First BanCorp. New

Good morning, and welcome to the First Bank Corp First Quarter 2021 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to John Pelling, IR Officer. Please go ahead.

Thank you, Betsy. Good morning, everyone, and thank you for joining First Bank Corp's conference call and webcast to discuss the company's financial results for the first quarter of 2021. Joining you today from First Bank Corp are Aurelio Allman, 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 form of 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 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, onefirstbank.com. At this time, I'd like to turn the call over to our CEO, Aurelio Allman.

Aurelio. Thanks, John. Good morning to everyone, and thanks for joining our call today. Please let's move to slide five to discuss some of the highlights. Before I go into the detail of the quarter, as you have hopefully seen, we're really very pleased to announce earlier today the Board's approval of the $300 million share repurchase program. The repurchase may be in the open market or in privately negotiated transactions. Timing and exact amount will be subject to market conditions. Given our outside capital position and the continued earnings accretion, we are committed to return excess capital to our shareholders and we're very, very pleased to move forward with this announcement. Now before talking about financial results, I'd like to touch on the macro. the integration and how pandemic is progressing in Puerto Rico. On the micro front, there was significant stimulus flowing to the island, to the CARES Act and subsequent programs, the most recently approved in February. When you add all the programs, the latest estimates that we have seen from the fiscal board are around $45 billion, which is a material amount is over 60% of the island annual GDP. Obviously, this significant stimulus continues to support the recovery, continues to strengthen our customers, is driving growth in deposits, but on the other hand, it's also softening long demand in the near term. We're very pleased with being able to deploy this stimulus in the island and see how the pandemic recovery trends are showing. In our view, similar trend should continue this quarter and improve later in the year as the reopening takes place and as the reconstruction efforts continue to pick up. When we look at individual metrics, the economy in Puerto Rico and actually Florida also continues to show clear signs, clear evidence of recovery. Tourism, hotel occupancy, airline passengers, cement sales, all showing improving trends. Recently, the government disclosed their financials. Interim net revenue to the Commonwealth General Fund is up 21% for the first eight months, and that's probably the first time in many, many years we have seen the government exceeding the budget revenues. Having expanded our position in Puerto Rico and our significant presence in Florida, we're definitely very optimistic with where we are positioned to benefit from these improving economic conditions. And we're very pleased to see that finally the reconstruction efforts are getting traction. We have to say that the government has done a good job managing the pandemic challenges. As you might know, we've recently experienced tightening in safety protocols in Puerto Rico and travel rules as we experience a pickup in cases following spring break. While, you know, on the other hand, while cases spike, the number of those vaccinated is a positive, you know, sustaining the potential for recovery trends. As reported by the health department, the island has made significant progress on the vaccination front. with 27% of the eligible population fully vaccinated and approximately 48% with the first shot. So we believe these are really good numbers to support the continued recovery. Moving to the integration, I'm happy to say that we are progressing according to schedule. This past quarter, we converted the consumer and commercial lending platforms, and we just finished the credit card conversion in April. We also made some progress in the branch rationalization, and we have consolidated three branches during the quarter. Also, we implemented our second phase of the voluntary separation program, which was previously announced. So we're quite pleased with the progress, and we