First Bancorp
NYSE:FBP
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First Bancorp
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Good morning and welcome to the First BanCorp Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to John Pelling, Investor Relations and Capital Planning Officer. Please go ahead
Thank you, Andrew. Good morning everyone and thank you for joining First Bancorp's conference call and webcast to discuss the company's financial results for the second quarter of 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.
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 of press release, you can access them at our website, 1FirstBank.com.
At this time, I'd like to turn the call over to our CEO, Aurelio Alemán. Aurelio?
Thank you, John, and good morning everyone.
This time, before going into the details of the quarter, I would like to discuss what we consider a more pressing matter at hand. Earlier this morning, on their separate press release, we disclosed an exciting piece of notes. Yesterday, we did receive regulatory approval for moving ahead with our strategic transaction with Santander.
We're very pleased of achieving this step. We do expect to meet our closing conditions and close the deal by September 1. As we shared before, this is a transformational transaction for our company. And while there have been many moving parts since October, we actually expect that the result in deal metric, meaning TBV dilution EPS acquisition and earn-back, will be inline with those that we report in October as compared to our stand alone projections.
Please keep in mind the deal excludes just to remember some of the metrics that we share the point in time, then it excludes NPAs. The premium is calculated based on the size of the balance sheet at closing. In addition to what we disclosed on the agreement in October, we expect that Santander would deliver to us an additional $28 million on loan loss reserve to account for loans that are subject to COVID related moratoriums.
We also have to consider that over the past few quarter we have incurred expenses associated with the transaction of about $50 million already. We have impacted our bottom line and turnover book value already. Also, obviously that will reduce the remaining quarter going forward. And I think it's important to note here that, given the timing, most of the savings of the transaction and the synergies will occur in 2021.
We do expect to complete the full integration by the end of the second quarter of 2021. I think it's important to mention that when we disclosed our transaction in October, we did not mention the DTA but this transaction should have a potential benefit to our DTA, we can expand that later in the Q&A.
And I just want to comment, obviously, we're being operating under this new private environment and we have learned a great deal from an operational standpoint as we move through the pandemic and now as a larger institution with greater scale, we will definitely look forward to identify larger synergies and additional opportunities for growth in this consolidation.
We are greatly appreciative and welcome both the employees and expand the client base and we will work hard to continue enhancing our products, services and channels to meet or exceed our expectations. So we're very pleased of achieving this step.
Please, let's now move to Slide 5 of the presentation, so we can cover the highlights of the quarter. Definitely the landscape has changed, I would call the operating landscape of the industry and from the operational standpoint, I must say that we are being extremely proud of our team and the dedicated frontline employees and also to our customers for their ability to adapt in this challenging operating landscape.
Priority number 1, it's been the safety of our employees and customers while we provide the services. As of today still more than 80% of the support staff is working remotely in the facilities we continue to execute strict safety protocols including contact tracing and preventative testing of COVID.
Since the beginning of the pandemic, we have been committed to maximize the benefit of the CARES Act to support our customers. This includes the referrals, includes the programs such as PPP. And we also been involved in some other programs such as the FHLB of New York grants and the USDA to support the rural communities. We understand that, obviously those are key benefits to mitigate the challenging times that our customers are - we all experiencing. It's really good experience that we, on the trend that we continue to see in the inter channels.
They continue to enhance the customer experience and as mobile and online technology tool have definitely facilitated customer interaction remotely and as you can see in the right side of this slide definitely a transaction have shifted from branches our alternative data channels and we're very pleased to see those trends finally taking place in our market.
Please let's move now to Slide 6 to talk a little bit of the quarter. Before that actually reopening trends are important when we talk about the quarter, the drivers are what's happening after the closure was happening with the reopening. Early indicators actually look good but we continue to track this metrics within our customer base across different industries. The information included here pertains to our customer base and we are tracking only by weekly basis how the different sectors are moving.
Obviously, we are also conscious of the potential impact of additional tightening towards the reopening - to the reopening effort due to the spikes in cases recently. We have to say that the hospitality sector hotels, restaurants is definitely the most impacted so far, and the recovery will depend on the reopening speed.
