First BanCorp. New

Good day and welcome to the first Bancorp 2Q21 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question from the queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead.

Thank you, Sarah. Good morning, and thank you for joining First Bank Corp's earnings conference call webcast to discuss the company's financial results for the second quarter of 2021. Joining you today from First Bank Corp are Aurelio Alleman, 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 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 OneFirstBank.com. At this time, I'd like to turn our call over to our CEO, Aurelio Alleman.

Aurelio. Thank you, John. Good morning, everyone, and thanks for joining us today. Please, let's move to slide five to cover some of the highlights. Before we go into the highlights for the quarter, I would like to touch on the macro environment, on the progress we made on the integration and the support to our customers through the pandemic. On the macro front, pandemic relief funds continues to play a very important buffer for economic activity in the island and all our three regions. Macro indicators continue to show month-over-month improvements. Passenger movement at San Juan in Puerto Rico is above pre-pandemic levels since April. And despite a recent slight increase in reported cases, As of June, vaccination rates on the island are over 60% now. The significant amount of stimulus continues to strengthen our customers, driving growth in deposit and also softening long demand in the near term. The economy in Puerto Rico and Florida continues to show strong signs of recovery with economic activity approaching pre-pandemic levels. Obviously, we have seen improved consumer confidence, evidenced by increasing retail sales, credit card activity, debit card activity, auto sales. And in addition, in the case of Puerto Rico, hotel occupancy and ADRs are now at pre-pandemic levels. Government collections were also on the rise, continue to show improvement of the economic activity. We also seen in parallel the progress the fiscal board is making on the government debt restructuring, which is, I think, a positive for the macro in Puerto Rico. Regarding digital adoption, our registered users continue to increase. We experienced a 4% increase this recent quarter and a 20% increase on a year-over-year basis, which is a good number. Our data channels continue to play an important role in deposit gathering, reducing branch transactions, across the network. A very important milestone for us, we consider this a huge milestone this quarter. Regarding the integration and conversion, we are on schedule to complete the full integration now during this quarter. A few weeks ago, early July, we completed all system conversions. Again, for us, this was really a huge milestone to move forward. This actually, this final conversion allowed us for finalizing the branch consolidation in Puerto Rico. We actually did consolidate the six branches in this phase. We're really quite pleased with the progress and look forward to capturing additional market share going forward through our now expanded fully integrated franchise. Now we have certainty that most of the pending benefits regarding synergies will be reflected in the four-quarter numbers. Finally, with regard to the PPP program, you know, as we know, it ended in May and final transactions were processed in June. Through the life of the program, we originated 745 million or over 14,000 loans supporting commercial clients across the three regions. Now the focus through our fully integrated digital platform, self-service, We have processed forgiveness to 81% of the clients that participated in RAN 1, equivalent to $377 million. Also, during this quarter, we disbursed the last $74 million in new SBA PPP loans and received principal forgiveness remittance of approximately $151 million. I think this is also important. Obviously, it was a great product, but obviously it was competing with with the day-to-day core business of small business lending. Now let's move to slide six to really cover the highlights for the quarter. It was definitely a solid quarter for the franchise, generating $70.6 million in net income, or 33 things per share, compared to $61 million last quarter. Definitely the improving macroeconomic trends are a contributor. driving a reserve release of $26 million this quarter. But on the other hand, you know, the core earnings, pre-tax, pre-provision income increased over $10 million to a new high of $96.6 million. Our efficiency ratio for the quarter improved to 60.6. And actually, if we adjust that for merger and COVID-related expenses, we were at 55% level, which is actually our goal. Asset quality metrics, you know, in all fronts improved. MPAs decreased 29 million now to 1.2 percent of assets. Inflows to non-accrual also decreased, and delinquencies improved across all products. Again, you know, as I mentioned, the significant amount of stimulus continued to strengthen customer liquidity. Deposits, excluding government, grew significantly. 558 million or 4 percent during this quarter. On the capital front, capital ratios are very strong and improving. And during the second quarter, we repurchased 7.96 million shares for approximately $100 million under the previously announced $300 million repurchase program. So we're very pleased with how the quarter

