfolio. And as we have mentioned in prior calls, we continue to reiterate our intention and our ability to retain this investment through maturity. With that, I would like to open the call for questions. Thanks.

Thank you. [Operator Instructions] So our first question comes from the line of Timur Braziler of Wells Fargo. Your line is now open. Please go ahead.

Hi. Good morning.

Good morning, Timur.

Good morning.

Starting on the deposit side, I'm just wondering how the cost trend that the lag effect of public funds is in the rear view? You mentioned excess liquidity in your prepared comments a couple of times. I'm just wondering, can you frame what you consider excess liquidity remaining on your deposit base as that exists, is the expectation that it's back filled with brokered deposits, and then all in kind what does that mean for deposit pricing and cost as we go through the first couple of quarters of '24?

Well, in terms of cost, clearly what I mentioned in the call, in the remarks is that -- with rates being stable as we have seen over the last couple of months and the possibility of rates coming down, we believe that we're going to start seeing cost reductions in the market in terms of deposits. The only question continues to be still there could be some shift. We have a strong 34% non-interest bearing ratio to total deposits, non-interest-bearing deposits to total deposits. And we could still see a little bit, although, that's slowed down a lot in the quarter, that migrates to higher cost. Not all the time deposit portfolio has repriced, still some of the older things are coming due, and that should be some of the other side of the impact on the cost. But clearly on the -- most of the non-interest-bearing, I'm sorry, interest-bearing savings and checking accounts were there and government repricing shouldn't change much based on these rates. In terms of the liquidity -- of the excess liquidity, is that, obviously, what we have seen is the market…

Yeah, market contracted. Overall market, Puerto Rico main market contracted about 3% in the first three-quarters overall market, of about 3% of the overall. In 2023, deposit about 7% -- contractable 7% in the Florida market. So, when we say excess liquidity, we really talk about there was a significant incremental liquidity that took place during the pandemic in 2021 and 2022, it actually started in 2020. That started obviously normalizing in 2023. And we probably expect a few more quarters of that normalization on the deposit, which is customers using that liquidity that they had in the accounts and they been buying more or consuming more. And also it's based on that data that we do expect that liquidity to be utilized. It was larger the contraction in the U.S. than in Puerto Rico. But also on a per capita basis, the pandemic brought more money into Puerto Rico rather than actually the U.S. on a per capita basis. Yeah.

Okay. Thanks for that. And then maybe pulling it all together and looking at NII trajectory in anticipation of a forward, in anticipation of kind of modeling in the forward yield curve, forward rate curve. We have inflection in 1Q, you're assuming rate cuts begin in 2Q. Can you give us a sense of what NII trajectory looks like as we go through the year?

Well, in terms of actual percentages, we haven't given a specific guidance, but yeah, we're assuming that there is going to be a pickup on the margin going up, with those assumptions on the way, the market rates move. Again it goes back to the $1 billion in securities that will -- cash flows that would come in 2024, those securities are yielding less than 1.5%, that would be replaced with the lending side. The consumer lending portfolio is a fixed-rate portfolio, as well as most of the CRE portfolio, so those will continue to be there. But assuming rates move as expected, conversations of four to five rate cuts in the year should also lower the cost of deposits that would compensate for that. And the wholesale funding components are short-term nature, so they would be replaced with shorter -- I mean, lower rates. Therefore, we're assuming that net interest margin should start picking up going forward. The one caveat on the deposits is that obviously the non-interest bearing component, we saw more stability in the fourth quarter. But if it changes a lot, changes a little bit the dynamics, but still the overall, I believe, trend would be, as I just mentioned, with some improvements in margin.

Actually and the other component [Multiple Speakers]

Great. Thanks.

We have a larger portfolio starting the quarter then we had the private quarter in terms of the loan portfolio size. Yeah.

Got it. That's a good color. Thank you. And then just last for me, looking at credit, we're continuing to see a normalization of the consumer. It seems like from a charge-off standpoint, I guess a, how close are we to reaching what you ultimately expect to be a normalization and net charge-offs? And then, looking at the allowance ratio that's moved lower every quarter in '23, is that a sign of confidence around broader credit and could it ultimately get back to a level of pre-pandemic in the 17s (ph) again?

Yeah. First, I think we will probably have a couple of more quarters of this consumer normalization closer to mid-year, we'll guess. On the other hand, remember that charge-up on consumers, they don't accumulate. So they move to charge up pretty quickly, so they cycle pretty quickly. So the ACL, the allowance that you state is a function of what remains on the portfolio. And obviously, the coverage you see on the provision every quarter if we have to increase the coverage or not to absorb the losses. So, we haven't done a projection on that matter. But as of today, obviously, if you take it by probably -- mortgage business, its showing much better metrics than pre-pandemic, as you mentioned, commercial also and consumers still not getting [Technical Difficulty] multiple products, which we manage the book as a one large book, which is now $3.6 billion. So under that, auto is primary and it's still registering much better performance in terms of charge-off rate than we had pre-pandemic.

What you're seeing is the commercial side it's behaving very well. So we have seen some of that reduction coming on the commercial portfolios. As you have seen on the release, the consumer side has increased in the allowance coverage only because of this trend. You mentioned a 1.7 or something in the call, I don't remember what you're referring to, but we can discuss more. We were above 1.7 if you were talking at our ACL, pre-pandemic. So we can discuss later if you want a little bit of those ratios.

Great. Thank you.

Thank you. Our next question comes from the line of Alex Twerdahl of Piper Sandler. Your line is now open. Please go ahead.

Hey, good morning.

Good morning, Alex.

Good morning, Alex.