As an example, we're looking into really activity of merchants and point of selectivity. We experienced significant increase during the last week of June compared to last week of March. So obviously, retail is open, is to the public and spend. It's been actually significantly up.
Obviously, the second quarter result for us were hampered by the lock down remember that in Puerto Rico, we were not able to originate for a long-term mortgages up until May and basically half of the quarter show limited origination activity on the consumer side.
We tried PBT pickup in June. It worth mentioning that Florida did remain open, the Florida market and we continue originating normal levels of mortgage is actually better than normal, and but obviously quarterly originations in consumer drew an auto and the residential portfolio as you can see in the graph show obviously the positive impact of June.
The moratoriums on the other hand, and further at progress have increased customer liquidity materially. When we look at growth, we experienced an outstanding $1.2 billion increase in core deposits 30.5% and these exclude government deposits. I think it's important to keep in mind that the estimated stimulus for Puerto Rico market is about $14 billion so far and this is very material as a percent of the GDP has created this significant liquidity in the market.
This should definitely help offset some of the risks that our present over the next couple of quarters. We compare these to the liquidity that we experienced during the last Hurricanes and driven by the support and stimulus provided then. So, please move to Slide 7 for a moment, Orlando will expand on this detail but with the quarter ended up with $21 million with net income or $0.09 per share.
As expected, we experienced some deterioration in the economic forecast and that require an additional reserve bill. This quarter was $29 million, which impacted our bottom line. Pre-tax, pre-provision revenue continue strong, $67 million considered in the rate environment and the impact to the NIM.
Definitely. I have to say we do have a fortress balance sheet extremely well capitalized, total risk-base capital ratio of over 25% and now the reserve to loans is at 3.55%, which both of these are among the highest of the industry of the sector and APAs continue to move down now below 2.2% of assets.
Again, we remain committed to servicing our clients on their new operational challenge of COVID. We're committed to the safe deal of our employees and the customers as a priority and obviously while we face - we still face uncertainty regarding the future part of the economy. Our fortress balance sheet and Battle-tested management team will allow us to navigate this pandemic through the end.
So, with that, I'm going to leave you with Orlando to cover the details of the quarter, I'll be available for the Q&A.
Good morning, everyone.
I would've earlier mentioned, we posted a net income of $21.3 million for the quarter were $0.09 a share, that compares to $2.3 million 1 Senate share in the first quarter of 2020.This quarter, we had what we define in our press release as few special items in both income and expense components, they were tied to the pandemic, tied to the Santander transaction.
We even have had an insurance recovery in the water that resulted in an income and I will touch upon those on the next few slides but if we were to adjust the balance sheet for this items on a non-GAAP basis. Our net income for the quarter would have been $22 million or $0.10 of share, which compares to a net loss of $5.9 million - adjusted net loss of $5.9 million in the first quarter, which was $0.03 a share.
As we had anticipated, net interest income decline in the second quarter to $135 million lowered by $3.4 million from first quarter and obviously the net interest income was impacted by the significant reduction in interest rates and the reduced level of loan originations that resulted from the pandemic and the lock down, as already explained, we were not originating for half of the quarter.
Also, we did have a large increase in deposits, which has translated into increase levels of cash on money market, which in this interest rate scenario is significantly lower yields. Interest income by itself in the quarter are declined $3.3 million in cash and investment securities and an additional $3.3 million in loan.
Even though, we did have an increase in the average balances related to the PPP loans but those are lower yielding loans. On the other hand, although the average balances of interest-bearing deposits grew almost $400 million for the quarter, interest expense declined $3.2 million.
Basically reflecting the 22 basis points reduction in the average cost of interest-bearing liabilities. Right now, the overall cost of deposits is about 61 basis points, which replace a reduction in rates and a recent deposit is down from about 77 basis points in the first quarter. The margin for the quarter was 422 compared to 463 last quarter.
Trying to break it down in components, the impact includes about 4 basis points reduction related to the PPP loans, about 7 basis points reduction for the repricing of the cash balances. And another 11 basis points for the higher proportion of cash balance to interest earning assets of obviously change the mix of the earning assets. Downward repricing of loans of commercial loans and credit cards with around 9 basis points and we did have some impact of our 4 basis points for accelerated premium amortizations, which resulted from the prepayments of the investment securities.