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Thank you. You know, apologies, not sure what happened, but, you know, hopefully we're back. I just want to make sure the, you know, everybody's dialing and it's okay with the system. John, please. It looks good. Okay, thank you. So I was saying that, you know, the consumer portfolio, on the other hand, GREW NICELY DRIVEN BY AUTO, $98 MILLION INCREASE IN THE AUTO PORTFOLIO. WE ALSO HAVE SOME INCREASE IN THE FLORIDA MARKET. ON THE OTHER HAND, YOU KNOW, WHEN YOU LOOK AT THE COMMERCIAL AND CONSTRUCTION PIPELINE, IT REALLY LOOKS PROMISING FOR, YOU KNOW, WHEN YOU COMPARE THIS TO EARLIER, HOW WE WERE EARLIER IN THE YEAR. THERE'S A LOT OF MOVING PARTS IN THE LOAN PORTFOLIO SIDE DRIVEN BY THE MACRO. When you look at the mortgage business, higher payoffs driven by rates. Also, the increasing limits on the conforming side that happened some time ago are also having an effect. Most of the loans are now conforming. Second, as an example, the floor plan utilization is at the lowest level due to inventory in the auto business. We expect that to actually change as new inventories coming into the pipeline. And another contributor in the construction, which is actually good news, absorption of housing units are also accelerated and creating repayments in those lines that we have available. Again, and then on the deposit side, as I say, nice growth, 1.5 billion growth in the government segment. in the public funds tied to Puerto Rico and the ECR region. So in a nutshell, the franchise continues to execute well, driving a lot of key initiatives in parallel, achieving consumer growth, supporting our commercial borrowers, accelerating digital transformation, and really making great progress on the conversion and integration of the acquired operations. We are delivering on the expense efficiencies, and PPNR continues to improve Credit results and delinquency trends continue to perform well given the improvement in the economy, and we are well positioned for the second half of the year and optimistic on the positive impact of the economic activity in our loan portfolio. I am grateful to all First Bankers for their dedication and commitment, overcoming the pandemic challenges, and coupled with the integration activities that we have to dedicate over the past year, Also really proud of how my teams were able to support our customers through this pandemic. So with that, I will turn the call over to Orlando to cover the financials in more detail.

