First BanCorp. New

Good morning, all, and thank you all for attending the First Bank Corp Q3 2024 Financial Results Conference Call. My name is Brika, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Ramon Rodriguez, Investor Relations Officer at First Bank Corp. Thank you. You may proceed with mine.

Thank you, Brica. Good morning, everyone, and thank you for joining FirstBank Corp's conference call and webcast to discuss the company's financial results for the third quarter of 2024. Joining me today from FirstBank Corp are Aurelio Aleman, President and Chief Executive Officer, and Orlando Verges, 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 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 Rima.

Thank you, Ramon, and good morning. Good morning, everyone, and thank you for joining our call today. This morning, we reported another strong quarter for our franchise, earning $73.7 million in net income, or $0.45 per share, which resulted in a solid return on assets of 1.55%. Adjusted pre-tax preprovision was slightly down to 1.12, mostly due to an increase in expenses, as we have discussed before. Still, the organization continues to operate in the 52% efficiency ratio range in line with our guidance. Credit demand continues to be healthy in our environment, resulting in actually our strongest quarter of commercial loan ordination for the year. Our loan portfolio grew by 63 million. despite higher levels of unexpected commercial prepayments that amounted to approximately $132 million in the third quarter. Even though we continue to see a very strong pipeline and we continue to work towards our 5% loan growth guidance, but we now expect our loan portfolio to grow closer to 4% in 2024, and actually it's primarily driven by the higher-than-forecasted prepayments that I just made reference to. In terms of deposit, market dynamics seems to be behaving as expected at the start of this easy cycle. Core deposits, other than broker and government deposits, remain at $12.7 billion. We did prepay some broker CDs. Most of the decline coming from non-interest-bearing deposits. We, you know, we're broadly monitoring deposit flows and potential deposit repricing opportunities as we capitalize on the expected rate environment which started and will continue in 2025 with our target of achieving NII improvement over the period. Asset quality, it also improved during the quarter with non-performing assets coming down to just 63 basis points of total assets. We think their coming rate environment should be favorable. to commercial customers and votes well for additional asset quality improvement. Finally, our liquidity and capital position remains quite strong. This quarter, we were able to sustain our commitment to deliver 100% of earnings in the form of some capital actions by redeeming 50 million of our outstanding energy ventures and paying 26.3 million in common dividends. Even accounting for these actions, our capital ratios improved during the quarter, and our tangible book value per share grew by 15%, benefiting from the rate backdrop and the short duration of our bond book. We enjoy a nice degree of capital flexibility and expect to deploy it in a manner that best suits the long-term interests of the franchise. Let's turn to page five to talk a little bit about the environment. You know, we continue to experience, you know, what we consider stable and positive economic backdrop reflected in a good quarter of the re-nations and also in the trends of asset quality. September unemployment in Puerto Rico just came out at 5.5%. Actually, historical lowest in 1976. It also is reflecting, you know, year over year, payroll employment improvement of 1.6%. Our team remains focused on expanding the city relationship, building commercial loan pipeline, and adopting new platform technology. We did launch in September our Encino platform, which actually provides a completely digital experience in the commercial lending workflow. We continue to generate a lot of organic capital and we continue to, our priority is to fund loan growth and continue franchise investment in technology to better serve our customers while deploying any excess capital into ongoing equity balance sheet, you know, management opportunities. We're, you know, we are proud of our third quarter result. We thank all our employees and we look forward to updating you in January. on what to expect in 2025. I will now turn the call over to Orlando, and we'll be back to answer some questions. Thank you.