As you remember, we had sold some securities last quarter in anticipation of that and prepayments were even higher than we had assumed. The other component was around 4 basis points decrease related to late fees as we had a higher proportion of the portfolio on their payment deferral programs.
Noninterest income for the quarter was $20.9 million compared to $30 million but also these two quarters had some special items. In the first quarter remember, we realized an $8.2 million gain on the sales of approximately $275 million of available for sale securities. This quarter we had a $5 million benefit from the final settlement of the business interruption insurance claims that we had related to hurricanes, Irma and Maria back in 2017.
Excluding these items, non-interest income still declined about $6 million in the quarter, $3 million of this decrease relates to the seasonal contingent insurance commission that we received in the first quarter. It happens the first quarter of every year, but we also saw decreases in service charges on deposits and transactional fee income, all primarily related to the lower volume of transactions resulting from the reduced business activity services due to the COVID impact and the lockdowns.
On the expense side, expenses decreased $2.4 million for the quarter from $92.2 million to $89.8 million. These expenses they include also some of the special items I mentioned. There are $2.9 million in merger-related expenses, what merger-related expenses all associated with all the legal and integration efforts associated with the Santander transaction. Last quarter, we had about 800,000 of those.
We also had this quarter about $3 million in COVID related expenses. And when I mean COVID related expenses that includes items such as cleaning cost, employee testing, protected material we have put in the branches or provided to our employees. Additional security has been put on the branches to control traffic, both food and car traffic.
Some special compensation, we did provide about $1.7 million of special compensations to our customer facing employees and support employees that were there for the whole process as well as expenses that we had incurred in customer communications to keep them abreast of what we're doing on the different branches and the programs.
Also remember that in the first quarter, we did have about a $1.5 million recovery - insurance recovery against expenses. If we were to exclude these items, the expenses decreased $8.2 million. Basically reduction is associated with lower business volumes.
As far as the expense control measures that we have implemented. So far we've basically stop all hiring a vacant positions. We have modified business promotion strategies and reduce some of them. We have eliminated traveling. We have reassessed project plans and we've gone through all the different components.
So it's resulted in some of these reductions, they are more --but basically explained in more detail on the press release, but you can see some of the components, but there is a lot part of it, which is volume related in terms of expenses.
As volumes normalize, some of these expenses would grow. Obviously, an expense level --the expense levels estimated for going forward. It's a little bit more challenging, but still assuming that excluding any COVID related expenses on Santander expenses. We should be in that $88 to $90 million range in the next quarters without any transaction cost and integration cost, which would be part of the expenses that we will see.
In terms of reserves that the provision for the quarter was $39 million, which as Aurelio mentioned resulted in a $29 million increase in the allowance for credit losses. Total allowance for credit losses is $337 million now - as of June 30, of which was $319 million relates to loans.
And we look at since the adoption of CECL allowance for credit losses on loans have grown about $164 million from $155 million we had in December to the $319 million we have now. And the allowance represents 3.55% of loans excluding the PPP loans, which is our 2 times the 1.72% of loans we had as of December. We believe this is allowance relates very ample coverage against possible losses and obviously positions us well for what is the expectation of the economy.
I'd like to mention that in addition to the $319 million allowance on the loan, we do have about $7 million additional allowance related to unfunded commitments on some of the lending facilities that we have.
Moving on to some of the other components, moratoriums an important component. So, we had mentioned during the first quarter discussion, we have implemented payment moratoriums programs to support customers during this initial stages of this pandemic at the end of June.
As of June 30, we had 36% of the portfolio on the moratoriums. A lot of them were moratoriums extended for that 3 months time frame. And in July, many of this borrowers have started to meet their scheduled payments and the moratorium, as of 24th July have been reduced to approximate 18% of the portfolios and that includes reductions on all the components as you can see in the chart.
It's important to mention that the Government of Puerto Rico legislation requiring banks to extend moratorium through the end of August to residential mortgage borrowers that sold these higher. Borrowers had to be currently qualified in the beginning of the pandemic that would keep moratoriums on the residential for a little bit longer time frame.