Good morning, everyone. So Aurelio mentioned net income for the quarter was $70.6 million, or $0.33 a share, compared to $61 million, or $0.28 a share last quarter. Pre-tax, pre-provision was $96.1 million, which compares with $0.86. $1.4 million last quarter. As you probably saw in the release, results for the quarter include a benefit of $26.2 million on the provision for credit losses as compared to what we had last quarter, which was also a benefit of $15.3 million. The after-tax benefit of this provision on results represents approximately $0.08 this quarter, and it was about $0.04 last quarter. Results also include $11 million in merger and restructuring costs associated with the acquisition. In this quarter, well, last quarter, we had $11.3 million. Looking at components, net interest income for the quarter increased $8.5 million. We saw interest income on investment securities and interest rate and cash balances increased by $4 million. mainly driven by the $1.4 billion increase in the average balances, which is directly related to the increase we've had in deposits this year. The combined yield of the investment and cash interest rate and cash, it's 95 basis points, up four basis points this quarter as compared to last quarter. The thing is that now investments and cash represent about 44% of all interest-earning assets, which is a high percent. It's 5% higher than what it was last quarter, which was 39% of the total interest-earning assets. On the commercial and construction loans, interest income grew $2.5 million. That includes $2.9 million, we realize, from some deferred interest that were recognized on a loan that was paid up in the quarter, that improved the margin by about six basis points. On the other hand, fee income acceleration on PPP loans paid off with about 1.5 million, which is 1.7 million lower than last quarter, and that reduced the margin by about four basis points. Interest expense for the quarter was down 1.7 million, The average cost of interest-bearing liabilities, total interest-bearing liabilities was down from 63 basis points we had in the first quarter to 55 basis points this quarter. And if we look at the total cost of deposits excluding brokers, that was 24 basis points, which is down from the 30 basis points we had last quarter. Margin was 10 basis points lower, was 381. despite the increase in net interest income, but we continue to see the pressure on the change in the mix of assets. Securities continue to grow as a result of the deposit flows. And also combined with, as Aurelio mentioned, the loan portfolio, residential mortgages, we continue to focus on conforming paper, and the loans have come down on the portfolio. Non-interest income was fairly in line. Two things, three main things. Number one, last quarter we had a $3.3 million contingent insurance commission we received. That's received in the first quarter of every year based on the prior year volumes. We didn't have any of that in the next quarter. Mortgage banking revenues was a bit down based on volume of originations. But on the other hand, We continue to see the transaction volumes on debit and credit cards go up, getting close to what they were pre-pandemic. And that increased the fee income based on those transactions. On the expense side, expenses decreased by $3 million, total expenses, to $130.2 million. As I mentioned, that includes $11 million in merger expenses. compared to 11.3 last quarter and includes 1.1 million in COVID-related expenses, which is very similar to the 1.2 we had in the first quarter. On a non-GAAP basis, excluding this item, expenses were 118 million for the second quarter compared to 120 million in the first quarter for a 2.8 million reduction. The quarter employee compensation is down $1.5 million. We are starting to achieve the savings from the voluntary and involuntary separation programs that were implemented at the end of last year and during the first quarter, resulting in an additional savings of about $800,000. Total savings for the quarter under this were $1.7 million. Last first quarter, we had a savings of about $900,000. Also, we had a decrease in payroll taxes of $1.5 million as employees reached payroll limits. Oreo expenses were also down $2 million, primarily $2.2 million write-down related to a $2.2 million write-down we had on the value of a commercial property in the first quarter. And we also saw reductions in professional fees of $900,000. mostly associated with a PPP origination platform, the cost as a variable component. But on the other hand, we had an increase on debit and credit card costs, a combination of the higher volumes and the fact that we received some incentive payments in the first quarter related to the 2020 volumes. Our efficiency ratio Aurelio made reference to was 60.6 percent, but if we exclude the merger-related costs, the ratio improves to 55.5 percent, which as we continue to complete the conversion processes, those merger-related expenses will start to disappear. We are expecting significant reduction this quarter on those costs. On a question we get frequently, and it's been one of the difficult components to respond, we continue to achieve savings from the Santander, as I mentioned, on the BSPs and voluntary separation and involuntary separations. To give you some indication, we believe expenses, excluding OREO and transaction expenses, will normalize in a range of... 117 to 119 million per quarter in the near term. Keep in mind that we have several technology projects that are still in process, and that's part of the ultimate cost of some of these projects. It's been included in our estimate, but they're still being fully determined, the ultimate cost. On reserve levels and credit quality, We have seen that significant improvement on projected macroeconomic variables over the last two quarters, both at the national level and in Puerto Rico. Unemployment rate is projected to continue to improve, as well as the home price index and the commercial real estate index, which are both leading indicators. As a result, the allowance for credit losses, the total allowance for credit losses of June 30th was $339 million. which is down $34 million from the prior quarter. This reduction in allowance led to the $26 million provision benefit in the quarter I mentioned before. The quarter we also had a $5 million recovery on a non-performing commercial loan that was paid off. The resulting net charge-offs were $7.6 million as compared to $12.5 million we had last quarter. We look at the allowance just on loans, excluding some of the other components, which is $325 million, which is also down $34 million from last quarter. Looking at it by portfolio, on the commercial loans, the allowance declined $22 million. In the case of residential mortgages, the allowance is down $1.2 million. And in the case of consumer loans, decreased $10.7 million. which basically was the charge-offs that were taken in the quarter. We didn't need to add much in terms of provision, small provision in the quarter for the consumer side. The ratio of the allowance to total loans held for investment was 285 as of June 30th, compared to 308 as of March 31st. We did not allocate any allowance to SBA PPP loans, since they are basically fully guaranteed If we exclude those on a non-GAAP basis, the ratio of the allowance to loans was 294 compared to 320 in March. Still, we have significant reserve coverage ratios on the portfolios. On the asset quality, as we continue to execute our strategy, reducing the non-performing levels, total non-performing assets decreased by 29.3 million in the quarter. to $256 million, and total non-accrual loans decreased by $18.4 million to $183 million. This reduction includes the sale of a $10 million commercial property, an Oreo commercial property in Puerto Rico, and we had decreases of $10.6 million in non-accrual residential mortgage loans, basically collections of non-performing loans and loans of broad current. And consumer loans also we saw a decrease of six million, part of it related to some of the charges. Inflows to non-accrual were down to 16.8 million compared to 32 million we had last quarter. And basically all categories had reductions. Also improvements, we saw improvements in early delinquency, 30 to 89 days was down by 60 million from 144 million we had last quarter to 84 million this quarter. Resulting non-performing assets now represent 1.2% of assets, and loans, non-performing loans represent 1.6% of total loans in the portfolio. TDRs continue to come down, amounted to $450 million as of June, which is $10 million lower than what we had as of March. On the capital front, Aurelio already made reference to this, but not Without being repetitive, just to mention capital, obviously it remains very strong. We completed the $100 million acquisition. Overall, the capital decreased less because of the revenues we had in the quarter and the OCI improvement on the value of the securities. If we look at the repurchase through a couple of days ago, we have repurchased $118 million. That includes the $100 million that were purchased as of June and additional $18 million we have repurchased since. And the repurchase as of June represented approximately $0.10 per share, just close to 1%. But obviously, all of this was made up by the revenues, the earnings we had in the quarter and the OCI improvements. So we ended up with a tangible book value per share increasing 30 cents in the quarter. With that, I'd like to open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your hands up before pressing the keys. To withdraw your question from the queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ibrahim Poonawalla with Bank of America. Please go ahead.