Good morning, everyone. As Aurelio mentioned, we reported 74 million in net income for the quarter, 45 cents a share, which compares to 76 million or 46 cents a share last quarter. The provision for the quarter increased 3.6 million to provide for increases required in the allowance for credit losses on the consumer loan portfolios based on charge of trends and the size of the portfolios. We also had some reductions like the reductions on the effective tax rate as the relationship of projected taxable versus income changed a bit from what we had before. Net interest income for the quarter was $202.1 million, which increased $2.5 million as compared to last quarter. This quarter, we did have an additional day, which is approximately $1.2 million improvement in net interest income. And we also had increases of $3.8 million in interest income on loans. But on the other hand, the investment portfolio income was down $1 million as we continue to see repayments. and maturity is coming in. Loan yields were down one basis points. We did have small impact on the 50 basis points reduction in September. Obviously, the lower yields are going to affect the yields on the floating rate component of the portfolio. Overall cost of funds, however, stayed flat in the quarter. Net interest margin expanded three basis points to 425, mostly reflecting the change in the asset mix from the deployment of the cash flows from the lower yielding investment securities to fund higher yielding loans and bringing down the wholesale funding costs. Regarding net interest margin going forward, What we expect to see the margin to be flat, similar to this quarter, in the fourth quarter of 24, with improvements going into 25. Our expectation is that rates will come down an additional 50 basis points this year and probably 125 basis points in 2025. But the impact on the downward repricing of the commercial floating rate portfolio, it's going to be compensated by the repricing of the cash flows from the lower yielding investment portfolio and the repricing of deposits, which typically have a lag in the repricing component. Also, we have been repurchasing subordinated ventures, which have higher cost, and we have led some broker cities, not renewing them, those are higher cost funding, as well as any new renewables would be done at a lower cost. That will improve the margin. In terms of the securities, to put it in perspective, our estimates are that we'll see another 480 million of repayments and maturities in the portfolio in the fourth quarter of 24. and approximately $350 million in the first quarter of 2025. And the repricing of these cash flows, either through loans or securities, will be seen in the first half of 2025. Other income was fairly flat in the quarter. We did collect an older insurance claim for $100,000. and enter into other income, but otherwise was fairly stable. Expenses were $122.9 million, which is $4.3 million higher than last quarter. Oreo gains this quarter were $1.3 million as compared to $3.6 million last quarter. We had last quarter, we sold a large commercial Oreo that had been on the books for a while, and we realized $2.3 million gain on that sale, which was nothing similar this quarter. If we exclude Oreo, expenses for the quarter were $124.3 million, which compares to $122.3 million last quarter. This increase includes about $1.6 million in higher personal costs. related to merit increases as well as an additional day, payroll day in the quarter. We also saw increases in consulting costs related to some of the technology projects like the Encino project Aurelio just mentioned. We had higher electricity costs and higher rental expenses because we're charging to expense over the last four months of the year. the remaining rental agreement of one branch that will be closed at the end of December. As Aurelio mentioned, our efficiency ratio continues to be around the 52%. Based on the current stage of several technology – of several ongoing technology projects, we estimate that our expense base for the next couple of quarters would be in the 123 to 124 million range, slightly higher than before. But we will provide more guidance for 2025 as the year ends and we report full-year results. In terms of asset quality, we had a reduction in non-performing of $7.8 million, which is 63 basis points of – non-performing represent 63 basis points of total assets. The reduction was mostly on the sale of an $8.2 million on accrual commercial loan that we had in Puerto Rico. Inflows to nonperforming were down 5.3 million. Commercial loan inflows were 17 million lower, but consumer loans increased 10.5 million. You might remember that second quarter inflows included a 16.5 million commercial relationship in Puerto Rico that was migrated to nonperforming. On the other hand, loans in early delinquency registered a decrease of $4 million, The decrease in the consumer loan portfolios was almost 8 million, 7.9 million exactly, while the commercial portfolios increased 4 million. However, this commercial increase was really a case that matured at the end of the quarter and was in the process of renewal, but it's up to date in payment, so it would come out from early delinquency now in October. In terms of the allowance for credit losses, it's down $7.5 million to $247 million, with most of the reduction coming from the residential and commercial allowances that declined $12.9 million due to improvements in the macroeconomic forecast and also improved financial conditions of several of the commercial borrowers that we have. On the other hand, the allowance of the consumer portfolio did increase by 5.4 million due to the recent loss trends. The ACL ratio, overall ACL ratio is down to 198 from 206 on the quarter, as we continue to see good credit trends in the commercial and the residential mortgage portfolios. Net charge for the quarter were 24 million, or 78 basis points of average loans, which compares to 69 basis points last quarter. including the charge of its $1.2 million on the sale of the commercial loan accrual loan. I just mentioned that it represents approximately four basis points of the increase. Consumer net charge of increased $1 million in the quarter as compared to the third quarter. On the capital front, regulatory ratios increase as we continue to be significantly above wealth capitalized. We did deploy, as Aurelio mentioned, 100% of the earnings into the junior subordinated debenture and repurchase we did in the quarter, as well as the payment of the common dividends. But capital did increase based on the excess of earnings over the dividends. The tangible book value per share increased by 15% to $10.09, and the TCE ratio reached 879. mostly a combination of the $160 million increase in the fair value of the securities, as well as the earnings for the quarter. Still, we have remaining AOCL on the books, which represent around $2.92 of tangible book value, and over 230 basis points of the TCE ratio. We will continue with our capital deployment. in a way that it's, as Aurelio mentioned, the best interest of the other franchise and our shareholders and in accordance with our capital plans. This concludes our prepared remarks. Operator, would you please open the call for questions? Thanks.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypads. If you change your mind at any time, please press star then 2. And as a reminder, that is star followed by 1 to ask any questions. We have the first question on the line from Tamara with Wells Fargo. You may proceed.