And we have continued to work with borrowers and have been performing detailed reviews of all commercial borrowers in the different industries. Clearly, the hospitality industry is still facing the largest challenge but some of the other industries have started to normalize.
Charge-off levels for the quarter were lower. Obviously, some deferral programs migrations tend to go down. That it's what you will see on the non-performing side. Inflows to non-performing were $10 million in the quarter, which is $20 million lower than last quarter. A big part related to these deferrals that the other customers kept making their payments.
Overall non-performing decreased by $14 million to $303 million as of June 30, compared to $317 million as of March 31. We continue to monitor the portfolios that continue to spend time understanding customer's behaviors. So as Aurelio mentioned, a number of customers already open non-operating. So we feel very good track to continue to execute.
With that, I would like to open the call for questions.
[Operator Instructions] First question comes from Ebrahim Poonawala of Bank of America. Please go ahead.
This is Chris Nardone for Ebrahim. Congrats on getting the regulatory approval. Just want to know are there any performing loans that you are planning to acquire initially but are no longer acquiring given the COVID stress?
The agreement given from the Santander transaction, the agreement calls for acquiring all loans that are performing at closing. If there is any non-performing loans that meets all the financial of nonperforming has to be classified as such and Santander will keep.
So if any loan has been affected to reach that point to be considered non-performing, it has to be classified as such and will not be part of the transaction. If it's just related to some payment deferrals that have been given in the market under normal terms and all of that, not necessarily, it's a function of that payment capacity of the customer.
But the answer is anything that migrated to MPO since October to closing is not part of the transaction.
And just a quick follow-up. Appreciate your prepared remarks, but if you could just give us an update on the pro forma capital outlook. Just in terms of the tangible book value dilution that you expect and where you expect the TCE ratio to end that would be great. Thanks guys.
You mean, with the transaction?
Yes.
Yes. The ratios, as you know we had anticipated the ratios, the Tier 1 ratios to be above 15% on the transaction that - those numbers still hold. If you look at the balance sheet - at the balance sheet, we are a bit larger mostly because of the large increase in deposits and it's all cash - a lot of cash and investment securities. So, the risk weighting of that is zero or 20% depending on the component. Santander balance sheet has remained fairly consistent to what we had before.
I anticipate a slightly lower leverage, only because of the higher average balances that we have on that cash, but not other than that, still all the ratio's been well - well capitalized. The leverage ratios will be - we had anticipated around 11% originally maybe as slightly lower, but still above 10% at closing.
So, it's fairly consistent with what we had disclosed before including tangible book value dilution, similar to what we had disclosed before. We haven't seen any changes, obviously all based on - as compared to our standalone there has been some reviews of our standalone estimates, but the transaction will continue to add as we had expected.
Next question comes from Alex Twerdahl of Piper Sandler. Please go ahead.
So, I just wanted to elaborate or I guess dig in a little bit more to that last comment about the tangible book value dilution being consistent with the announcement. So, I think if I recall that the announcement is at 7% tangible book value dilution from the transaction and then another - somewhere between 1.5% and 2% dilution from the CECL impact of the acquired loans, would it be fair and then you also kind of alluded to DTA and kind of I think you'll expand a little bit more upon that - upon me asking.
But as we kind of put all that together and then look at tangible book value at 6/30 of $9.83 is the right way to think about pro forma tangible book value just kind of knock in somewhere between 8.5% and 9% off of that, the way we would have upon the announcement or is there something else we should be factoring in as well?
We believe it's going to be more in the 7% to 7.5% combined with CECL, based on some of the changes on the balance sheet and some of the other components that we have seen, but it's just a bit lower considering CECL, but not too different, and similar earn back to what we have before. The DTA component that you made reference to, we did not include that in any of the analysis and it's something that clearly Santander adds to our borderline some revenue streams that would allow us to utilize DTAs, we'll work exactly on the exact amount.
We haven't finished the full analysis of the amount, but clearly it's going to add some to the bottom line. I don't think it's going to realize the whole DTA evaluation allowance that we have, what would allow us to realize part of it, and that's going to help also in compensating for any dilution.
