First BanCorp. (FBP) Earnings Call Transcript & Summary

Good morning. Thank you for attending today's First Bancorp 4Q 2022 Financial Results Conference Call. My name is Alexis and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to the Corporate Strategies Investor Relations Officer, Ramon Rodriguez. You may proceed.

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 fppinvestor.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. Please turn to Page 4 to discuss the highlights of the quarter. We closed [indiscernible] solid return on asset of 158%. We earned $73.2 million or $0.40 per share in net income achieved 122.2 million in pretax preprovision income and reached an efficiency ratio of 48%, even lower than 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 an increase in the interest expense portion. Stable credit trends continue, supporting asset quality improvement with nonperforming assets decreasing by $14.1 million to $192 million, which is a decade low at 69 basis points of total assets. Also good news on the early delinquency side, which also improved during the quarter and still below prepandemic levels. In terms of capital deployment, we continue our plan. During the fourth quarter, we repurchased $3.5 million shares of common stock for a total purchase price of $50 million and paid $22 million in common stock dividends. Our consistent earning generation capacity, disciplined sales management have definitely allowed us to continue returning capital while allocating resources to organically grow the purchase. Let's move on to the balance sheet page 5 to discuss loan and deposit trends. On the asset side, total loans and 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 loans, which are almost finished now, commercial and construction grew by 141 million or 3% linked quarter. Total originations, including renewals and credit card deletion activity was very healthy at 1.4 billion, up 15% versus the prior quarter. That is our priority, deploy capital to achieve profitable loan growth and capture additional market share across all the lending segments. It's really the core principle of our plan, and 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 $215 million or 2.3% during the quarter, which was actually slightly better than the local market trend for the quarter. As expected, we continue to see excess liquidity gradually tapering off within household balance sheet. However, our deposit balances for both retail and commercial customers remain above prepandemic levels. We are focused on leveraging our expanded sales distribution channels and digital channels to grow our market share on the deposit market and the products and services related to it. That said, liquidity levels remained high with our ratio cash plus liquid securities to total assets above 19% still. Please let's move to Page 6 to discuss the highlights of the full year. We're really very proud of the work that the team performed during 2022 over the course of 2022, the teams were very hard to deliver oustandings for the franchise. We raised the organic loan growth of $762 million when we exclude PP loans and the strategic reduction of residential mortgage, earned $305 million in net income and achieved a record pretax preparation income of $475.3 million, which is up 21% when compared to 2021 and reached a decade loan nonperforming 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 omnichannel our strategy with the investment in digital self-service platforms to optimize the distribution capabilities and products. When we look at some of the metrics, we continue to improve digital engagement, retail banking registration were up 4% during the quarter, 17% during the year, our option of our newly launched Visa digital banking applications continue to increase. Our new business digital lending functionality has improved our penetration to the small and medium business and SBA segment. And also, we continue to capture over 40% of all deposits to the service channels. All these milestones have been achieved within the context of a more efficient traditional branch network. During 2022, we also consolidated 5 additional branches, including 2 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, improved institutional channels, best-in-class talent, all without compromising the operating leverage of the organization. Definitely, this result translated into one of our best-performing years on record for the franchise, while 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 enabled us to continue delivering value to our shareholders while at the same time providing ample loss attraction capacity in the event of an economic downturn. Please let's move to Page 7 to discuss some highlights on the outlook of our macroeconomic environment. Definitely, global expectations point 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 continued to sustain an onward trend pay or employment reaching a decade high in November 22 or 4% year-over-year and the economic activity index, our monthly indicator of that traffic, the economy close equate 22 about 2021 levels even when accounting for the impact of [indiscernible] in September, which disrupted the market for a couple of weeks. Most importantly, our growth thesis continue to be sustained by the large amount of federal date funds, still pending to be dispersed. Over $45 billion diverse obligated funds has been earmarked to support broad-based economic development and rebuilding initiatives designed to improve the online infrastructure and overall capital stock. Public data shows that the experiment reached $3.2 billion during the 11-month period ending in November, which is actually 96% above what was registered in 2021. The rollout of these funds is expected to gradually increase over the next decade with the most recent estimates reflecting approximately $5 billion are the estimates for 2023. That would be great. The target disbarment of these funds, coupled with the government improvement fiscal position and focus on economic development is really what is driving the tailwinds 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 and look forward to many more years of collaborating supporting our clients and the communities and growing the franchise. We do have multiple initiatives to celebrate this accomplishment and show our gratitude to the communities, employees, customers. I will now turn the call to Orlando to go to more detail on the financial results. Thanks to all for your support.

