First BanCorp (FBP) 2021 Q3 法說會逐字稿

Good morning, and welcome to the First BanCorp. 3Q 2021 Financial Results Call. (Operator Instructions) I now have pleasure of handing the call over to today's host, Ramon Rodriguez. Ramon, please go ahead.

Thank you, Emily. Good morning, everyone, and thank you for joining First BanCorp's. conference call and webcast to discuss the company's financial results for the third quarter of 2021. Joining you today from First BanCorp. are Aurelio Alemán, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at 1firstbank.com.

At this time, I'd like to turn our call over to our CEO, Aurelio Alemán.

Thank you, Ramon. Good morning, everyone, and thanks for joining us today. Please, let's move to Slide 4 of the presentation for covering some highlights. It was a very strong quarter for First BanCorp. I would say both in terms of financial performance and operational progress. I would like to cover the operational highlights before discussing our financial results. As planned, during the quarter, we completed the integration of the acquired operations, and all remaining system conversions. I have to say that lots of resources and management time was required to achieve this important milestone, on time and on budget, which is also important. I would like to thank all my colleagues involving the integration for completing this very complex process actually in less than a year after closing the transaction. Now, the fully integrated with expanded sales resources and origination capacity will allow us to continue growing market share across basically all products and services. Now going forward, our full dedication with resources would be gear towards growing the franchise and servicing the clients. In terms of our Puerto Rico franchise, we have now the second largest market share among banks across all products and channels. This will allow us to definitely better serve our clients and communities with a little opportunity for organic growth. Our focus on digital solutions have proven effective. More clients continue to adopt our digital experience, as online banking users grew by 12% during the quarter and approximately 40% of all deposits were captured through digital and self-service channels.

Our expanded digital functionalities includes not only transactions but the ability to process mortgages, credit cards, personal loan applications through our corporate portal and on the commercial front, the loan forgiven requests for the PPP loans that are still pending.

As we look ahead over the next years, definitely increased efforts and capabilities will be added towards enhancing the existing digital offerings, and also developing new functionalities, focused on the ease of use and best-in-class customer experience, but also we will continue to optimize our branch network across the island.

On the macro front, we're pleased to see improvements in the economic backdrop within our 3 operating regions. We see an improvement in Puerto Rico, including the -- obviously, all the stimulus in the Virgin Islands, similar investments also made in reconstruction. And obviously, flooring that economy continues to be very, very solid. Both pandemic and the sector relief funding continue to support the economic activity.

And it's important to also highlight that Puerto Rico reached one of the highest vaccination rates of any state in the U.S. jurisdiction. This has led to an accelerated reopening of the economy, material improvement in the tourism and an overall improvement in the business environment and consumer confidence. This should result in increased loan demand.

We're also optimistic, I have to say about the resolution of the Puerto Rico bankruptcy and then settlement in the near future, which has been going on for quite some years now.

So let's move now to Slide 5 to review some of the financials. During the quarter, we generated $75.7 million in net income, $0.36 per share. And I think, importantly, a record $103 million -- $103.6 million to be exact in pre-tax pre-provision income, clearly reflecting the benefit of our expanded franchise. The efficiency ratio continued to trend down to 53% during the quarter compared to 60% registered during the quarter.

Very important asset quality metrics continued to improve during the quarter, nonperforming assets reached a decade low to 0.81% of total assets. Reduction in NPAs was primarily driven by derisking sale of $52 million in nonaccrual residential mortgages, also there was the sale of REOs, which were important during the quarter. NPL sales drove the ACL ratio down also a bit to $2.59 for the quarter, but also there were releases associated with the improvement in the macroeconomic factors.

Finally, on the capital front, I think we continue to make significant progress in our capital plan and continue to return capital to our shareholders. During the quarter, we completed the repurchase of 4.2 million shares amounting to $50 million. Year-to-date, that amount has reached $150 million in repurchases. Also, we announced a redemption of the $36.1 million of the preferred stock, which will happen in this fourth quarter.

