First BanCorp.
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Good day and welcome to the First BanCorp Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Pelling, Investor Relation Officer. Please go ahead.

[John Pelling:]

Thank you, Alyssa. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the fourth quarter and fiscal year ended 2020. 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 today. We wish you all a healthy 2021. Please, let's move to slide four to discuss the highlights of the year. We're definitely very pleased with our results for the year. And I'm truly proud of what our team was able to accomplish overcoming all the many challenges posed by the pandemic in the operating environment. It really was a transformational year for our company with the acquisition that closed on September 1, which has further expanded our market share, solidify our position in Puerto Rico, with now over 30% growth in our customer base, reaching 675,000 customers. We're also very pleased with the technological advancements on the year and our data preparedness. Our clients' adoptions of digital channels continued to improve during 2020 reaching an increase of over 33% in logins and digital transaction increasing over 55% for the year. It is a priority to continue investing in technology infrastructure projects and digital and so we continue driving efficiency as we progress in parallel with the integration. We were definitely very focused on integration and has been running on schedule and is planned to be completed by the end of the summer. On the economic side, the macro and geopolitical landscape in Porto Rico seems continued to be improving. Economic measures stemming from additional stimulus and disaster relief funding will definitely provide additional support to those impacted by the pandemic and the overall environment. The lockdowns continue at a different layer, but when we look at December activity, it was actually fairly healthy considering the limitations in operating hours. Most impacted sectors as we know continued to be hospitality and retail.

[Orlando Berges:]

Good morning everyone. Aurelio mentioned we had a strong quarter, 50 million in the quarter or $0.23 a share, which compares with 28 million last quarter, $0.13 a share. Again, keep in mind that the quarter does reflect the full - the first full quarter effect of the acquired operations. We only had one month of those results in the third quarter of 2020. The quarter included still some merger and restructuring costs 12.3 million this quarter compares with a 10.4 million last quarter. And also keep in mind that last quarter we had a Day 1 CECL allowance for the appropriation of almost 39 million. And we recognized an 8 million reversal - a partial reversal of the deferred tax asset valuation allowance, which also reflected on results. Net interest income for the quarter, it's up 29 million. A lot has to do with the 1.7 billion higher average loan balance we have in the quarter, which includes the Santander acquisition, obviously the full effect, but also new originations on the commercial and consumer loans for the quarter. Those were partially offset by - so Aurelio made reference to also the fact that we have continued to reduce the mortgage portfolio, which is down about 130 million as compared to September 30 as well as the 49 million reduction in PPP loans. Some loans have been submitted for forgiveness and they were paid off in the quarter.

[Operator:]

We will now begin the question-and-answer session. The first question today comes from Ebrahim Poonawala of Bank of America. Please go ahead.

[Chris Nardone:]

Hi, guys, good morning. This is Chris Nardone on for Ebrahim.

[Orlando Berges:]

Good morning Chris.

[Aurelio Alemán:]

Good morning Chris. Hey, good morning. So I appreciate the comment that you guys are continuing to work on your capital plan to send to the board. But is there anything specifically holding up a buyback announcement either your comfort on the macro-outlook or anything deal integration related, if you can address that and any potential timing, whether first half is realistic, that'd be really helpful.

[Aurelio Alemán:]

There's obviously steps to get there, to get to the final plan updated with the more recent data of the combined entity. So that process is undergoing and once we conclude we go to the required approval. So we expect to between now and the next call give more firm news on any potential capital actions.

[Chris Nardone:]

Okay, that's very helpful. And then just one separate follow up. I appreciate the mid 50% long-term efficiency guidance. Can you guys just discuss whether that assumes a higher rate outlook on either the short end or long end? And what's a realistic timeline to achieve that assuming the economy bounces back as early as the second half of this year?

[Aurelio Alemán:]

We're assuming that - that assumes that the economy, yes, starts to see reopening in the third quarter. And obviously, we still have activities of integration in that quarter. So our goal, it's really by the end of the year.

[Orlando Berges:]

But clearly, your reference to rates make a - come to play here. At this point we've been modeling mostly based on the current forward curves that you see on Bloomberg, when would be a good indication, and obviously, still doesn't show a significant amount of increase in rates. It would definitely help, but we do have to go through the completion of the integration and achieving some of the integration savings through this process.

[Chris Nardone:]

Alright, great, guys. Thanks for taking my questions. I'll re-queue.

[Orlando Berges:]

Thanks, Chris.

[Operator:]

The question comes from Alex Twerdahl of Piper Sandler. Please go ahead.

[Alex Twerdahl:]

Hi, good morning guys.

[Orlando Berges:]

Good morning Alex.

[Aurelio Alemán:]

Good morning Alex.

[Alex Twerdahl:]

I just - first off, I want to make sure I heard what you said there really or correctly on your commentary on additional capital actions. It sounded like you said that between now and the next earnings call in April that you hope to have some more firm news. Is that right?