Thanks, Aurelio, and good morning, everyone. So Aurelio mentioned that 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, it's a benefit on interest income from the increase associated with the upward repricing of variable rate loans along with the higher average balances in the loan portfolio for the quarter. But as anticipated, we have also continued to see an acceleration on the participants which is driving deposit costs higher. In addition, we did increase the level of wholesale funding in the quarter, which, combined with the increase in the post ultimately resulted in a reduction in net interest income. The provision for credit losses in the quarter was $15.7 million, 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 up on that a little bit later. Just to mention for our allowance, we continue -- for determining the allowance, we continue to use 2 scenarios. We weigh them, a baseline scenario and a downside economic [indiscernible]. 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 the higher loan balances. But on the other hand, we had a $20 million reaction 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 a $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 on pricing on your originations. On interest expense, just looking at deposits, interest expense grew $11 million or 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 cost increases. Deposit betas for the quarter, for the toller 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 a $2 million increase in cost of borrowings. $700,000 relates to repricing of floating rate debentures and the other $1.4 million, it's basically increase in the size of the borrowing portfolio, FHLB advances and repos. Margin increased 6 basis points in the quarter from 4.31% to 4.37%. The change was primarily a change in asset mix as the average balance of cash and investment securities, which are lower yielding, decreased by $600 million, while loans increased about $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, if you look at balances 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 $830 million in commercial loans that reprice now in January, some of them are quarterly repricing loans. However, we do expect that 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 we 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 the improvement in net interest income coming from the growth in future growth in the loan portfolios. In terms of noninterest income, it remained relatively similar to last quarter. The improvement -- we had improvements in credit on the card transaction fee based on seasonality but that was offset by lower mortgage banking income. We also -- during the quarter, we also reversed out $700,000 of previously recognized fees on nonsufficient funds as far as some changes on fee structure that are being implemented just towards the end of the year. In terms of FX expenses for the $112.9 million, which compared to $115.2 million in the third quarter, $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 increased $500,000 increase in business promotion, sponsorship and product relation activities that we had during the quarter. The expenses in the quarter were very much in line with our estimates of $115 million to $116 million, which excluding OREO obviously, and our 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 -- at the end of the year, we have seen significant increases in -- or some increases in contract renewals with inflation clauses, some of the renewals are coming up. And there are several technology improvement projects that we have underway that are picking up speed in this quarter. Based on this, if we exclude OREO expenses, we believe expenses for the quarter or for the first couple of quarters should be closer to the $120 million range. In terms of asset quality, our OREO made reference, we continue with a very stable asset quality. Nonperforming decreased $14 million in the quarter, Standard $129 million, which is 69 basis points of assets. The reduction included $9.3 million nonaccrual commercial loan reductions, $5 million loan that we restored workable status. And we also had a $7 million that's what drove mostly the reduction in the commercial side. And we had a $7 million reduction in OREO properties based on increasing 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 delinquency, again, defined as 30 to 89 days continues to be good, decreased 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 our consumer portfolio. We also had a $1.7 million charge-off that we took on in the fourth quarter on the sale of an adversely 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 these figures are significantly lower than prepandemic 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 200 on just loans was $260 million, which is $2.6 million higher than last quarter. The ACL reflects the increase in the portfolios 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 $228 million on the third quarter. On the capital front, just take what Aurelio mentioned already, we continue with the execution of the plan. We repurchased 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 small reduction in Tier 1 and an improvement in the leverage ratio. Tangible book value per common share increased from $646 to $692 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 $681 compared to 655 last quarter. If we were to adjust for the OCI impact, non-GAAP tangible book value per share would be about 11.30% and tangible common equity ratio would be approximately 10.6%. So those are strong numbers. And again, we -- as we have mentioned in the past, we believe this impact is temporary since we do have the ability to all the securities through the end of the maturity process. Securities continue at a 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.

[Operator Instructions] The first question comes from the line of Timur Braziler with Wells Fargo.

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 it to remain in your current levels?

Yes. There will be some pressure 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 2 components, we are 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 from the growth in the portfolio. That's what's going to drive improvements in net interest income in the near term.

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 increased for the first time in over a year. How should we think about the funding of future deposit outflows to the extent that there is 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 book?

Well, again, the securities portfolio, it's given us somewhere approximately $150 million per quarter in cash flows so that clearly is 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 2 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 broadly being or we expect them to be less than the significant 2022. So that creates some stability on deposit movement, but there is still volatility in the market that we need to be conscious. So there could be some increases in wholesale funding based on that.

[indiscernible]

The investment, I'm sorry, you're saying that we do have the cash flow coming from the investment portfolio, but we also can use the portfolio for repos or advances.

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 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.

No. We feel the balance sheet 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 the one on deposits. Clearly, there was excess liquidity that has been redeployed for different things people are using and obviously, the market rate movements 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.

The next question comes from the line of Kelly Motta with KBW.

I thought you'd pick up on the loan side. You had really strong growth this quarter, and that seems to be one of the factors that helps offset some of the other areas of pressure that we've been talking about. Can you speak to your pipeline, how demand has been holding up as we've gotten quite a few rate hikes now and kind of the outlook for growth and color around categories would be helpful.

