Earnings Call Transcript - FBP Q3 2021

Operator, Operator

Hello, everyone. Good morning, and welcome to the First BanCorp's 3Q 2021 Financial Results Call. My name is Emily, and I'll be coordinating the call today. All participants are currently in a listen-only state; however, during the presentation, you'll have the opportunity to ask a question. I now have the pleasure of handing the call over to today's host, Ramon Rodriguez. Ramon, please go ahead.

Ramon Rodriguez, Host

Thank you, Emily. Good morning, everyone. 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 the call over to our CEO, Aurelio Alemán.

Aurelio Alemán, CEO

Thank you, Ramon. Good morning, everyone, and thanks for joining us today. Please, let's move to slide four of the presentation to cover some highlights. It was a very strong quarter for First BanCorp, I will 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 systems conversions. I must say that a lot of resources and management time were required to achieve this important milestone on time and on budget, which is also significant. I would like to thank all my colleagues involved in the integration for completing this very complex process, actually in less than a year after closing the transaction. Now, the fully integrated organization 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 of resources will be geared towards growing the franchise and servicing the clients. In terms of our Puerto Rico franchise, we now have the second-largest market share among banks across all products and channels. This will allow us to better serve our clients and communities with additional opportunity for organic growth. Our focus on digital solutions has 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 include not only transactions but also the ability to process mortgages, credit card, personal loans applications through our corporate portal, and on the commercial front, the loan forgiveness requests for the PPP loans that are still pending. As we look ahead over the next few years, 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. We will also 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 three operating regions. We observe the improvement in Puerto Rico, including all the stimulus, in the Virgin Islands, with similar investments made in reconstruction. And, obviously, Florida's economy continues to be very, very solid. Both pandemic and the economic relief funding continue to support the economic activity. It's also important to 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, a material improvement in tourism, and an overall improvement in the business environment and consumer confidence. This should result in increased loan demand. We're also optimistic about the resolution of the Puerto Rico bankruptcy settlement in the near future, which has been ongoing for quite some years now. Now, let's move to slide five to review some of the financials. During the quarter, we generated $75.7 million in net income, $0.36 per share, and importantly, a record $103.6 million in pretax 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 second quarter. Very importantly, the quality metrics continued to improve during the quarter, as nonperforming asset reached a decade low of 0.81% of total assets. The reduction in NPAs was primarily driven by the risk in sale of $52 million in non-accrual residential mortgages, and there was also the sale of OREOs, which were important during the quarter. NPL sales drove the ACL ratio down 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, we continued to make significant progress in our capital plans and continued 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. We also announced the redemption of the $36.1 million of preferred stock which will happen in this fourth quarter. Additionally, we announced on Friday an increase in the 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 six. I would like to cover some details on the loan and deposits. Loan originations are healthy at $1.2 billion, but they are definitely still short of our goals, and that's really the focus of the management team. The loan portfolio decreased largely due to the reduction of $130 million in SBA PPP loans and the mortgage de-risking sale of $52 million. As we have mentioned before, our mortgage portfolio strategy is now focused on conforming paper, which we will continue to see some decrease in the mortgage loans. Consumer loans grew nicely, and commercial loans excluding PPP are finally stabilizing. Our focus will continue to be centered on consumer and commercial growth, which is the key objective of the management team. We must say that utilization is beginning to pick up as government stimulus subsides, and we expect that to continue improving during this quarter and into 2022 as the economy fully reopens, and large-scale disaster relief related projects begin to emerge. Core deposits continued to grow nicely; excluding broker and government core deposits raised an increase of $288 million during the quarter. So liquidity is still present, and we're all trying to define how much is coming. With those comments, I will turn the call over to Orlando to provide you with more details on the financials. Thank you.