do remain on schedule to complete the full integration by the end of the summer. Looking forward to that date. Finally, with regard to the PPP program, it was the focus of the quarter in terms of number of applications and obviously making the most out of it to benefit our clients. We originated $209 million, actually disbursed $209 million, and actually we also processed forgiveness remittance for $176 million of loans that were originated in the prior year. We will continue originating PPP loans. Pipeline, it's been coming down. And the program will expire at the end of May. So we will continue processing PPP loans through the end of the program. And obviously for the rest of the year, we also will support our clients processing the forgiveness applications, which will continue to flow probably till the end of the year. So let's move to slide six. for some highlights of the quarter. I'm just gonna cover lightly, Orlando will cover in detail. We did generate 61 million dollars of earnings or 28 cents per share compared to 50 million last quarter. Definitely the improving macroeconomic trends and forecasts is a key driver of the reserve release of 15 million for the quarter. Pre-tax, pre-provision was basically unchanged at close to 86 million, even though this quarter has two fewer days of operations. Pleased to see that as a quality metric remains stable. I think we have mentioned in the last call that we expected some pick-up of MPAs as the moratoriums expire. Obviously, there's a lot of liquidity supporting the market, so it's positive to see this metric being sustained or improved. Definitely, liquidity was also a big contributor, and core deposit, excluding government, excluding broker, grew $472 million, which is about 4%, so we're very pleased with that also. And you just saw the capital ratios, they remain really strong, and they are the baseline to support our buyback going forward. Please let's move to slide seven to touch a little bit more on loan. Definitely, you know, long-array nature is a challenge as we see, you know, this economy being supported with all this additional liquidity, which is good. Even though I think it was solid considering the seasonality and the programs that are happening in parallel, it was solid reaching $1.2 billion in the quarter, including credit card reach of $1.3 billion. And definitely, there's always seasonality in the commercial deals as they gain traction through the later half of the year. But if we look at year versus year, obviously, you see the seasonality on the graph in the top on the right side of the graph. The, you know, I think obviously when we expect that in the second half of the year, you know, we have both the stimulus subsiding and we also have, we expect full reopening of the economy and definitely some reconstruction projects that are getting traction, so we're more optimistic about second half of the year commercial activity than what we're getting now. As I mentioned, PPP loan was also a focus. When we look at the loan portfolio, it declined by 1%, and the primary decline was in the mortgage portfolio. As I had mentioned before, our focus is to reinate conforming mortgages, which we sell in the secondary market, And it was also a good quarter in mortgage ordinations and non-interested income from the gains. We also have some repayments on commercial credit lines due to the liquidity. So if we look at credit lines, we probably have low usage compared to prior years, which also contribute to the reduction. On the other hand, the consumer portfolio continues to pick up. both the unsecured credit card a bit, but definitely the auto at least finance segment, which we are an active competitor, and we're very optimistic of being able to achieve additional growth in this sector. Florida also contributed. We obviously will continue to be focused in Florida. It brings our geographic diversity. And this quarter, the Florida commercial and construction portfolio increased by 23 million. So activity should also pick up. On the digital front, adoption continues to grow. We continue to do investments to continue to enhance the platforms. Digital banking registers and active users grew 6% and 9% respectively during the quarter. So with that, I now will turn over the call to Orlando, and I will return back for questions. Thanks to all.