Hi. Good morning. My first question is around the balance sheet. Just wondering what your thoughts are around when the balance sheet can actually start increasing here. And then as it relates to NII and the release, it sounded a little hopeful for NII growth in 2025 being driven by bond cash flow reinvestment. I'm just wondering, you know, what the correlation is between the ability to grow the balance sheet and grow NII in 2025.

There are two things there. The cash flows will continue to come from the investment portfolio and will continue to reprice. As of now, most of that cash flow has been reinvested in loans, and either that or staying in cash. That's why necessarily a balance sheet is not necessarily growing. We will continue to put monies into loans. And as Aurelio mentioned, we're expecting like a 4% growth this year. And that will continue to be a stable balance sheet until we feel that the investment portfolio size is at the level that it's on average what we would like to maintain for liquidity needs and for collateral of public funds. At that point, we will start reinvesting some of the money and there will be some growth on the balance sheet As I mentioned, Timur, some of the broker cities that we had on the books that mature, we're letting them go. They're high cost of funds, and at this point we still have good liquidity coming in from the investment portfolio. So not necessarily we need to increase the balance sheet to maximize earnings, but clearly that's something that we should start seeing later part of 2025.

Okay, so that latter part of 2025, is that kind of corollary to when you're expecting net deposit growth as well, or could we see some incremental deposit growth here in the near term?

Yeah, deposit growth have been sort of flat. It's a little bit up or a little bit down. When I talk about the deposit flow, I typically exclude – I'm sorry, deposit growth, I typically exclude a – for this discussion, brokers and government. Brokers, we totally decide, you know, when we want a little bit more or a little bit less. Some of it is being used to fund the Florida operations. So we manage that. And government, it's sort of a stable kind of base what we have, so it comes up or down a little bit. So looking at the other deposits, you saw they were just slightly down this quarter, our 36, 37 million. We had a little bit of a shift between interest and non-interest earning. And, you know, we feel that the market in general will stay sort of that and maybe grow a little bit. But we don't expect to see significant growth on the deposit portfolios. But, you know, only the reinvestment of the interest component increases the portfolio typically in the market. But obviously, the market is coming from a humongous amount of liquidity from all the funds that were allocated, and most of that, it's gone by now. So what's coming in is some of the other programs that we have discussed in terms of still remaining FEMA and some of the pandemic kind of infrastructure funds that are coming into the market and construction-related that are coming into the market.

Got it. And then just last for me, it looks like although the Puerto Rican banks this quarter had a uptick in some consumer credit, I'm just wondering that the broader health of the consumer there, have we kind of troughed out from some of the pandemic benefits And I guess, you know, what are we looking at now for general consumer trends on the island?

I think we talk about normalization early in the year. We talk about, you know, 2020. We actually started talking about this in 2020. You know, the post-liquidity increase on the consumer pocket by the pandemic primarily. At that most doubt, we were expecting some normalization on the behavior of the consumer portfolios. started for the credit card in 2023, continues to 2024. And then what we see now is that we're reaching a peak and we should, going forward, as we're seeing today in some of the early delinquency metrics, show some slight improvement. That is coupled with whatever happens with the demand. So we're not We're not increasing risk appetite. We have been very firm in, you know, doing that. We have metrics for each portfolio that involves of tolerance of delinquency and losses. And, you know, I will say, you know, we expect stability on that portfolio with some, you know, delinquency and loss improvement over 2025. Great. Thanks for all the call.

Your next question comes from Steve Moss with Raymond James. You may proceed, Steve.

Good morning. Maybe just starting here on the, maybe just starting here on the, or following up on the securities portfolio here. I heard you, Orlando, on the 350 million maturing in the first quarter of 2025. Just wondering, you know, kind of what are the expected cash flows beyond the first quarter?

Yeah, the 480 this quarter and 350 in the first quarter, and we have for 2025, full 2025, including the 350, we're estimating that it's going to be somewhere between 1 billion and 1.1 billion. based on maturities and repayments, that's full 25, including the 350 on the first quarter.