Yes. If you look at it by segment, obviously, residential mortgage, we don't expect any growth. Actually, the portfolio has been holding. And if we saw last quarter, we had a slight growth, it's really a mix of repayments and origination at the end of the day because you know how the market, the resi market is performing. Obviously, the more conforming rates go down, which they've been moving a little bit better, some of the nongovernment volume will move to that. So we're forecasting that segment to remain flat. We continue to see strong demand from the consumer and auto businesses, credit card, and we continue -- and the pipeline for construction and commercial remains very strong, actually probably very similar to the prior quarter that we started. Some of the deltas, one quarter versus the other depend on the consumer, what we did last year was close to 10%. What we did in the commercial was less than that. It depends on the more chunky deals. I will say on a blended basis for the year, we should think about 5% to 6% mid-single digits as a closest estimate based on what we see today, what we have, and that could be some larger chunky deals that we're not including here that could be participation in some of the public private partnerships at the government is structuring to be able to define the timing of those, it's quite complex in terms of predicting when they will be finished and close, but some of those are floating around, are part of the fiscal plan and they've been in the negotiation with different bidders. So some of that could help [indiscernible] which I'm sure most of the bank locally will participate as part of our support to the infrastructure and the economy. So that I would say, Kelly, the closest estimates about mid-single digits, yes.

Got it. That's helpful. And to circle back on NII and NIM, as you think about it potentially expanding in the latter part of the year. How should we be thinking about the turn and threshold of NII reaching a bottom or should we be anticipating a similar level of deposit pricing pressure this quarter? Is it potentially heating up? And if you could give any numbers around the core deposit base, excluding the government deposits and how betas are trending on that, that would be helpful in understanding this?

Okay. This quarter, we do expect still some pressure. Remember that, obviously, you're seeing average impact in the last quarter of what happened with rate movement throughout the quarter. But obviously, the ending number in the quarter, it's higher than the average that we had because of it. Clearly, a lot it's a push on the more volatile government component that had a very large beta and that we expect that to have some impact in the second quarter, although our future impact because of rates expectations are not necessarily going to be at the same pace. On the rest of the deposit, as I mentioned, the average cost of all the other deposits was 40 basis points in September and the September quarter, it was about 66 basis points in the fourth quarter. The beta there was a little bit over 18%. And we are not seeing a dramatic movement. It's probably going to be somewhere between 18%, 22% is what I expect on that portfolio. Obviously, the government side will stay at similar levels that we saw. But I mean, government public deposits in general that we saw during the quarter.

Got it. I'll turn to the expenses and then step back. I appreciate the guidance of about $120 million of expenses. I understand you had some OREO gains this quarter excluding that, it looks like you would have been more around like $115 million. So that implies a $5 million step-up. Just in terms of the cadence, do you think in the next quarter or 2, there's going to be a build towards that 120 or should we anticipate with the moving parts you laid out in your prepared remarks that we're going to enter 2023 with 120 and kind of build off that number?

Well, you have a large component is what I mentioned on payroll taxes as all the thresholds are reset. We see immediate impact on that on the first couple of quarters. That tapers down towards the end of the year, some of the limits are reached. So we do see a lower impact on that one. But on the other hand, we do have several technology projects going on that we're trying to get to completion during the year, and that's kind of compensate. That's why the $120 million, it's the number we are expecting based on the immediate impact from that payroll implication. And we've also seen because of the inflation components of some of the contract renewals, obviously, are yielding higher increases that we saw a couple of years ago in terms of contract renewals. So we're starting to see that -- we saw that in the last quarter and -- but we had several and we are seeing that in the first quarter. So that's why we feel that $120 million should be like a benchmark on going on the next couple of quarters.

The next question comes from the line of Alex Twerdahl with Piper Sandler.

Okay. Just going back to deposits quickly. Can you just remind us if there's any seasonality that we should be thinking about over the next couple of quarters or do you have any line of sight on some deposit wins maybe early in '23 related to taxes or anything along those lines?

Well, you always have a little bit of open and taxes on people using the money, but it's never been a significant component on the movement of deposits and the bank at the institution. So we wouldn't -- I wouldn't say seasonality, it's going to drive a lot movement over the year it's more of the other factors.

Okay. And then with respect to the buyback, you get the $125 million, which I think is good until June, if I'm not mistaken. How are you thinking about using that today? Some banks are saying they're seeing more uncertainty and other banks are saying they're getting back in the market. So I'm just curious how you're thinking of things. And if we should expect additional commentary in April, which had been your cadence over the last 2 years for capital return.

Yes, the answer question number one is definitely, as we said before, we would like to keep the optionality, and we've been doing that. And we adjust how much we do every quarter based on several factors what we see, including market uncertainty. At this stage, we continue to execute we probably, I will say, the most probable number for this quarter is similar to last quarter. Based on what we see today, that can be adjusted if we -- things that they became a concern to the market. And on the other hand, we don't have a limit when to use the 125. So we can do it now or do it in 3 quarters or doing in 2 quarters. There's no expiration. On the other hand, answer to the question number 2, yes, our cycle to revisit the capital plan, run a stress test, see the numbers and decide finally how much more we're going to go forward, it's going to be April. So yes, we do expect to make an updated announcement on capital during April. That is correct. Yes.