Orlando Berges, CFO

Good morning, everyone. Aurelio did provide some details, but I'll cover some other 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 from the last quarter of 2021 with $70 million. Credit quality components have continued to perform extremely well for the quarter, and as Aurelio also mentioned, the projected macroeconomic variables have also continued to show improvements. As a result, 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 is approximately $0.04 per share; last quarter was about $0.08 per share. Another significant component of results for the quarter was, as Aurelio mentioned, the completion in July of the last pending system conversion. This resulted in a reduction in merger and restructuring costs to $2.3 million from what we had last quarter, which was $11 million. If we look at net interest income, it was basically similar to last quarter at $184.7 million. Our margin was down to 360 from 381, mostly due to a 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 633 for the quarter, which is very similar to 634 we had last quarter. Our loans now constitute 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 these instruments is slightly down from 96 basis points in the second quarter to 92 basis points now. Money market and short-term investments encompass a large portion of this component, and we have kept the portfolios largely shorter-term based on current market yields and expectations that there could be some increases in the near term. We've continued to work on the cost of deposits. The costs of interest-bearing deposits have decreased three basis points to 33 basis points. We have also continued to grow on the non-interest-bearing side, which obviously helps the margins, but does not compensate for the change in the asset mix. If we look at our non-interest income, it remained relatively flat. We had improvements in credit and debit card fees, ATM fees, and POS transactions, but had some reductions in revenues for mortgage banking and other deposits, mostly related to the conversion process, so we're back to normalized levels now. On the expense side, which is a large component, we had expenses of $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, making up $9.2 million of this reduction. If we exclude all these items, expenses were $111 million compared to $218 million last quarter. But we did have a couple of things we don't typically see every quarter. On one hand, we had $1.4 million in expense reimbursements and incentives we received from a debit and credit card processing agreement, and we had a $2.3 million profit on OREO properties. What we've seen in the market is that sales prices have improved significantly, resulting in gains on the disposition of all real estate properties that exceed the operating costs associated with managing those properties. These gains do include, however, an $800,000 profit we had on the disposition of a $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 are approximately $115 million for this quarter. What we've seen is that we're running at much higher level of vacant positions than what we normally would have. Similar to what's observed in the U.S., we have experienced difficulties in hiring for several positions. Although I can say that the trends in the last few weeks are encouraging, we're still working on reaching normalized vacancy levels. Once we reach those normalized vacancy levels and complete all the technology projects underway, I must say that we still believe expenses will range within the scope that we had mentioned before, around 117 to 119. However, it's important to note that it's not going to happen immediately; it's going to take a little time to fill those positions. On the asset quality, as Aurelio made reference to, we continue to achieve significant improvements. Non-performing assets decreased by $83 million in the quarter and are now at $172 million compared to the $255 million we had last quarter. NPAs are now at 81 basis points of total assets, marking the first time under 1% for a very long time. This decrease was primarily driven by both the sale of the $52 million in residential mortgage loans and the repayment of two large residential mortgage loans totaling $3.9 million. The results for the mortgage sector were quite good in the quarter. We also concluded the sale of the commercial OREO property I just mentioned, resulting in a $21 million reduction. This was compensated by the fact that inflows to non-performing assets remain low, remaining basically unchanged from the second quarter at $17 million. The allowance for credit losses, as Aurelio mentioned, stands at $300 million, which is $40 million lower than last quarter. The allowance for loans and lease losses was $288 million, which is $37 million lower than what we had last quarter. The reduction in the allowance reflects the charge-offs we are taking on the non-performing residential mortgage loans that were sold, as well as the improving trends we continue to project on macroeconomic variables—all the variables used to calculate the allowance for credit losses. As we pointed out, the charge-offs that were taken on the residential mortgage loans had been substantially reserved in prior quarters, resulting in minimal impact on this quarter's results. The allowance ratio is now at 259 versus 285 we had last quarter. Excluding PPP loans, what's left on the PPP is approximately 264; this still represents a healthy coverage we have on the loans. On the capital front, just to summarize again, we continue executing our plan, as Aurelio mentioned. We repurchased $50 million in shares this quarter, totaling 4.2 million shares. So far, we have repurchased $150 million since we started the stock repurchase program last quarter. As for what's left, we will continue with the repurchase program, but as Aurelio mentioned, we'll be redeeming the $36 million that remain outstanding in preferred shares during the fourth quarter. Additionally, we have already announced an increase in the common dividend to $0.10 per share per quarter, starting in the fourth quarter. The dividends on the preferred shares represent approximately $2.7 million per year, which would be around $0.13 based on the current number of shares, thus improving the earnings per share for common shareholders. Capital ratios continue to be high, even with the execution of the capital strategies, meanwhile, strong earnings maintain these capital ratios significantly above the well-capitalized levels. With that, I would like to open the call for questions.