Good morning, everyone. Aurelio touched upon this, but just to start, net income for the quarter was $61 million and $0.28 a share, which compares with the $50 million or $0.23 a share we had last quarter. The quarter results had on the positive side the $15 million provision release for loans compared to $7.7 million provision we had last quarter. That's $0.04 per share last quarter impact as compared to this quarter. The results also include the $11 million we had on transaction expenses associated with the Santander acquisition. As we have seen in the quarter, the expectations on some of the microeconomic deterioration has not reflected as aggressively as was originally considered in the projections. We've seen unemployment impact being less. We've seen lower impacts on home price index, as well as CRE index. As a result, as we have seen in the market, in the general banking market, the provisioning needs have come down considerably as compared to what we saw in 2020. In net interest income, That's still a little bit of the item where we continue to see some pressure. Clearly, net interest income was down $1.5 million in the quarter. Part of that, it said there was two less days in the quarter. That impacted results by $2.2 million. But on the other hand, we recognize about $2.5 million more in accelerated fee income recognition on the PPP loans that were repaid in the quarter, the $175 million Aurelio mentioned. Moyer's portfolio has come down, as he also mentioned. On average, the portfolio was down $121 million, which resulted in a reduction in interest income of $2.4 million for the quarter. But on the other hand, the consumer portfolio was up $45 million, which increased net interest income by $1 million in the quarter. We've continued to work on the liability side. The cost of our interest-bearing liabilities was down eight basing points, resulting in a reduction in interest expense of $2.6 million in the quarter. And if we consider all deposits, the overall cost of deposits for the quarter is down from 41 basis points we had in the fourth quarter of 2020 to 32 basis points this quarter. Margin for the quarter was down four basis points to 391 versus the 395 we had last quarter. Prepayments on the investment portfolio have affected, resulting in accelerated amortization of premiums, which obviously combined with a reduced rate of reinvestment alternatives has led to reductions in the yield. The yield of the investment portfolio was 97 basis points in the fourth quarter, and it's down to 91 basis points this quarter, therefore affecting the margin. However, the funding mix have improved considerably, resulting from this increase in non-interest-bearing and low-interest cost deposits. which has offset some of the margin impact. Liquidity levels remain extremely high. Even though our investment portfolio has grown approximately $700 million from last quarter, at the end of the quarter, cash was still $80 million higher than what we had in December. So, this large component of funding at a very low interest rate clearly puts pressure on the margins for the quarter. Non-interest income was fairly stable. We did have a couple of things. This quarter we collected on contingent insurance commissions. It happens every first quarter of the year based on the volumes originated on the prior year, and that number was $3.3 million, which offset the $1.4 million in fee income we recorded last quarter in connection with the sale of loans originated under the Main Street Lending Program. Mortgage banking income still sustaining, but it was down $300,000 as compared to last quarter. We have continued to originate and sell mortgages, as Aurelio mentioned, but we have seen a little bit of compression of these spreads in the market on the sales, and that has resulted in a little bit lower gains on those sales that were made in the quarter. On the expense side, expenses were $133 million, as you saw in the release. That included $11.3 million of merger expenses, and we still have the COVID expenses of $1.2 million. Last quarter, merger expenses were $12.3 million as compared to what we had this quarter. On a non-GAAP basis, excluding these items, expenses were 120 million in the first quarter compared to 121 million last quarter. Main components, employee compensation was down 800,000. During the first quarter of each year, we have a higher level of payroll taxes as employees have not reached the limits. For this quarter, payroll taxes were 3.4 million higher than last quarter, but on the other hand, the quarter had two less days, resulting in reduced expenses of 1.1 million, which upset some of that. And we also had a higher deferred loan origination cost as a result of the volume of PPP loans that were originated in the quarter. And that resulted in that combined $100,000 reduction. On the credit card side, we received 1.6 million in incentive payments related to volumes originated last year. And even though we have seen volumes start to normalize. We all had impacts of pandemic impact during 2020, still not fully at levels that we had pre-pandemic, but it's still worth starting to see normalization on volumes. These savings were a little bit of offset by we had some 1.3 million increase in Oreo expenses. related to some valuation on some properties that we had in the OREA side. The allowance for credit losses was down 28 million, same reason as mentioned before. We had 373 million allowance for credit losses for the loans. The allowance was 359 million specifically, which is also down 27 million from the 386 $386 million we had last quarter. When we look at the portfolios on the commercial loans, the allowance declined $15.9 million. That is a function of a $14.6 million reserve release and $1.3 million in charge-offs. Release, again, reflects improvement on the macroeconomic variables which correlate to this reserve. main ones being unemployment, GDP, and so on the HPI and CRE index. On the case of residential mortgages, the allowance increased $6.3 million, which is a $4.2 million release of provision driven mostly by macroeconomic, and obviously in this case, the reduction on the size of the portfolio. On the consumer side, We had a provision of 4.3 million, but we had charge of 9.1 million for a net decrease on the allowance of 4.8 million. The ratio of the allowance continues to be pretty healthy. It was 308 as of March 31st compared to 328 at the end of the year, and we exclude the PPP loans. On a non-GAAP basis, that number would be 320, which is still a very healthy coverage on the allowance. On the asset quality, non-performing decreased 8.6 million in the quarter, down to 285 million. The non-performing loans were down 4 million. As Aurelio mentioned before, we were expecting some spike in NPLs in the first half of the year. as a result of loans coming out of the moratoriums. But so far we have seen fairly normal trends. The migrations to NPL for the quarter were 32 million compared to 32.9 million last quarter. The only increase we saw was residential mortgage migration increase of 4.6 million, but a commercial side was down 4.8 million. Early delinquency has also shown positive trends. 30 to 89-day delinquency decreased $5 million from $149 million last quarter to $144. And we saw also some reductions in TDRs of $19 million as compared to last quarter. On the capital front, regulatory capital ratios remained strong. We did see tangible common equity and book value per share decline in the quarter. as a result of the change in the market value of the investment securities that are available for sale, which, as you know, are recorded through the other comprehensive income account on the capital side. Clearly, a function of the increasing rates on the longer end of the curve during February and March, which resulted in reductions on the market value of some of these securities that we have purchased over the last few months, But in reality, we do have the ability and the intention of holding these securities to maturity, thus making this impact temporary in nature. With that, I would like to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Alex Tordell from Piper Sandler. Please go ahead.

