First BanCorp (FBP) 2021 Q2 法說會逐字稿

Good day, and welcome to the First BanCorp. 2Q '21 Results Conference Call. (Operator Instructions) Please note that 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 BanCorp's. earnings conference call and webcast to discuss the company's financial results for the second quarter 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 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. Aurelio?

Thank you, John. Good morning, everyone, and thanks for joining us today. Please, let's move to Slide 5 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 3 regions. Macro indicators continue to show month-over-month improvements, passenger movement at San Juan in Puerto Rico is above prepandemic levels since April. And despite the recent slight increase in reported cases as of June, vaccination rates on the island are over 60% now.

The significant amount of stimulus continue to strengthen our customers, driving growth in deposit and also softening loan demand in the near term. The economy in Puerto Rico and Florida continues to show strong signs of recovery with economic activity approaching prepandemic 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've also seen in parallel, the progress on 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 -- this, now during this quarter. A few weeks ago, early July, we completed all systems conversions. Again, this 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 6 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 fourth quarter numbers.

Finally, with regard to the PPP program, 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 3 regions. Now the focus through our fully integrated digital platform self-service, we have processed forgiveness to 81% of the clients that participated in round 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 was competing with the day-to-day core business of small business lending.

Now let's move to Slide 6 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 $0.33 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, the core earnings pretax 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 in all fronts improved. NPAs decreased $29 million now to 1.2% of assets. Inflows to nonaccrual also decreased and delinquencies improved across all products. Again, as I mentioned, a significant amount of stimulus continue to strengthen customer liquidity deposits, excluding government, grew $558 million or 4% 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 (technical difficulty).

Pardon me, this is the conference operator. It appears we've disconnected our main speaker line. One moment while we reconnect.

Pardon me, this is your operator. You may proceed with your presentation.

Thank you. Apologies, not sure what happened, but hopefully, we're back. I just want to make sure everybody's dialed in and it's okay with the system, John, please.

It looks good.

Okay. Thank you. So I was saying that the consumer portfolio, on the other hand, grew nicely, driven by auto, $98 million increase in the Other portfolio. We also have some increase in the Florida market. On the other hand, when you look at the commercial and construction pipeline, it really looks promising for -- when you compare this to earlier how we were earlier in the year. There is 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 increase in 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 OREO business. We expect that to actually change as new inventories coming into the pipeline. And another contributor on the construction, which is actually good news, absorption of housing units also accelerated and creating repayments in those lines that we have available. Again, and then on the deposit side, as I said, nice growth $1.5 billion growth in the government segment in the public funds tied to Puerto Rico and the ACR region.

So in a nutshell, the franchise continued 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. Pretax pre-provision was $96.1 million, which compares with $86.4 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 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. While 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-bearing cash balance has increased by $4 million mainly driven by the $1.4 billion increase in the average balances, balances which is directly related to the increase we've had in deposits this year. The combined yield of the investment and cash -- interest bearing cash, it's 95 basis points, up 4 basis points this quarter as compared to last quarter. The thing is that now investments and cash represent our 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 realized from some deferred interest that were recognized on a loan that was paid up in the quarter, that improved the margin by about 6 basis points. On the other hand, fee income acceleration on PPP loans paid off with somewhat $1.5 million, which is $1.7 million lower than last quarter, and that reduced the margin by about 4 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 3.81% 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 Aurelio mentioning the loan portfolio, residential mortgages, we continue to focus on conforming paper and the loans have come down on the portfolio.

Noninterest income was fairly in line, 2 things -- 3 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 this 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 million last quarter and includes $1.1 million in COVID-related expenses, which was very similar to the $1.2 million 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 or a $2.8 million reduction. In 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, resulted in an additional savings of about $800,000. Total savings for the quarter under this were $1.7 million. And at the 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 the PPP origination platform, the cost as a variable component. But on the other hand, we had an increase on dividend 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 million -- I'm sorry, 60.6%. But if we exclude the merger-related costs, the ratio improved to 55.5%, which as we continue to complete the conversion processes, those merger-related expenses will start to disappear, we are expecting, [without] some significant reduction this quarter of those costs.

On a question we get frequently and it's been a -- 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. We give you some indication, we believe our expenses, excluding OREO and transaction expenses will normalize in a range of $117 million 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 this -- some of these projects, it's been included in our estimate, but they are still being fully determining the ultimate cost.

On reserve levels and credit quality, we have seen a significant improvement in projected macroeconomic variables over the last 2 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 all leading indicators. As a result, the allowance for credit losses, the total allowance for credit losses of June 30 was $339 million, which is down $34 million from the prior quarter. The reduction -- this reduction in allowance led to the $26 million provision benefit in the quarter I mentioned before.

In the quarter, we also had a $5 million recovery on a nonperforming commercial loan that was paid off. Thus, the result in 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 was $325 million, which is also down $34 million from last quarter.