[Aurelio Alemán:]

That's correct. Yeah, obviously, we're working in the process. And as I mentioned in the last call, we're consistent with the plan, growth in the year, having a combined bank, having a combined stress test, going through the approval process and completion of the document and present it to our board. It's a sequence of events in this type of activity. And hopefully, by the next call, we can give you the more firm action plan.

[Alex Twerdahl:]

Okay, great. And then just in terms of how that process works is it based on yearend numbers that you update your stress test annually? Is it kind of an annual process that you go through? Or is it a more fluid process depending on market conditions and et cetera?

[Aurelio Alemán:]

So obviously, economic forecasts are updated frequently. So it depends on the frequency that you see variability in the economy. It's unstable you don't necessarily have to do that every year, in a bank of our size. Obviously, we have significant changes in the economic forecast over the last years. The most recent one obviously shows a better prospect of the economy for 2021 and hopefully that continues. But that's the reason behind it. You have to be - you have to make sure you assess what is the latest economic forecast and apply to your scenarios.

[Orlando Berges:]

And with the acquisition Alex, it's a significant change in portfolio. So we're running full set of stress testing on portfolios, on the combined portfolio, just to make sure that everything - it's on line with what our estimates were as we were working on a transaction. And that is significant component of any capital planning analysis. So that's - those steps are ongoing as we speak and ongoing for all that stress testing of the portfolio.

[Alex Twerdahl:]

Okay, and then as you kind of go through that stress testing process, I mean, what sort of are the variables that matter? Do you look at sort of adversely - adverse case capital level kind of defects type number as sort of helping to be sort of the guide frame for where you need to operate today? Or how should we think about the capital levels on a go forward basis both like the severely adverse scenarios, but also just how much capital you need to run with in a normalized environment?

[Orlando Berges:]

Now, what we have done, over the years, it's come up with - as part of that stress scenario, come up with what we believe are some of the levels of, let's call it cushion or levels of a buffer that we feel we should keep based on the current scenarios and the composition of the other portfolios. And with that well capitalized level and all of that we come up with what we feel it's the ongoing run rate of capital we should keep on the books. And that should be the basis to determine how much is the excess capital we should - we have now.

[Alex Twerdahl:]

Okay, that's helpful. And then the securities purchases that you did during the fourth quarter, when in the quarter were those executed and just kind of is there going to be some carry through impact in the first quarter of next year on NII from just that liquidity deployment?

[Orlando Berges:]

There were a few things going on in that. Number one, remember that we sold the end of September some of the portfolios - of the Treasury portfolios we acquired from Santander, which ended up with a really, really low deal after purchase accounting treatments. So we sold all of those. Those were reinvested through October, most of it happened, I mean, the settlement dates most of them were between half - the second - the middle of October and the end of October. After that with deposit increases and the liquidity we have continued to reinvest. And obviously the level of prepayments continued to be seen on the on the portfolio. So those are reinvested. So those have been throughout the quarter. The challenge is that as you know we don't take credit risks or we avoid all credit risk on the investment portfolio. We try to keep the credit risk on the loan portfolio and the deals out there are not - reimbursement deals are not large as you will know, unless you take a lot of extension risk, and we don't feel at this point it's something we want to extend too much. So that's been the challenge. And it's creating some reductions on the overall deal of the portfolio. A bit compensated with the fact that we've been originated a good share of demand deposits as part of the growth. So that helps on the mix of funding. But investment portfolio, I don't think it's good - I don't come with investment portfolio to be a big contributor to improvement of deals.

[Alex Twerdahl:]

Okay, and then just on the other side of the balance sheet on the other interest-bearing deposits, nice tick down in the fourth quarter to 54 basis points. Where do you see that trending to overtime assuming there are no changes in the rate environment?

[Orlando Berges:]

I mean, the question is that changes the rate environments, but clearly, the biggest - but we have already done a lot of re-pricing of some of the transaction accounts. The time deposit account it's taken a bit longer to go. The market in Puerto Rico, it's going to be always a little bit higher than the states. There may be a possibility of improvement as we re-price those. We've been eliminating some of the broker CDs that were there. We still have some longer-term variables that are fixed and they cost a lot of money. So we're still trying to work with those. And there is a little bit of margin on that - those time deposits and taking it down. To be honest, I haven't done a calculation to be able to say how much it could be this year. But there will be a few basis points in reduction as - if rates stay where they are with re-pricing of time deposits.

[Alex Twerdahl:]

Okay. And then just final question for me, as I think about the reserve level and some of the inputs there, I appreciate what happened this quarter. And I know there's probably a fair amount of that qualitative aspect to the reserve as well. Do you see the reserve coming down in a more meaningful way before the economy really reopens in full? Or do we really need the effective rollout of the vaccine and the hotel sector to kind of comeback online and things like that before the reserve can come back down to a more historical levels or even your sort of CECL Day 1 level?