Operator, Operator

Thank you. Our first question today comes from Alex Twerdahl from Piper Sandler. Alex, your line is now open.

Alex Twerdahl, Analyst

Thank you. Good morning, guys.

Aurelio Alemán, CEO

Morning, Alex.

Alex Twerdahl, Analyst

First off, wanted to hone in a little bit on the comment you made, Aurelio, 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?

Aurelio Alemán, CEO

All right, when you—obviously, liquidity in 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. I have to say that the pipeline on the commercial side, including construction, is also continuing 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 themselves. Orders continue to be very strong, and I think that's obviously, even with the challenges on the inventory, we have a very focused strategy, like we had before. We have been achieving portfolio growth and market share growth in that business for a couple of years now, and 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's obviously an important component; rates drive the refinancing volume which is still high and should start to come down as long-term rates move up. But on the other hand, our strategy continues to focus on the origination side, on the conforming. I have to say that the prepayment of mortgages is higher than we estimated when you look at the yearly numbers, which also contributed to some 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 this will translate into loan demand.

Alex Twerdahl, Analyst

That's great. I guess two 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 started to see those pick up or any indication that those would be picking up any time soon?

Aurelio Alemán, CEO

Some of it happened late in the quarter, but not a lot; it started to pick up.

Alex Twerdahl, Analyst

Okay, and then the other—

Aurelio Alemán, CEO

I think the wildcard is the liquidity; we're really monitoring how liquidity is moving. Our focus is not on government deposits; it's really on the core businesses. So, we're dedicating a lot of time to ensure we monitor individual clients, different types of products on the deposit front to get a better forecast of when overall liquidity will subside or not. There's also a lot of funds coming into the construction sector, which will capture some of that too, yes.

Alex Twerdahl, Analyst

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

Aurelio Alemán, CEO

No, we monitor refinance; obviously, some of that also is part of the corporate portfolio that we have in Florida. The refinance activity is linked to the refinance activity and the rates. I think the more the rates continue to move up, the fewer paydowns and the less refinancing activity we will see in the commercial market. That's definitely a reduction versus what we had in the first two quarters, when looking at the paydowns we had in the third quarter, yes. And we don't have anything on the horizon that we could say may come this quarter, to be honest with you. But then, sometimes they come as surprises too, so to be realistic, we have to be realistic.

Alex Twerdahl, Analyst

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 had any line of sight or any more information on how close the Senate vote was or anything else you can share in terms of what to expect with the bankruptcy?

Aurelio Alemán, CEO

There were a lot of local articles over the weekend. Obviously, there is no perfect deal when you're dealing with bankruptcy, but I think this is a balanced deal that everyone had time to negotiate and put their views forward. We know there is an important hearing today with all members of the executive and legislative bodies, as well as the fiscal board with the judge. So, I must say that we're optimistic that this should move forward, and we think it's a balanced deal for Puerto Rico. If we achieve this in the short-term, it would be a significant milestone. We believe this is the closest we've been with all parties dedicating their time, focus, and effort towards making it happen. Everyone here is trying to get it done, it's just that there are, 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 feel we haven't seen it closer to where it is today, and that's why we feel optimistic about it.

Alex Twerdahl, Analyst

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

Aurelio Alemán, CEO

Yes, to answer the first question: Yes, when we announced the buyback, we included the $36 million as part of the $300 million; that answers that question. Our goal this quarter is to try to reach $250 million of the overall $300 million, and that's our goal. We will include the $36 million plus another $60 million-something, yes, that's our goal for this quarter.

Alex Twerdahl, Analyst

Great. Thank you for taking our questions.

Aurelio Alemán, CEO

Thank you, Alex.

Operator, Operator

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.

Orlando Berges, CFO

Thank you.

Aurelio Alemán, CEO

Thank you.