And can you remind us what the - what that valuation allowance was at the end of 6/30 the total one?
The evaluation allowance, on the bank, it's about $40 million - from the top of my head, I'll give you the exact number, I think it's $47 million, Alex, just on the bank remember that their evaluation - it's evaluation allowance on the holding company that it's a bit different because of the individual legal entity taxing component of the Puerto Rico plus $50 million was the evaluation allowance on the bank as of June 30, Alex.
$50 million. So, some portion of the $50 million will likely come back in, when the deal closes or I guess subsequent to the deal closing?
Yes.
And then, just last question from me, just as I think about the margin going forward, and if you back out the PPP impact of 4 basis points, the 4 basis points of accelerated prepayments amortization, and then I guess 4 basis points from the lower late fees, is that kind of the right starting point for the margin going into the third quarter? And then, as you kind of look out and the opportunities you have on deposits and the pricing pressures on loans - like how should we be thinking about the NIM trajectory over the next couple of quarters?
Well. The PPP will be there for the - our estimation is that they will be there for the next couple of quarters or a large part of it because we feel that a large chunk of the loans will stay for the six months timeframe. So, in this quarter or next quarter, we'll - I think that, that impact will still be there. The - to be honest, I was expecting prepayments it was a bit higher so that's a little bit of difficult to estimate on the investment side.
In terms of repricing of loans, it's a function of the curve. We - the estimation of the curves at this point, it's more stability a little bit going down, not a lot. So, I would say that it all depends on the curve. So, it might not affect too much going forward. The one thing we've seen is deposits grow and the things that reimbursement it's based on the same - low market.
So, the - to some extent, the ability of the market to reopen and be able to go back to originations like Aurelio mentioned, the trends are better in July and June and July in some of the consumer portfolios - think about a 1.5% - 1% to 1.5% investment alternative in the market, as compared to 7% or 8% on a consumer loan, makes a big difference. So, assuming normal trends we - deposits continue to be healthy, so that makes changes.
I don't know, if we should - we shouldn't be going down to be honest, but that our mix of assets could change that a little bit. You're right, the late fees it's something that - it's a function to some extent of moratoriums, is it going to go down completely, the impact? I don't know, but part of it should go down as well as I am assuming that the prepayments at this point on investments should be lower, so that should be a smaller impact going forward than what we had in the quarter.
And then just as a follow up, when you layer on the Santander balance sheet initially it was supposed to be NIM dilutive, but given what's happened to the NIM already, do you still expect NIM dilution or is it going to be relatively neutral to the margin?
The Santander balance sheet should be a bit NIM dilutive, they still have a significant amount of securities in their portfolio. Even though the transaction is a cash transaction, so some of it, it's going to be gone but that effects income also, so it should still be a bit dilutive, as we had anticipated before only because of the mix.
Thank you for taking my questions.
Just to clarify, the yields on their loans are very similar to our deals, they are - they have more consumer - I mean commercial and mortgages, they don't have as much in consumer, as you probably have seen on their balance sheet, so that by itself it's a lower yield, their cost of funds is good, so that helps - but they do have large amounts of cash balances and securities there.
[Operator Instructions] The next question comes from Glen Manna of KBW. Please go ahead.
Congratulations on getting the approvals for the deal. I'm sure, given the current environment that it was no small feat to get it done. But just to dive into the NIM, just a little bit farther on yields on the commercial book, given the Fed move and how fast they move, could you provide some kind of a percentage that you think commercial loans a variable portion are pricing in where current rates are given moves in one month and three month LIBOR and Prime?
So, we did provide some information on the release. Let me give you exact, so I don't misquote. About 70% of our portfolio - let me get the exact numbers for you. When you have information and you don't find it. Okay, let me - the commercial portfolios are - about two-thirds of the commercial portfolios are either based on Prime or based or based on LIBOR. Most on LIBOR, it's about a third on Prime, and the other two-thirds of that and 66% of the portfolio, it's LIBOR based.