[Orlando Berges:]

I mean, our portfolios are heavily driven by a few macroeconomic variables in the estimation of losses, unemployment being a key one, and the unemployment is really tied up to what you just mentioned, it's reopening and what we see on those businesses that are affected, recovery in the hotel industry, still we see impact other retail or commercial real estate, we still see impact. If we - if that starts opening up and the unemployment components and GDP components start to show improvement that should definitely help on the level of reserves to take it down. Provisioning on the other hand is going to be a mix of obviously, as we put in new loans, depends on that mix of loans because of the older loans that are repaid, because of the timeframe remaining on those loans, carry lower reserve percentages as compared to the new loans that are coming in with full life ahead. The reductions in mortgages do create some reductions in reserves. So it's going to be a little bit of a mix in that. If we see significant improvements, we can see on the economy, I mean, we can see some offset of reserves on growth - required for growth with reserves require - being released based on ratios. But it's still a bit too early. Our assumptions are not that that's going to happen early in the year. If in any it's going to start happening towards the end of the year. We don't see the need of large reserve additional provisioning levels, I mean, but what we do see - we do expect to see is some level of provisioning still being required.

[Alex Twerdahl:]

Okay, I appreciate that color. And just actually one final question, as I think about expenses for 2021, as you kind of approach the full integration of the deal midyear, can you help us think through the synergies and sort of cost expectations coming out of the backside of the year with the run rate that trend towards?

[Orlando Berges:]

Okay, a little bit of a few factors come in. Number one, keep in mind that expenses for the second and third quarter of the year were really lower because of the volumes out there on the market, so we should base it more of what we saw on as a running rate or starting point running rate in December and first quarter of December '19 and first quarter of 2020, which is more of normalized level. The savings are going to come from full integration of the systems as we are going to save a good amount of money on processing costs. Savings are going to come from you know that we instituted a voluntary separation program. Not all the people left - have left already. Some people left at the end of November. But there are other people that are staying through conversions. So those savings, we wouldn't start seeing them until the second half of 2021. Also, in the process, we've been investing in some additional changes. I think we have mentioned this before in some of the calls that for example, we're just running out a full change of the teller and platform system. It's an expensive system. It's starting to be depreciated. We didn't have that in the expense space before. But clearly, we should be - preliminarily, I would say that we should be in that range of 120 million to 125 million in expenses. We will continue to work on trying to finalize all of that, Alex, as we go through all the different details of agreements that are in place, when they can be eliminated. Still negotiating some things on when you are adding things to - things. I mean the increased volume to your current - our current contracts. So we're still negotiating some of those. And that's when we'll see the full extent of all the savings that we can finally realize, even though we're still shooting for what we had said before, as part of the transaction. And we have identified a number of components that are very much on track of what we expected. So at point it's that range what I'm looking at by the third quarter or something like that of next year as we complete some other processes of integration and renegotiation.

[Alex Twerdahl:]

Okay, thanks for taking my questions.

[Orlando Berges:]

Thanks Alex.

[Operator:]

The next question comes from Glen Manna of KBW. Please go ahead.

[Glen Manna:]

Hi, good morning.

[Aurelio Alemán:]

Good morning Glen

[Orlando Berges:]

Good morning Glen.

[Glen Manna:]

Most of my questions have been asked and answered. So I'll just ask one about NCOs. Looks like you had a recovery in commercial mortgages this quarter. And I was just wondering if maybe you could give us some color on that? And then in the overall outlook for NCOs, what would your expectations be, a peak of NCOs mid next year and then a decline? And just how are you kind of thinking about that?

[Orlando Berges:]

The recovery was a –we had a couple of cases. The main one was a very old case that was fully charged up in the US and we were able to recover finally that amount and a smaller amount on another case in Puerto Rico. Those were the recoveries. Some of these old cases you continue to work on. The question is very good. Obviously, the fact that we had to put a lot more reserves on the books does indicate that there should be someone increased charge offs. We do believe that we're going to see some of the implications of moratoriums and pandemic on the business side to start happening in this first half of 2021. And we do expect that there will be some charge offs. The speed of the recovery could be a driver of when and how much we end up realizing of those losses. But clearly you don't end up estimating increased reserves without being able to estimate or having to estimate charge offs. So we should see normal levels. Remember that if you take consumer portfolios for example moratoriums lasted somewhere between August and September. And some of them the 120 days, 180 days and credit cards, you don't start seeing those until the first half of 2021. And that's when you finally realize how much is really just temporary delinquency vis-à-vis permanent delinquency that ends up being charge offs. The commercial side, you go more on one-on-one and you start identifying, and it's more of an industry related what we're seeing now, but clearly, we should expect the first half of the year to have higher level of charge offs what we had over the last two quarters.

[Glen Manna:]

Okay, thank you.

[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, Alyssa. On the IR front, we look forward to seeing you virtually on February 10 and 11 at the KBW Winter Financial Services Symposium, as well as March 16 for the KBW Virtual Investor Conference. We appreciate your continued support and look forward to seeing you soon. This time we will conclude the call. Thank you.

[Operator:]

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