Looking at it by portfolio on the commercial loans, the allowance declined to $22 million. In the case of residential mortgages, the allowance, it's 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 2.85 as of June 30 compared to 3.08 as of March 31. And 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 2.94 million compared to 3.20 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 nonperforming levels. Total nonperforming assets decreased by $29.3 million in the quarter to $256 million and total nonaccrual loans decreased by $18.4 million to $183 million. This reduction includes the sale of a $10 million commercial property -- OREO commercial property in Puerto Rico, and we had decreases of $10.6 million in nonaccrual residential mortgage loans, basically collections of nonperforming loans and loans brought current. And consumer loans also, we saw a decrease of $6 million, part of it related to some of the charge-offs.

Inflows to nonaccrual 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 nonperforming assets now represents 1.2% of assets and loans -- nonperforming loan represent 1.6% of total loans in the portfolio. TDRs continue to come down were 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 we purchased as of June an additional $18 million we have repurchased since. And the repurchase of June represented of 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 tangible book value per share increasing $0.30 in the quarter.

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

(Operator Instructions) Our first question comes from Ebrahim Poonawala with Bank of America.

I guess as the first question around expenses, so thanks for putting out that guidance for $117 million to $119 million. 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 are expecting that by the fourth quarter, we still have some transaction expenses in 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 2 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.

The -- we're still -- I mean originally, we thought it was mostly going to be done through June. But as we move some of the conversion on the deposit side to now to July, we still feel that it could be somewhere between $4 million and $5 million that is left.

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 your 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 CET1 that you're targeting.

You want to?

Yes. The -- I think the capital plan is a living creature that we're going to monitor constantly as we perform. When we built the plan, we have certain levels of expectations for the year, we're actually doing better than that. So we revisit the plan again, not this quarter, but next quarter, and it could change. It could change depending on how the franchise performed.

We wanted to get done, I think this huge step of finalizing the integration. It takes a lot of resources, a lot of time and make sure that the franchise continues to perform well and now entered into the third quarter, we have a lot more confidence on the prospect of the next couple of quarters. So it's something that we will relook again. I think everything is on the table as we've been progressing 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 than expected. So now that continues to be the case. We continue to reevaluate and decide.

And again, the target capital ratios are a factor of the environment of the macro, the other factor of the asset quality, the other factor for all components of the economy and that will evolve also. So we're still operating with certain cushions that we haven't published to the market, but that will continue to evolve as we see this economy getting stronger. And we see asset quality metrics getting closer to a U.S. banks are which we expect that to continue to move in that direction.

Got it. And just tied to the asset quality metrics. The loan loss reserves ex PPP 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?

Hopefully, it's 0, but. Well, at this point, it's one step at a time. What we're seeing is sort of -- if you go back to our day 1 CECL reserve 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 pretty soon in the process based on the way the economy is moving and the project that economic, macroeconomic variables are. So that's the first indication.

I see, we continue to see possibilities with investor inflow in the market in Puerto Rico and so maybe getting the nonperforming 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 nonperforming loan side, which is 1.6%, be more on the 1% level down the line. So we'll -- we continue to move in that direction.

There's -- 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 nonperforming 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 charge offers direct consider, better prices on people paying down some of the loans or getting them up to date. So that has helped in -- also in getting the numbers down.

(Operator Instructions) Our next question comes from Alexander Twerdahl with Piper Sandler.

First off, just want to hone in on one of your comments from the prepared remarks, Aurelio, 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 the timing behind some of those projects coming online?

Well, we do expect -- yes, the construction pipeline is improving. And it's linked to actual 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. I think, 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, and 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 maybe continue to suffer higher payoff 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 to -- 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 purchase has 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 and short term to actually decrease in the third quarter?

The thing here, Alex, is that obviously, it's all tied up to what's happening with the deposit flow. So Aurelio mentioned this quarter, we had $1.5 billion government deposits come in. We know that some of those funds are temporary funds are related to some of these same efforts. So some of it is going to go away. We still had with $2.5 billion of cash. Some of it -- most of it is on the Fed account that does get some interest payments, but a small amount.

The question here is that, obviously, we were cautious about extending investment portfolio life within the policy guidelines, obviously. But even within that, extending it because of the 130 -- 10-year node, which is still lower now, it's longer too attractive and some significant [extension] risk in there. So we find 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 I just wanted to do a follow-up on the question on the buybacks. It could 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 are -- we have targets for each quarter, we have set internally, we'll review those as we go on -- we go along. I cannot tell you that -- I cannot answer to you really 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 FirstBank that you called out in the press release.

The valuation on FirstBank, on prior discussions we've had, remember that the tax loss in Puerto Rico, unfortunately have [disposition] 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 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 has ended 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 won't -- I'm not in a position to tell you that much of the $64 million will be realized. It's -- 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 that -- those levels of exempt 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?

Well, the effect of this quarter was about 33% -- remember, 33% something we disclosed then. We are seeing something -- should be similar to that 33% to 34%. We still have the exempt income. We still have just a relationship of with -- 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 were coming from an estimate of 30 -- just over 30.5% 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 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 23 and 24. We greatly appreciate your continued support. And with that, we will conclude the call. Thank you.

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