Orlando, with respect to your NII and your NIM guidance, which I think you said is inclusive of rate cuts, what if we don't get rate cuts? Is the repricing in the -- on the asset side, you think sufficient to fully offset deposit, I guess, continued deposit pressure?

I believe so, Alex. Remember that a significant portion of the pressure, again, on the way of pricing and the market was foregoing deposits. Rate stay where we are. It shouldn't be similar -- that repricing shouldn't be similar to what we face in the past. The only repricing on the deposit side would definitely come from the maturing time deposits. Still that -- that is a manageable one. But once you consider that the lending portfolio, it's larger -- it has a yield up of 7%, meaning on the commercial side it's going to be a little bit less combined, but it's still a very ample yield. And the fact that the investment portfolio, as I mentioned continues to run off, and it's a very low yielding, we should definitely be able to still increase the margins, assuming those components.

Okay. And then you kind of alluded a little bit to sort of the yield on commercial loans. Can you just give us a sense for -- you know, like what sort of spreads are like down there right now? We've seen a pretty big pullback in the five year, and I think some bank managements are saying that customers are demanding that and others are saying that they've got pricing power. I'm just kind of curious, where you're able to put on new production in Puerto Rico?

The overall yields on the commercial portfolio, on the portfolio -- on the general loan portfolio it's about 7.73% (ph) as of the -- for the third quarter. The spreads we continue to price similarly, which are based on market rates. So we try to sustain a spread according to internal profitability models that we want to achieve on each case, considering operating expenses and things like that. So you'll see depending on the kind of loan and the kind of pricing, somewhere between 2.5% and 3.5% spreads. But it all depends on the terms and the nature of the facility. So over market terms, I'm assuming over market rates. So the consumer side, we continue to see on the auto yields above 8%, credit card, it's priced out of a prime rate, so it's -- the 16% to 18% range. And obviously, residential, we do exactly the same as you see on the marketing in the U.S. But we are not adding too much in terms of portfolio on the residential side. So the average yields on that portfolio are around 5.70% or 5.80% on the overall portfolio. And that should stay somewhere in there because of the movement of the new cases. The repayments are upsetting a lot of what we put in and the new things we put in.

Great. Thanks. And then, I guess, just a final question for me, just as I think about capital and capital generation and really you -- I think mentioned in your prepared remarks, third year of a 100% payout. And you think about the growth down in Puerto Rico, it seems like the growth that's available, even though it's picked up a lot is probably still not sufficient to utilize the full amount of capital that you guys generate every year. So is it fair to assume a 100% payout, with respect to dividend buyback in the near term should continue?

Yes, it's a fair assumption. Yes, that's correct.

Perfect. Thanks for taking...

We...

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Kelly Motta of KBW. Your line is now open. Please go ahead.

Hi. Good morning. Thanks for the question. I may circle back to the loan growth side of things. I appreciate the color that you are budgeting or looking for mid-single digit growth, but it sounded like you were optimistic that perhaps you could do more, can you? One is that, was that the right interpretation? And two, where could you see opportunities to do better, or conversely where might there be more pressure?

Yeah. Obviously, the mix, if you look at the three prior years, we have achieved double-digit growth in the consumer. We expect that demand to reduce a little bit. Obviously, the larger the portfolios, the repayments are larger too. So when you combine demand and repayment, so we don't see double-digit growth in the consumer world this year. On the other hand, we do have the construction portfolio. So we see, we experience mid-single digit in the commercial overall, when we add the disbursement that we expect next year in the construction. So that should actually be larger than that. And then mortgage, we see basically almost flat year, we have achieved in the most recent quarter. So definitely we look for opportunities to do better than that. But obviously, when we look at all the noise around the world and rates, I think rates could improve that. So we'll see how markets move and how the rate cuts motivate that incremental investments for us to continue to participate. So that -- but obviously, we're sticking with our guidance on mid-single, obviously we will -- we like to do better.

Got it. That's helpful. And clearly, this quarter growth was impacted by metro pieces (ph). Just wondering, I appreciate the color overall about where new commercial production yields are coming on. Just wondering, if that kind of larger loan was noticeably different than where commercial loans are being typically priced right now. Just to be mindful of modeling it as we head into 1Q.

No. It was on the same, it was -- in fact, I think that's probably going to, you can get on the high side of the range that Orlando mentioned.

Yes. [Multiple Speakers]

And then the pile of mix, I have to tell you, the commercial pile of mix is very healthy. Definitely some projects on the reconstruction side for housing supported by CDBG, some – the acquisition of businesses, expansion of businesses. So really – today, we see the pipeline as a healthy one, if we compare to what we saw the last quarter or so. So obviously, the -- as we said always, the 150 loan was a one-off loan, not the usual loan that we do every quarter. But what we see enough volume additionally to continue sustaining the level of commercials that we did last year. Yeah.

Got it. And maybe a last housekeeping question for me. It seems like the repricing of the securities is going to be a big part of the story as we head through this year. Can you remind us what -- about where those securities are rolling off at? It just similar to where average security yields are now?

Well, the average yield on those securities are -- on a non-taxable equivalent basis is about 1.5%. So that's basically the average of what's rolling off, should be close to that.

Appreciate it. I'll step back. Thank you so much for the color.

Thank you, Kelly.

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Ramon Rodriguez for closing remarks.

Thanks to everyone for participating in today's call. We will be attending KBW Financial Services Conference in Boca on February 15; Bank of America's Conference in Miami on February 21; and Raymond James Institutional Investor Conference in Orlando on March 5. Looking forward to seeing a number of you at these events, as we greatly appreciate your continued support. Have a great day. Thank you.

Thank you.

Thank you, all.