And as we announced on Friday, we increased a common dividend by 43% to $0.10 per share. All these capital actions are in parallel with the strength of our balance sheet and our commitment to increase shareholder value.

Please let's move to Slide 6. I would like to cover some details on the loan and deposits. Loan originations, they -- we consider they're healthy at $1.2 billion, but they're definitely still short of our goals, and that's really a focus of the management team. The loan portfolio decreased largely driven by the effect of the reduction of $130 million in SBA PPP loans and the mortgage derisking sale of $52 million.

Also, as we have mentioned before, our mortgage portfolio strategy is focused on the conforming paper, which we'll continue to see some decrease in the loans -- in the mortgage loans. Consumer loans grew nicely and commercial, excluding PPP, are finally stabilizing. Our focus will continue to be centered on consumer and commercial growth, and that's the key objective of the management team. We have to say that credit demand is picking up as government stimulus subsides and we expect that actually to continue improving during this quarter and 2022 as economy fully reopened and large-scale disaster relief related products begin to emerge.

Core deposits continue to grow nicely, excluding broker and government, core deposits raised an increase of $288 million during the quarter. So liquidity is still out there. We're all trying to define how much is coming.

Well, now with those comments, I will turn the call to Orlando to provide you more details on the financials. Thank you.

Good morning, everyone. Well, Aurelio did provide some details, but I'll cover some more items here. Again, not to be repetitive, but as he mentioned, net income for the quarter was $75.7 million, which is $0.36 a share compared to $0.33 a share last quarter -- in the quarter of 2021, $70 million. Credit quality components continue to behave extremely well for the quarter. And as Aurelio also mentioned, the projected macroeconomic variables have also continued to show improvements.

As a result, you saw we had a net benefit of $12.1 million in the provision for credit losses, which is lower than the $26.2 million we had last quarter but still a benefit. The after-tax benefit on the provision, it's approximately $0.04 per share. Last quarter, it was about $0.08 per share.

Another significant component of results for the quarter was also, as Aurelio mentioned, the completion in July of the last pending system conversion. This resulted in reduction in merger and restructuring costs to $2.3 million from what we had last quarter, which was 11 million.

If we look at our net interest income was basically similar to last quarter, $184.7 million. However, margin was down to 3.60% from 3.81%. Most of it has to do with the mix of interest-earning assets that has led to this reduction. If we look at the components on a GAAP basis, the combined yield on the loan portfolio was 6.33% for the quarter, which is very similar to the 6.34% we had last quarter. Our loans are now 55% of average earning assets compared to 59% last quarter.

Money market and investment securities, on the other hand, now represent 45% of average earning assets versus 41% last quarter. The yield on this instrument, it's slightly down from 96 basis points in the second quarter to 92 basis points now. Money market and short-term investments make up a large chunk of this component. And we have kept the portfolios more in the shorter term based on where the market yields are now and also obviously, the expectations that there could be some increases in the near term.

We've continued to work on the cost of deposits. Cost of interest-bearing deposits is down 3 basis points to 33 basis points. And we have also continued to grow on the noninterest-bearing side, which obviously helps the margins, but not to compensate for the mix -- for the change in mix in the assets. If we look at our noninterest income remain relatively flat.

We had improvements in credit and debit card fees, ATM fees and POS transactions, but had some reductions on revenues from mortgage banking and service charges on deposits. This one mostly related to the process of the conversion. So we're back to normalized levels now.

On the expense side, which is a large ship component that we had, we had -- expenses were $114 million, which is $16 million lower than last quarter. Merger and COVID-related expenses were $2.9 million this quarter versus $12.9 million last quarter and make up $9.2 million of this reduction. If we exclude all these items, expenses were $111 million compared to $118 million last quarter. But we did have a couple of things we don't have typically every quarter.

On one side -- on one hand, we had $1.4 million in expense reimbursements and incentives we received from a debit and a credit card processing agreement. And we had a $2.3 million in profits on are OREO properties. What we've seen in the market is that sales prices have improved significantly resulting in gains on the disposition of other real estate owned properties that exceed the operating costs we had on managing all those properties. These gains do include however $100,000 profit we had on the disposition of 20.7 million commercial OREO property that we had on the books for quite some time.