Hey, good morning.

Good morning, Ibrahim.

I guess is the first question around expenses. So thanks for putting out that guidance for 117 to 119. How quickly do you think we reset down to that level? And once we get to that expense level, how should we think about growth from that point on? Or do you think that is relatively steady state absent obviously any revenue growth given expenses?

We're expecting that by the fourth quarter, we still have some transaction expenses the third quarter. So if you take those out, we would be at similar levels. We start realizing more of the savings now at the fourth quarter, and we're expecting to be at those levels by the fourth quarter. Obviously, I'm excluding Oreo a bit because of the volatility that you could have on some of the components. But on the other, we see that 2022, there is a little bit of impact from some of the projects that I mentioned on the technology side that it's going to come in. But we still feel that it's going to be in that range. So we're hoping to reach normalization of an expense base by the end of the year, where we can see quarterly already some of the savings already implemented. As Aurelio mentioned, we're closing some of the branches now, and we have also been eliminating some of the services that were being provided while we kept two systems running. So those benefits will show up in full impact in the fourth quarter.

Understood. And remind me, if you could please, what was the merger expenses that are outstanding that you expect to record? in the back half of the year?

The merger restructuring charges in the back half of the year.

Oh, the, we're still, I mean, originally we thought it was mostly gonna be done through June, but as we moved some of the conversion on the deposit side to now to July, we still feel that it could be somewhere between four and five million that it's left.

All right. It's relatively small, understood. And then just on the capital front, I mean, obviously you still have a lot of excess capital. You did a decent amount of buybacks. One, talk to us in terms of your appetite to accelerate the buybacks or upsize sort of the $300 million amount as we think about the next year. And remind us in terms of what's the end game around the targeted capital ratios, be it I'm assuming it's the CET one that you're targeting.

