First BanCorp.
Q2 2021 Earnings Call Transcript

Published: 23 Jul 2021

[Company Representatives:]

Aurelio Alemán - President, Chief Executive Officer Orlando Berges - Executive Vice President, Chief Financial Officer John Pelling - Investor Relations Officer

[Operator:]

Good day, and welcome to the First BanCorp 2Q ‘21 Results Conference Call. All participants will be in listen-only mode. . 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.

[John Pelling:]

Thank you, Sara. 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.

[Aurelio Alemán:]

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 highlight 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 to the pandemic. One the macro front, you know 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 outside Juan in Puerto Rico is above per-pandemic levels since April, and despite a recent and slight increase in reported cases as of June, vaccination rates on the island are quite over 60% now. This significant amount of stimulus continues 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 the economic activity approaching pre-pandemic levels. Obviously, you know 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, continued to showing 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 race to 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. We do see bright transactions across the network.

[Operator:]

Pardon me. This is your operator. You may proceed with your presentation.

[Aurelio Alemán:]

Thank you. Our apologies. Not sure what happened, but hopefully we're back. I just want to make sure the – everybody's dialed in and it’s only with the system John, please.

[John Pelling:]

It looks good.

[Aurelio Alemán:]

Okay, thank you. So I was saying that the consumer portfolio on the other hand grew nicely, driven by auto $98 milling, increase in the other 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 when you compare this to earlier - how we were earlier in the year. There's a lot of – there's a lot of moving parts in the loan portfolio side driven by the macro. When you look at the mortgage business, higher payouts driven by rates, also you know the increasing limits on the conforming side that happened some time ago, are also having an effect; you know most of the loans are now performing. 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 come into the pipeline, and another contributor in the construction which is actually good news, absorption of flossing units also accelerated and creating repayment in those lines that we have available. Again, then on the deposit side, as I said you know nice growth. $1.5 billion grows in the government segment, in the public bonds tied to Puerto Rico and the ECR regions. So in a nutshell, the franchise continue to execute well, driving a lot of key initiatives in parallel. Achieving consumer growth, supporting our commercial borrowers, accelerating data 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 continues to perform well, given the growing 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 had to litigate over the past year. Also really proud of how my teams were able to support our customers through this pandemic.

[Orlando Berges:]

Good morning everyone. 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 compared with $86.4 million last quarter. As you broadly 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. It was also a benefit of $15.3 million. The after-tax benefit of this provision on results represents approximately $0.08 this quarter. 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 – while last quarter we had $11.3 million. Looking at components the net interest income for the quarter increased $8.5 million. We saw interest income on investment securities and interest-bearing 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-bearing cash, its 95 basis points, up 4 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. Its 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 was about $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 the profits 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, it was 381 despite the increase in net interest income, but we continue to see the pressure on the change in the mix deposits. Securities continued to grow as a result of the deposit flows and also combined with already mentioned in the loan portfolio, residential mortgage. We continue to focus on conforming paper and the loans have come down on the portfolio.

[Operator:]

Thank you. Our first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala:]

Hey! Good morning.

[Aurelio Alemán:]

Good morning Ebrahim.

[Ebrahim Poonawala:]

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

[A - Orlando Berges:]

We're expecting that by the fourth quarter we still have some transaction expenses in the third quarter. So if you take those out, you know we would be at similar levels. We start realizing more of the savings now at the fourth quarter and we are 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 2020, ’22, 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, so you know 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.

[Ebrahim Poonawala:]

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?

[A - Aurelio Alemán:]

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

[Orlando Berges:]

Oh! The – we still are – I mean originally we thought it was mostly going to 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 $4 million and $5 million that is left.

[Ebrahim Poonawala:]

Indirectly 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 buy backs. One, talk to us in terms of your appetite to accelerate the buy backs 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 is the CET1 that you're targeting?

[Aurelio Alemán:]

Yeah, the – you know I think the capital plan is a living creation that we’re going to monitor constantly as we perform. You know when we build the plan you know we have certain levels of expectations for the year. We’re actually doing better than that. So you know we’ll revisit the plan again you know not this quarter, but next quarter and it could change. It could change depending on how the franchise perform. 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 makes sure that the franchise you know continues to perform well and now entering into the third quarter, we have a lot more confidence on the prospect over the next couple of quarters, so you know it's something that we’re looking in. You know I think everything is on the table as we’re progressing. You know when we did the acquisition we didn’t expect it to do the buy back so quick, so we moved a little faster than expected then, and actually to a higher number than expected. So now you know that continues to be the case, we continue to reevaluate and decided. And again, you know the target capital ratios are a factor of the environment, of the macro, and the factor will be as a quality, and 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 published to the market, but that will continue to evolve as we see this economy getting stronger and we see as a quality metric, you know getting closer to what U.S. banks are, which we expect that they continue to move in that direction.