If we normalize for some of these items, expenses, we're talking about approximately $115 million for this quarter. What we have seen is that we are running much higher level of vacant positions than what we normally would have. Similar to what's happening in the U.S., we have experienced difficulties in hiring several positions.

Although I can say that the trends in the last few weeks are encouraging, but we're still working on reaching normalized vacancy levels. Once we reach those normal vacancy levels and complete all of the technology projects that are underway, I would have to say that we still believe that expenses will be in that range that we had mentioned before of the $117 million to $119 million. But obviously, it's not going to happen immediately. It's going to take a little bit of time to fill out those positions.

On the asset quality, Aurelio made reference to, we continue to achieve significant improvements. Nonperforming assets decreased by $83 million in the quarter are now at $172 million from the $255 million we had last quarter. NPA now stand at 81 basis points of total assets again, first time under 1% for a very -- in a very long time. The decrease was primarily the bulk sale of the $52 million in residential mortgage loans. And the repayment of 2 large residential mortgage loans that are at $3.9 million, it was -- the result for the mortgage side was pretty good in the quarter.

We also had the disposition of the commercial OREO property I just mentioned for the 21 million being to some of that reduction. That obviously -- it's compensated also by the fact that the inflows to nonperforming continued to be low, we remain basically unchanged from the second quarter at $17 million.

The allowance for credit losses, as Aurelio mentioned, was $300 million. It's $40 million lower than last quarter just on loans and finance leases was $288 million, which is $37 million lower than what we had last quarter. The reduction in the allowance reflects charge-offs that we're taking on the nonperforming residential mortgage loans that were sold as well as the improvement trends that we continue to project on macroeconomic variables. All the variables that are used for -- to calculate the allowance for credit losses.

Important to point out that the charge-offs that we're taking on the residential mortgage loans had been substantially reserved in prior quarters, so it was a minimal impact on this quarter results.

The ratio of the allowance is now at 2.59% versus 2.85% we had last quarter. And if we exclude PPP loans and what's left of the PPP, it's approximately 2.64%. It's still a healthy coverage we have on the loans.

On the capital front, just to summarize again, we continue with the execution of our plan. As Aurelio mentioned, we repurchased $50 million in shares this quarter, $50 million in shares, which is almost 4.2 million shares. So far, we have repurchased $150 million since we started the stock repurchase program last quarter. What's left, we will continue with the repurchase, but also as he made reference to, we will be redeeming the $36 million that remain outstanding in preferred shares in the -- during the fourth quarter. And we will -- we have already announced the increase in the common dividend to $0.10 per share per quarter, also starting in the fourth quarter.

The dividends on the preferred represent approximately $2.7 million per year, which would be around $0.013 based on current number of shares, which would improve the earnings per share for common holder. Ratios are -- continue to be -- capital ratios continue to be high even with the execution of the capital strategies, but strong earnings are maintaining these capital ratios significantly above the well-capitalized levels.

With that, I would like to open the call for questions.

(Operator Instructions) Our first question today comes from Alex Twerdahl from Piper Sandler.

First off, I wanted to hone in a little bit on the comment you made really in your prepared remarks that credit demand is picking up and you expect that to continue. If you can give us a little bit more specifics I guess I'm assuming you're talking mostly about commercial and maybe also construction, but maybe if you can give us some sort of -- just a little bit more to go on in terms of what you mean by that commentary.

Well, when you -- obviously, the liquidity on the consumer also started to subside a bit. And when you look at personal consumer loans and credit cards, we're seeing over recent months including September better activity. Also, when you look at the pipeline of small loans, that actually is improving.

And I have to say that the pipeline on the commercial side, including construction, it's also continued to show improvement. As you know, it takes time from pipeline to closing. But if I have to say, compare the pipeline to where we were in the first quarter, we are overall in a better place in all the commercial products itself. Order continue very strong.