We do have floors on many loans, so some of the portfolio won't suffer from future changes on rates because of the floors are there, but there are still some that don't have floors, and if rates were to go down, especially the three month LIBOR, it would affect a bit.
At this point, the expectation is that Prime will be sort of at this level for a little bit of time, and the changes to the three month LIBOR I'm not expecting it to be large. So, I don't expect that to be a significant impact, obviously if things get worse and we move to the old subject of negative rates, that could have some impact on some of these loans that don't have floors. But again, our two thirds of the portfolio it's floating, and it will move with either one of these items.
And maybe, given the addition of Santander, can you discuss or just remind us of some of the opportunities that you have on the funding side of the balance sheet, after the deal closes?
Well. I mean at this point the funding meaning we have changed a lot funding components. As deposits have grown, we have been able to eliminate a lot of the wholesale funding, it's significantly down, broker CDs are significantly down, we still use some broker CDs in our Florida market which has a different funding profile at this point. It has remained an expensive deposit market, so we tend to use Puerto Rico funding or wholesale funding to fund that market.
At Santander, we'll just add to that - I believe, at the end it's a function of what makes sense in terms of portfolios and being able to mix correctly, they don't have wholesale funding, it's almost nothing what they had on the balance sheet the last time I looked. And obviously, we want to keep all those deposits. So, it's not going to change. We don't want to take away - their deposits are not expensive deposits, they are normal market deposits.
So, we want to keep all those customers, so that's only going to add to that deposit mix that we have to help fund the assets. So, the Santander part it's not going to change much what we have been doing so far within our own balance sheet, it's just going to add to that diversity of our customers.
And on the payment deferrals, and just kind of last question, the slide shows a 36% drop from 36% of the portfolio down to 18% here - here in July, and you had mentioned some of the government mandates with respect to resi mortgages, but still that shows a pretty big drop in what's on deferral. Could you talk about customer behavior and maybe some of the people that are on deferral that are still paying and kind of how they are responding to it?
Behavior has been really, really good. This decrease I've mentioned, significantly has been on customers that have already started payments, their payment patterns in July. The overall payment patterns we've been tracking data weekly compared to prior to the pandemic implications, and it's been really, really consistent with that. So, so far it's been really good.
I think that it's - keep in mind that deposits in the market have grown significantly, just ourselves we grew about $1.2 billion in deposits including government, and that means our liquidity also, so that helps in that component. There are customers that - we've had a number of customers that originally we were anticipating that we could need on the commercial side extensions, from the three month, maybe up to six months, and many of them have come back and say no we don't need any more extension.
I think, it's still the challenge, it's going to be with the hospitality industry, and we have to continue to work with those, and some retail side could be affected. What happens with the lockdown and whether we have to revert back to some of it could change a bit, but as of now the trends - the payment trends have been really good during the month of July. So, it makes us comfortable with what's going on with these customers.
This concludes our question-and-answer session and the First BanCorp conference call. Thank you for attending today's presentation.
I think we have one more on the line.
Okay. So, I'll put in that - a question from Alex Twerdahl of Piper Sandler. Please go ahead.
Sorry. Thanks. I want to sneak one more in here.
Put the buzzer.
With respect to sort of pro forma capital, I don't want to put the sort of the horse too far or that cart too far ahead of the horse here with the deal not even closed yet, but with the pro forma tangible book value of $9 $10-ish that's trading at 65% of tangible book value and 15-ish percent common equity Tier 1, how should we be thinking about the time frame for additional capital return, with respect to things like buybacks, once the deal actually is closed?
I think Alex, this question had a different answer three months ago, but with the pandemic I think it's not really prudent to - we need to rethink the capital plan definitely, if things goes well and the pandemic get resolved and the recovery is as expected in the most recent trends, obviously something should happen next year regarding next capital actions.
But, I think it's going to be driven by how we see the pandemic, how we see the additional provisions, if any, or not. It's the most prudent thing to do obviously it is there hopefully that will be the next step as the economy continues to improve. That's our main goal to move ahead, complete this one and then be able to move to our next capital action.
And this concludes the question-and-answer session and the First BanCorp conference call. Thank you for attending today's presentation. You may now disconnect.