Hey, good morning, guys. Hey, Alex, how are you? Good morning, Alex. I'm well, thanks. First off, I wanted to... Just ask about the buyback, the $300 million you guys authorized. It looks like it expires in a little bit over a year. Is the intention to kind of use that at like $75 million a quarter, or would you consider doing something like an accelerated share repurchase program?

You know, as we mentioned, Alex, you know, all the alternatives are on the table. And, you know, as we continue to move on and disclosures are required, you know, we will move on, obviously. Market conditions are a driver to determine the exact amount of timing. So as soon as something comes up that we have to disclose, you will know about it immediately.

Okay. And when can you actually start being in the market repurchasing shares?

We expect by May 1st to be in the market. We expect.

Okay, great. And then I wanted to drill in a little bit more on some of your commentary on the potential rebound for loan growth in the second half. I think you alluded to some reconstruction projects maybe helping to drive that, and obviously the economy reopening. Maybe it would be helpful if you could elaborate a little bit more on some of those projects. And then there are certainly a lot of people out there that think that as some of the stimulus wanes, that loan growth could really explode, whether it's later this year or earlier next year. And maybe you can talk a little bit about how you're positioning the balance sheet over the next couple of quarters in order to really be able to make sure to monetize or to take on as much of that loan growth as you possibly can?

Well, first of all, at the end, it's market conditions and execution. It's a combination of both. If you look at it by business, we expect the mortgage business to continue its trend of hybrid refinancing and and actually we have seen an increase in purchases. There is actually new construction in Puerto Rico for the first time in many years that are now into closing and are into being delivered. Even though that does not necessarily achieve growth in our portfolio, obviously the runoff is being accelerated. At some point in time, that runoff will also level. Look at the consumer. Obviously, the liquidity in the consumer hands, as we all know, is extremely high when you look at the deposits. Auto sales continue to grow. They have shown sustainable increase. We expect that to continue. We also expect, when you look at the unsecured consumer business, we see good traction in the quarter, and we expect some recovery. PPP loans, disbursements will be done this quarter. So that liquidity should also help us go back to the small business lending and the small commercial groups which will benefit from it. Obviously, we do expect that after that, obviously, some incremental utilization in the credit lines. Commercial deals are, you have to be out there, you have to be competing, you have to be trying to get the deal. There's deals going on out there. and they just take time to get to them and be the winner. We have a large portfolio, which we also have to protect and take care of our clients. We're also looking into opportunities. There is reconstruction in Puerto Rico going on, not only in infrastructure, but in private projects, in schools, in new housing. We're starting to see the municipalities have significant number of projects that are still related to the funds deployed for Maria. CDBG funds, the $8 billion were restated with more simplified rules a couple of weeks ago. We're out there. It's really being out there, execute. Obviously, we recognize that we're also working on integration at the same time. We're happy to say that we completed the commercial teams integration this quarter, so obviously incremental focus goes back to the business also. And then Florida, we continue to be an active participant in the market. And same way, same strategies that we used prior years, you have to be on top of it and try to look for opportunities to compete and and grow the portfolio. Obviously, I don't see that happening this quarter, obviously, because it's not what the market is showing. Okay.

Our next question comes from Glenn Manna from KBW. Please go ahead.

Hi, good morning. Hey, Glenn. Hi. Morning, Len. I'm doing well. Congratulations on the buyback. It's been a long time coming, and this is a recognition of all the work that you guys have done at the bank over the last 10 years. Some of your competitors have said that long-term capital ratios, specifically CET1 on the island, could be entering kind of a new inflection point, given all the stimulus on the island, the return to growth. This is moving out of a perennial state of recession. And, you know, I know we just got the buyback today, but thinking forward, how do you think about long-term capital on the island? And, you know, could it go down to the 12% range, CET1, over time?

Well, you know, again, you know, look at the economy in cycles, as always has been. You know, at some point in time, Puerto Rico had, you know, very beneficial economy. for banks to be in a different position. Obviously, you know, we've been in the money in tough times for the last 15 years. And, you know, it's about time to do the recovery. It continues to show. And, you know, we probably have, you know, the better opportunity to get to that level that you mentioned based on what is, you know, the designated funds and the activity that we're seeing. So, So it's very difficult to predict, but when you look at all the evidence and elements that are taking place, it's a possibility.

Yeah, I don't see any reason why not. We've seen significant improvement trends over the years in the number of components. So as that continues, we definitely see the need for high capital ratios not you know, not being there as much as it was before. So we see a space on some of these key ratios like the common equity tier one that you mentioned.