And I think that's obviously -- even with the challenges on the inventory, obviously, we have a very focused strategy like we had before and we have been achieving portfolio growth and market share growth in that business for a couple of years now that we expect that to continue to be the case based on how we're running the business and how we're executing our strategy.

And then when you look at mortgages, that obviously it's 2 important components, rates, which drive the refinancing volume, which are still high and should start to come down as long-term rates move up. But on the other hand, it's really our strategy to continue to focus on the origination side on the conforming. I have to say that the prepayment of mortgages, it's higher than we estimated when you look at the year numbers, which also contributed to some of the contraction of our loan portfolio. But in general, a lot going on, a lot of new investments, new investors coming into the market. So we feel very optimistic that, that will translate into loan demand.

That's great. I guess 2 more questions kind of related. One, in terms of line utilizations, I think last time we spoke, they were running well below normalized levels. Have you seen -- started to see those pick up or any indication that those would be picking up anytime soon?

Some of it happened late in the quarter, but not a lot, but it started to pick up. I think the -- the liquidity, we're really monitoring how the liquidity is moving. Our focus is not in government deposits. It's really in the core businesses. So we're doing -- dedicating a lot of time to make sure that we monitor individual clients, different type of products on the deposit front. So we get a better forecast of when liquidity overall will subside or not. And then there is also a lot of funds coming into the construction sector, which will capture some of those too.

Great. And then the other piece is the paydowns, which are still elevated, and I know some large paydowns that worked against your origination volume this quarter. Do you have any line of sight on to any larger paydowns that are coming in the next couple of months?

No, we monitor refinance that -- obviously, some of that also is part of the corporate portfolio that we have in Florida of participation. So the refi activity -- it's linked to the refi activity and the rates. I think the more the rates continue to move up, the less paydowns and the less refinancing activity we will see in the commercial market. That's definitely -- it's a reduction versus what we had in the first 2 quarters when you look at the paydowns that we had in the third quarter. And we don't have anything on the horizon that we say it's coming this quarter, to be honest with you. But they -- sometimes they come as a surprise too, so to be realistic, as to be realistic.

Okay. Perfect. And then switching gears a little bit to the bankruptcy and sort of the macro. We've seen some headlines. I think the Senate has postponed their vote on the new debt until tomorrow. I was wondering if you just had any line of sight or -- any more information on to how close the Senate vote was or anything else you can kind of give us in terms of what to go off of other than the headlines on expectations for the bankruptcy?

Well, there was a lot of local articles over the weekend. Obviously, there's no perfect deal when you're dealing with bankruptcy, but I think this is a balanced deal. This is a balanced deal that everybody has time to negotiate, put their views. We know there's an important hearing today with all members of executive and also legislative and the Fiscal Board with the judge.

So I have to say that we're optimistic that this should move forward. We think it's a balanced deal for -- and it's a great milestone if Puerto Rico could achieve this in the short term. And we'll probably be -- it's the closest we've been with all the parties dedicating their time focus and effort -- in making efforts to get it done. So I think everyone here is trying to get it done. It's just obviously different views on how much goes where and how much it costs to the different entities involved in this very complex negotiation. So I have to say that we haven't seen it closer to where it is today, and that's why we feel optimistic about it.

Okay. Just a final question for me just on capital as I think about the amount or the sort of the pace of capital deployment via the buyback. We saw $100 million in the second quarter, $50 million in the third. Going into the fourth quarter, I guess, 2 questions. One is how should we think about the pace of capital deployment via the buyback. And as part of that, is the preferred redemption, does that count towards the overall capital deployment plan such that we could see a much lower level of buyback in the fourth quarter as a result of that $36 million being used towards the preferred redemption?

Yes. The first -- I'm going to answer first, yes. When we announced the buyback, we did include the $36 million as part of the $300 million. That's answered that question. Our goal this quarter is to try to reach $250 million of the overall $300 million. That's our goal. And then obviously, we'll move from there, but that's our goal this quarter. So it will include the $36 million plus another [$60 million] something, yes. That's our goal.

We currently have no further questions. So this now concludes today's call. Thank you, everyone, very much for joining us today, and you may now disconnect your lines.