Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- First BanCorp (FBP, Financial) reported a solid quarter with $76 million in net income and a strong return on assets of 1.61%.
- Total loans grew by 2.4% linked quarter annualized, driven by growth across all business segments.
- Core deposits, particularly non-interest-bearing accounts, improved and now represent 34% of total deposits.
- The company maintained a strong CET1 ratio of 15.8%, indicating robust capital strength.
- Net interest income grew by $3 million, and the net interest margin expanded by 6 basis points to 4.22%.
Negative Points
- Early delinquency and charge-off trends within the consumer book are returning to historical levels, indicating potential future credit issues.
- Non-performing loans increased by $3.2 million, primarily in commercial and construction sectors.
- The provision for credit losses was $11.6 million, reflecting higher charge-offs in the consumer portfolio.
- Funding costs increased, particularly in time deposits, which saw a 16 basis point rise in average cost.
- The efficiency ratio was 51.2%, which, while in line with guidance, indicates room for improvement in operational efficiency.
Q & A Highlights
Q: Can you provide insights on the macroeconomic environment in Puerto Rico and its impact on First BanCorp's performance?
A: Aurelio Aleman-Bermudez, President and CEO, highlighted that Puerto Rico's macroeconomic environment remains stable with positive indicators such as increased labor market participation, record levels of passenger activity, and strong consumer confidence. The $2.5 billion in asset relief funds distributed in the first five months of the year is higher than last year, primarily driven by construction projects. The economic activity index shows positive GDP growth, and foreign investments continue to flow into Puerto Rico, supporting economic stability and growth.
Q: What are your expectations for the net interest margin (NIM) moving forward?
A: Orlando Berges-Gonzalez, CFO, stated that the NIM is expected to continue increasing. The $720 million in cash flows from the securities portfolio, currently yielding about 1.5%, will be replaced with higher-yielding assets such as loans or investment securities, potentially adding 4 to 5 basis points to the margin. Funding costs have stabilized, and new loan originations are coming in at higher rates, contributing to the expected margin expansion.
Q: Can you explain the reduction in the commercial real estate (CRE) reserve due to macro factors?
A: Orlando Berges-Gonzalez explained that the reduction in the CRE reserve is partly due to the better performance of the Puerto Rico market compared to national trends. The CRE price index in Puerto Rico has not suffered the same impact as some U.S. markets, leading to improved projections and lower reserve requirements for the CRE portfolio.
Q: What is the outlook for loan growth, particularly in commercial real estate and construction?
A: Aurelio Aleman-Bermudez noted that some of the CRE growth was due to conversions from construction loans to permanent loans. While there have been delays in construction projects, disbursements are expected to pick up in the second half of the year. The loan pipelines remain healthy, and mid-single-digit loan growth guidance for the year is maintained.
Q: How do you plan to utilize the $250 million capital authorization for share repurchases or debt redemption?
A: Aurelio Aleman-Bermudez stated that the immediate focus will be on redeeming outstanding trust preferred debentures, which will provide immediate EPS accretion and simplify the capital structure. While the priority is on debt redemption, the company retains the optionality to execute opportunistic share buybacks as well.
Q: What are your expectations for the efficiency ratio given the anticipated margin expansion and expense outlook?
A: Aurelio Aleman-Bermudez and Orlando Berges-Gonzalez indicated that the efficiency ratio is expected to remain around 52% for 2024. While margin expansion could help offset additional investments, the company continues to prioritize investments in technology and facilities to support long-term growth.
Q: Can you provide more details on the non-performing commercial loan in the restaurant or food sector?
A: Aurelio Aleman-Bermudez mentioned that the non-performing loan is part of a relationship that includes both construction and commercial components. The company expects a resolution in the future as certain initiatives in the development of the relationship have been delayed.
Q: What is the outlook for deposit growth, particularly non-interest-bearing deposits?
A: Aurelio Aleman-Bermudez emphasized that growing core deposits is a top priority for the franchise. The focus is on enhancing products, digital functionality, and commercial activity. While market trends are flat, the company aims to maintain and grow non-interest-bearing deposits, which currently represent 34% of total deposits.
Q: How do you view the potential for further OREO gains to reduce overall expenses?
A: Orlando Berges-Gonzalez noted that while large commercial OREO gains may not be as frequent, the residential mortgage OREO market remains strong, with steady market prices supporting gains. The company expects operating costs to be offset by OREO sales for the next couple of quarters, although the exact duration is uncertain.
Q: What are your plans for reinvesting the accelerated securities cash flows in the back half of the year?
A: Orlando Berges-Gonzalez explained that reinvestment decisions will be based on loan pipelines and liquidity needs. The preference is to prioritize lending, but if necessary, the company will reinvest in the investment portfolio or let some wholesale funding mature. The impact of these decisions will be immediate, either through higher loan yields or market investment returns.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