I think the capital plan is a living creature that we're going to monitor constantly as we perform. When we build the plan, we have certain levels of expectations for the year. we're actually doing better than that. So, you know, we revisited the plan. Again, you know, not this quarter, but next quarter. And it could change. It could change depending on how the franchise performs. We wanted to get done, you know, I think this huge step of finalizing the integration. It takes, you know, a lot of resources, a lot of time, and make sure that the franchise, you know, continues to perform well. And now entering into the third quarter, you know, we have a lot more confidence on, you know, on the prospect of the next couple of quarters. So, you know, it's something that we will relook again. You know, I think, you know, everything is on the table as we've been progressing. You know, when we did the acquisition, we didn't expect it to do the buyback so quick. So we moved a little faster than expected then and actually to a higher number. So now, you know, that continues to be the case. We continue to reevaluate and decide. And again, you know, the target capital ratios are a factor of the environment, of the macro, are a factor of the asset quality, are a factor of all components of the economy. And that will evolve also. So we're still operating with certain cushions that we haven't, you know, we haven't published to the market. But that will continue to evolve as we see this economy getting stronger and as we see asset quality metrics, you know, getting closer to what U.S. banks are, which we expect that things continue to move in that direction.

Got it. And just tied to the asset quality metrics, the loan loss reserves, XPPP, at 3.2%. Remind us, Orlando, like... Even if we get to a steady state environment, what's the normalized reserve levels that you see where NPAs, NPLs are at a much lower rate? Where do you see that number kind of bottoming out?

Well, at this point, you know, it's one step at a time. What we're seeing is that if you go back to our day one CECL reserves, at that time we calculated that we're going to be about 2.6%. So we believe that we should be able to hit that target fairly soon in the process based on the way the economy is moving and the projected macroeconomic variables are. So that's the first indication. I see we... We continue to see possibilities with investor inflow in the market in Puerto Rico, and so maybe getting the non-performing down more. Clearly, 1.2% of assets looks pretty good compared to what we had before, but obviously we would love to be on the non-performing loan side, which is 1.6%, be more on the 1% level down the line. So we continue to move in that direction. The pandemic did bring some roadblocks or delays, let's call it, on things like foreclosures, especially on the residential side, which is the largest chunk of the non-performing we now have. So it delays the process of getting some of those loans resolved. So we're working through that. But on the other hand, as you saw in the quarter, we have seen better prices on short sale offers that are considered, better prices on people paying down some of the loans or getting them up to date. So that has helped also in getting the numbers down.

Thanks for taking my questions.

Thank you. Thanks, Evie.

Again, if you'd like to ask a question, please press star then one. Our next question comes from Alex Trudall with Piper Sandler. Please go ahead.

Hey, good morning, guys. Hey, Alex. Hey, first off, just want to hone in on one of your comments from the prepared remarks, Aurelia. You said that the loan pipelines really look promising, and I was hoping you could elaborate a little bit more On some of the things you're seeing, I know in the past you've been very optimistic about the potential for some construction loan disbursements later this year. Are you still feeling optimistic on that and kind of maybe help us understand, you know, the timing behind some of those projects coming online?

Well, we do expect, you know, yes, the construction pipeline is improving. And it's linked to actually investors coming to the island. It's linked to housing demand. It's linked to CDBG projects that are being approved and actually starting to kick off. Obviously, I think every quarter should get better as we move on. And obviously, probably peaking in 2022. I think obviously housing demand continues to be a factor that wasn't there before. And the other elements of the construction take a little bit longer, but when you look at the size of the pending funds to be deployed that are all reconstruction, definitely this is something that I continue to build up. We expect to have... improve every quarter from now on, and that's what the teams are working for. The consumer side, we had, I will have to say, weaker unsecured lending, personal loans, and credit card volume in the first half. That actually is improving, improved through May and June recently. Auto is very solid, even with the limited inventory, and we expect that to continue solid. The pipeline is solid. On the mortgage side, repayments are higher, so as long as rates continue to be so attractive to refinance on the conforming side, we might be continuing to suffer higher payoffs than we planned for. And we know that auto inventory is going to start to increase because factories are, and we have a very large auto floor plan portfolio. So when you add all the pieces, we definitely do expect and we're working towards improving our volume of originations quarter by quarter.