[Ebrahim Poonawala:]

Got it. And just tied to the asset quality metrics, the loan loss reserves ex-PPP at 3.2%, remind us Orlando, like 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?

[Orlando Berges:]

. 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 1 CECL reserves that 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 on projected economy, micro economic 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 – or for maybe getting the non-performing down more clearly, you know 1.2% of assets looks pretty good as compared to what we had before, but obviously we would love to be on their non-performing loan side, which is 1.6%, be more on the 1% level down the line, so we’ll – you know we continue to move in that direction. You know there is – the pandemic did bring some roadblocks or delays let's call it on things like foreclosures, specially on the residential side, which is the largest chunk of the non-performing we now have. So it’s delaying 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 you know better prices on chart sale offers that are considered better prices and people paying, you know paying down some of the loans or getting them up to date. So that has a help in also in getting the numbers down.

[Ebrahim Poonawala:]

Got it. Thanks for taking my questions.

[Aurelio Alemán:]

Thank you.

[Orlando Berges:]

Thanks Ebi.

[Operator:]

Our next question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

[Alex Twerdahl:]

Hey! Good morning guys.

[Aurelio Alemán:]

Hey Alex!

[Alex Twerdahl:]

First off, I just want to hone in on one of your comments from the prepared remarks really. You said that the, 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.

[A - Aurelio Alemán:]

Well, we do expect – you know yes, the construction pipeline, it's improving, and you know its linked to you actually investors coming to the island, it's linked to housing demand, its linked to you know CDBG projects that are you know being approved and actually started to kick-off. You know I think we – you know I think – obviously I think every quarter should get better as we move on and obviously broadly speaking in 2022, I think you know obviously housing demand continues to be a factor that wasn’t there before, and the other elements of the construction you know take a little bit longer, but you know when you look at the size of the pending funds to be deployed that are all pre-construction, you know definitely this is something that I will continue to build up. You know we expect to have – you know improve every quarter from now on and that's what the teams are working for. The consumer side you know we had – I will have to say weaker on secure lending, personal loans and credit card volume in the first half. That actually is improving; improved through May and June recently. You know although it’s very solid, even with the limited inventory we expect that to continue solid, solid. You know on the mortgage side you know 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 payout than we planned for and you know we know that order inventory is going to start to increase because factories are – and we have a very large order floor plan portfolio. So when you add all the pieces, we definitely do expect to – and we're working towards improving you know our volume of originations quarter-by-quarter.

[Alex Twerdahl:]

Okay, that's very helpful. And then a question for you Orlando. Just as I think about the deployment of cash to securities that you did during the second quarter and the impact to NII, has the full impact of the 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 to sort of see the cash in short term to actually decrease in the third quarter.

[Orlando Berges:]

The thing here Alex is that you know obviously it's all tied up to what's happening with the market floor. So the elements of this quarter we had $1.5 billion of government deposits come in. We know that some of those funds are temporary funds, are related to some of these efforts, so some of it's going to go away. We still had $2.5 billion of cash. You know some of it – most of it, it’s on the fed account. That does get some interest payments, but it's small amount. The question here, it's sort of – obviously we are cautious about extending investment portfolio life within the policy guidelines obviously, but even within that extending it because of the 130 tenure note which is still lower now. Now we are trying to find and some significant expense 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.

[Alex Twerdahl:]

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

[Orlando Berges:]

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 we have set internally; we’ll review those as go on. As we go along, you know I cannot tell you that – you know I cannot answer to you completely, but that's a goal. We’ll see how much makes sense to do.

[Alex Twerdahl:]

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 ETA valuation allowance still at FirstBank that you called out in the press release?

[Orlando Berges:]

The valuation on the FirstBank, on prior discussions we’ve had. Remember that tax laws in Porto Rico unfortunately, have a disposition that exempt income has to be considered as part of the. You cannot use some of the NOLs, because you have to accept 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 are seeing on the tax rate, it’s a little bit of a – the larger amount of excess cash has ended up in investments, not all of 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. You know, most of it probably won’t be realized. So we are just trying to see how we can maximize and use some of it, because of that, those levels of exempt income within the bank.

[Alex Twerdahl:]

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 etcetera?

[Aurelio Alemán:]

Well the affected this quarter was about 33%, remember 33% something we disclose that. We are seeing something, should be similar to that 33% to 34%. We still have the exempt income, we still have it as a relationship of a – 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 are coming from an estimate of 30, just over 30 and 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.

[Operator:]

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

[John Pelling:]

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.

[Operator:]

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