Okay. As we kind of look through and assess credit and we've been moving our banks down to that kind of CISO day one level, how would you compare the assumptions in your current level of reserving versus what you were assuming at CECL Day 1 back in January 2020?

Still, you have to look at components. The CRE index, it's still worse than what we were seeing before when we did CECL Day 1. HPI, it's moving in the direction of the new projections are moving in the same direction. direction. We're going to get there. And unemployment, the unemployment levels we feel are going to be at similar levels going forward. So we still see, I mean, there is a little bit of, we want to be able to see that the trends continue to show that same way as being projected. And that will take us there. But the With the expectation on the economic front and assuming there is no unexpected thing with the virus that changes the lockdowns, we've seen more normalization of the economy and all of that. So we are seeing that we should be able to get to those levels that we saw before in terms of projected macroeconomic numbers. So it would... Not yet there, but we are tracking that direction.

Okay. And then just two quick cleanup questions. It looks like you've recognized about $36 million in pre-tax merger charges. $48 million was the original projection. Is that still a good projection? And then on the premium amortization, how much premium could be left in the securities book?

I couldn't understand your first question. You said merger taxes?

No, the pre-tax merger charges. When you announced the merger, I think you said there would be $48 million, and I think you have about 75% of those in now. Is $48 million still a good number?

What we had announced was about $76 million of expenses associated with the transaction. The $48 million was more probably you were calculating the synergies based on what we had mentioned, the synergies based on their ongoing running expenses. So it was $76 million in expenses, what we were expecting.

Which started in 2019, Glenn.

Right. So that's still a good number, that $76 million?

Yes. Okay.

And on the premium, how much is left on that? Could we see it go down?

Premium amortization, you mean related to what? You're talking about portfolio, investment portfolio, or are you talking about something else?

Yeah, I'm talking about the investment portfolio.

The thing is that there is There is premiums on, you know, most recent purchases have a level of premium associated with the coupons that were available in the market. So it's a function of what happens with the trends in rates. I can see with rates coming back down a little bit of reduction. I don't have exact the number of premiums we have on the portfolio at this point, Glenn, to give you that number. I would need to check that, and probably I'll include something on the queue then to disclose that, since we haven't specifically mentioned the number on releases. But there is a level of premiums, because most portfolio purchases over the last few months have had a level of premium involved in all of them.

Okay, thank you for taking my questions.

Thank you. Thanks, Glenn.

As a reminder, if you have a question, please press star then 1 to be joined into the queue. Our next question comes from Jonathan Krautman from Rubik Capital Management. Please go ahead.

Hi, gents. There's a lot going on in Washington, D.C. with the new administration, and it seems like PR has a good partner in the White House and congressional leadership. whether it's efforts to increase pharmaceutical manufacturing or infrastructure spending. But what are the key areas, I guess, that you folks are watching that will affect the business here as far as Washington, D.C., and various initiatives there?

Well, you know, definitely the – obviously, you know, every time they talk about tax reform, you know, we open our eyes. This has been a long-term matter, the tax benefit that applies to corporations that are specifically manufacturing more than anything else. So it's always been a risk for some time, it's been mitigated, I think this time Better than ever, probably there's a lot more visibility of the challenges that Puerto Rico faces and how these potential changes could impact. So I think we all have to make sure that we provide the right feedback and the right education, and we understand this is also a focus of the fiscal board. Manufacturing is still 45% of the GDP, so it's a key component, plus plus the supply chain that is behind it. So it is important. Obviously, we know tourism is growing and is a future opportunity. Foreign investment from Act 20 and 22 are also an opportunity. So I will say those are the two elements that we have to continue watching and providing feedback and making sure that the private sectors provide feedback to Congress in terms of what potential implications could have in Puerto Rico. I think everybody is aware of the challenges. What is the objective of obviously improving tax collections in the U.S. or increasing to pay for definitely the very expensive stimulus that we have received. So definitely it's a priority, but yes, the manufacturing sector would be our primary concern.

This concludes our question and answer session. I would like to turn the conference back over to John Pelling for any closing remarks.

Okay, thank you, Betsy. On the investor relations front, we will be participating in the Seaport Financial Virtual Conference on May 15th.

Yeah, I just want to add that, you know, again, you know, how pleased we are to reach this milestone and be able to initiate, you know, announce our buyback program and be able to initiate this capital deployment initiative. So thanks to all our investors. Thank you. At this point, we'll conclude the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.