And the coupon on that I'm assuming is around 2% plus or minus?

It's minus, it's really about, the maturing component is probably gonna be somewhere between 150 and 160. So the overall yield, it's about 190, 180-something. But some of it, it's also things that don't mature until later in 26 and 27.

Okay. Great. Appreciate that. And then in terms of just curious here, you know, with the Fed rate cuts, of want to get a sense as to how you're thinking about the pace of deposit repricing and kind of what you're seeing here with the 50-days point cut.

So, deposit repricing, you know, obviously have to be divided in three components. The typical non-interest-bearing account, those had a beta coming up about 13 to 14%. So we're assuming that's gonna be following that same pattern. In the case of the government side, betas were about 78%. We feel those are gonna come down, maybe slightly lower beta than that 78% that we had coming up. But clearly those are the ones that do have some components that will reprice faster. Then in terms of time deposits, We have already started adjusting some rates on new each ones. But obviously, the repricing will follow whatever terms. Clearly, people were not making, you know, the average time deposit, it was mostly one to one and a half years. We didn't have much in terms of longer things being originated. So it doesn't take that long to start repricing, but we've already repriced some of our table rates for those terms going forward. So, I mean, again, I always see a lag on the typical deposit portfolios repricing. That's why I mentioned that we are expecting margin for the fourth quarter to be sort of the same line of the third quarter. because some of the repricing on the lending side, on the floating rate portfolio, will be factored at some of that on the deposit. But on the other hand, obviously, we are eliminating some of those higher-cost brokercies that are not long-term, that are being either repriced lower or eliminated at a full benefit.

Okay, great. I appreciate all that color. And in terms of just kind of You know, commercial originations, you know, remain quite strong here. Just kind of curious, you know, where are you seeing, you know, the most demand there? And, you know, it sounds like the pipeline's improved, so probably an uptick is coming in terms of total originations for the fourth quarter.

Well, you know, on the commercial side, you know, there is a combination of construction deals that continues to move into the book. Some of them related to the CDBG projects. There is auto industry deals, transactions that are coming into the bull also as new deals that are being happening. There's also CNI components on the commercial side. We're very active on the street looking for new clients. There are some distribution industries, supermarkets. So it's a combination of not necessarily a concentration in any asset class itself. And there's some government activity also that we expect during the quarter. And Florida actually continues to be the contributor to that commercial pipeline, yeah. The consumer, we will say it's stable more than just, you know, the growing market right now. Yeah. Right.

Okay, great. Orlando and Roman, really appreciate it. Thank you very much for all the call. Thank you, Steve.

Thank you, Steve. We now have Frank Chiaroldi with Piper Sandler. You may proceed.

Good morning. I'm wondering if you guys could just remind us on Orlando, I know you talked about the lag generally on the deposit side, specifically on the public sector deposits, as far as, you know, I guess a large portion of that is indexed. What are, you know, is it still reasonable to think a one-quarter lag in terms of those public sector deposits coming down in cost?

Yeah. You have, on average, clearly, yes, you have some that will reprice faster, but others have longer lags because they didn't necessarily reprice up the same way, depending on the type of account. So the average of one quarter lag, it's a good proxy, Frank.

Okay. And then just in terms of another question on loan growth, you mentioned the prepayments in the quarter. And so, you know, close to 4% this year. I guess with the stronger, this continued strong pipeline, you know, mid single digits is still a reasonable place to expect.

future loan growth in coming quarters? Yeah, I would say yes. You know, obviously, that was our goal this year. We've just been hampered by decided and expected repayments. But, you know, when you look at the origination volumes, they are in line with what we targeted in terms of, you know, early to anticipate next year. But, you know, based on what we see,

and you know what the economic activity is bringing you know it's a it's a good number for next year to uh you know meet single digit for now yeah okay um and then just lastly on uh orlando you mentioned uh expense um expectations on the expenses over the next i think couple of quarters um So, just want to make sure I heard that correctly, that 123 to 124, that 4Q and beyond, was that just 4Q? And then, you know, as we think about you guys, the targeted efficiency ratio of 52%, is it kind of reasonable to assume maybe that picks up a little bit in the near term, just given the expense guide, and then you get back to that 52% over time? You know, is that reasonable? when thinking about trends into 2025?