Okay, that's very helpful. And then a question for you, Orlando. Just as I think about the deployment of cash into securities that you did during the second quarter and the impact to NII, has the full impact of those security purchases been felt in the second quarter, or is there some carry-through? or is there some timing that's going to cause that level of NII associated with cash in short term to actually decrease in the third quarter?

The thing here, Alex, is that, you know, obviously it's all tied up to what's happening with the deposit flow. So Aurelio mentioned this quarter we had $1.5 billion of government deposits come in. You know, we're know that some of those funds are temporary funds, are related to some of these same efforts. So some of it, it's gonna go away. We still had, what, $2.5 billion of cash. Some of it, most of it, it's on the Fed account that does get some interest payments, but a small amount. The question here is sort of, Obviously, we're cautious about extending investment portfolio life within the policy guidelines, obviously, but even within that, extending it because of the, you know, 130, you know, 10-year note, which is still lower now, is no longer too attractive and some significant extension risk in there, so we're trying to keep it lower. So I believe that there is still going to be a little bit more pressure on the margin because of that into the third quarter.

Okay. And then just wanted to do a follow-up on the question on the buybacks. It couldn't help but to notice that the number that the amount that you bought back in the second quarter was a fairly round number at $100 million. Should we expect another $100 million to be repurchased in the third quarter?

We set a goal of $100 million in the first quarter. We wanted to accelerate, and we did that. We haven't disclosed anything. We have targets for each quarter, as we have said internally. We'll review those as we go along. I cannot answer to you concretely that that's a goal. We'll see how much makes sense to do.

Okay, and then just final question for me, just maybe a little bit of help on the tax rate and expectations. And then how should we think about that $64.6 million of DTA valuation allowance still at First Bank that you called out in the press release?

The valuation on First Bank, you know, on prior discussions we've had, Remember that the tax laws in Puerto Rico unfortunately have this position that exempt income has to be considered as part of the, you cannot use some of the NOLs because you have to offset with some of the exempt income. So a large part of what's there has to do with that. There might be a little bit of the DTA that can be used but But we don't expect much of that to be used unless there is a shift. And what you're seeing on the tax rate, it's a little bit of the large amount of excess cash is ending up in investments. Not all of it is exempt. And therefore, the tax rates have gone up because of that. So that could help a bit on that relationship. But still, we're having a good chunk of exempt income. So I am not in a position to tell you that much of the $64 million will be realized. Most of it probably won't be realized, so we're just trying to see how we can maximize and use some of it because of those levels of income within the bank.

Okay. And then just in terms of modeling the tax rate, should it be closer to that 36% for the third and fourth quarter based on the level of investments, et cetera?

Yeah. Well, the effective this quarter was about 33, remember, 33-something with this close end. We're seeing something, should be similar to that, 33 to 34%. We still have the exempt income. We still have, it's just a relationship of, remember that obviously we had reserve releases, level of charge-offs are down, so all of that increases that taxable component. as we go forward, and that increases then the effective tax rate. We're coming from an estimate of just over 30 and a half or something like that to this number, and a lot has to do with that combination of additional taxable interest income and much lower expectations on reserves and charge-offs.

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

Thank you, Sarah. On the IR front, we have Piper Sandler coming down for an investor field trip in person, September 23rd and 24th. We greatly appreciate your continued support, and with that, we will conclude the call. Thank you.

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