The 123, 124, it's what we estimate based on the stage of some of these projects I mentioned between fourth quarter of 24 and fourth quarter of 25. That obviously excludes any kind of Oreo. We're still seeing some positive numbers coming out of the Oreo portfolio. that would offset some of it. As you saw now this quarter, we had 1.3 million in Oreo gains. So that would be on the numbers, and that's part of the 52%. So that's why, you know, we feel that with the pickups through the year on earnings from the repricing dynamics of the investment and loan portfolios and so. with those levels of expenses, 52% sort of holds on a gap basis, including the OREO component. If you exclude OREO, it would be clearly a bit higher on the first couple of quarters, definitely.

Okay. All right. Got you. Thank you.

Thank you, Frank. We have our final question on the line from Kelly with KBW. You may proceed, Kelly.

Hi, good morning. Thanks for the question. I was hoping maybe you could expand a bit more on capital return. I know you did the sub-debt repurchase this quarter. Historically, you've paid out about 100% of earnings. Wondering thoughts on stepping back in here with the buyback, as well as paying out earnings given 16% plus CET1s. if that's a reasonable expectation as we look out to next year.

Well, you know, as I said before, Kelly, you know, we like to keep optionality. So we still have, you know, a capital plan that has, you know, plenty, you know, space approved for execution. We decided, you know, to focus on the last quarter on the on paying the drops and, you know, this quarter we'll see what happens. But definitely, you know, we keep the optionality. I think they keep in mind, you know, the 100% goal continues to be for now and through 2025. That is our position today. But that obviously could change as we move into 2025, yeah.

Understood, that's really helpful. And then can, remind us what happened with the Virgin Islands? I know there was some deposit outflow and that's where the commercial repayment was. Just wondering if there's anything unique going on that drove that variance on both sides of the balance sheet this quarter and how we should be thinking about that.

The Virgin Islands, it's two things. We did have a repayment on the government side. They used their funds to repay some lines. that came down from deposits they had on the bank. But the other thing is that if you go back, typically the third quarter, there is a seasonality component in the Virgin Islands. There's slow season. If you go back to third quarter of last year, we had about a $60 million reduction in the quarter from June to September, which compares with a $50 million or so reduction we had this quarter. The island has a big component is tourism, and it comes down this quarter. And you see the movement. And that's, there was nothing, you know, unusual. It was not like one account or one sector. It was sort of across the different business and retail components. And again, similar to what we saw in last year.

Got it. Got it. That's really helpful. Most of my questions have been asked and answered at this point. I guess on mortgage banking with, you know, the move in rates, any expectation that that revenue line could pick up here as we look ahead?

Yeah, I think, you know, the You know, the monthly applications reported in the market is really a good proxy. You know, the industry moves with rates, and we move as well. You know, we have a pretty good market share on the overall orientation of the market. And, you know, some shifting from conforming or non-conforming takes place based on, you know, where the rates are. And so, you know, I would consider, you know, the portfolio has stabilized and achieved some growth this year. driven by, you know, more non-conforming paper based on rates, and that could change, and that would bring, you know, more non-interested income into the picture. So if rates go lower in the non-conforming side, in the conforming side, you definitely will see that piece increase, or then you see it in the portfolio, their rates go to the other side. So the portfolio is very healthy. You know, we are achieving, you know, you know, the best asset quality that we ever had in that portfolio. So we, you know, we're very pleased with the performance of the business. And, you know, any opportunity that we see to grow, you know, will probably be taken next year.

Got it. And then last question for me, your commentary around NII and margin, you know, one factor in it is the repricing of some of these loans down in response to the rate cuts. Can you remind us how much of the book floats?

Yeah, we have 54% of the commercial book. The consumer book is a fixed rate portfolio. Other than credit card that do have some repricing with prime. But the commercial side, it's 54%, it's floating. Mostly on the CNI, the CRE, it's basically fixed. And that 54%, it's about 33%, it's SOFR-based. We have our 12% prime-based, and our 9%, it's basically treasury-based. So we, obviously, the prime-based loans In fact, as we saw, you know, in the second half of September, some of the other SOFR base, we've had some movement already as SOFR has come down through the quarter.

Thank you.

Thank you, Kelly. I can confirm that has now concluded today's question and answer session, and I would like to hand it back to Ramon Rodriguez for some final remarks.

Thanks to everyone for participating in today's call. We will be attending Hopley Financial Services Conference in Miami on November 7th and Piper's Conference in Naples on November 14th. 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 all for joining today's conference call with First Bank Corp. I can confirm today's call has now concluded. Please enjoy the rest of your day and you may now disconnect from the call.