First Bancorp
NYSE:FBP
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First Bancorp
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Good day, and welcome to the First BanCorp 2Q ‘21 Results 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 Officer. Please go ahead.
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.
Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business.
The company's actual results could differ materially from the forward-looking statements made due to important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website, at 1firstbank.com.
At this time, I'd like to turn the call over to our CEO, Aurelio Alemán. Aurelio.
Thank you, John. Good morning, everyone, and thanks for joining us today. Please, let's move to slide 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.
A very important milestone for us, we consider this a huge milestone this quarter, regarding the integration and conversion. You know we are on schedule to complete the full integration just now during this quarter. A few weeks ago, in early July we completed all system conversions. Again, this for us was really a huge milestone to move forward and this actually, this final conversion allowed us for finalizing the branch consolidated in Puerto Rico. We actually did consolidate the six branches in this phase.
We are really quite pleased with the progress and look forward to capturing additional market share going forward through our now expanded fully integrated franchise. Now, we have certainty that most of the pending benefits regarding synergies will be reflected in the fourth quarter numbers.
Finally with regard to the PPP program, you know as we know it ended in May and final transactions were processed in June. Through the life of the program we made $245 million or over 14,000 loans supporting commercial clients across the three regions. Now the focus to our fully integrated data platform self-service, we have processed forgiveness to 81% of the clients that participated in round one equivalent to $377 million.
Also during this quarter we disburse the last $74 million in new SBA PPP loans and received principal forgiveness remittance approximately of $151 million. I think this is also important. Obviously it was a great product, but obviously was competing with the day-to-day core business of small business lending.
Now, let's move to slide six to really cover the highlights for the quarter. It was definitely a solid quarter for the franchise generating $70.6 million in net income or $0.33 per share compared to $61 million last quarter. Definitely the improving macro-economic trends are a contributor, driving a reserve release of $26 million this quarter. But on the other hand, you know the core earnings, per tax, pre provision income increased over $10 million to a new high of $96.6 million.
Our efficiency ratio for the quarter improved to 60.6 and actually if we adjust that for merger and COVID related expenses, we were at 55% level, which is actually our goal. Asset quality metrics you know in all fronts improved. NPAs increased $29 million now to 1.2% of assets. Inflows to non-accrual also increase and delinquencies improved across all products. Again, you know as I mentioned, a significant amount of stimulus continue to strengthen customer liquidity. The deposits, excluding government grew $558 million or 4% during this quarter.
On the capital front, capital ratios are very strong and improving, and during the second quarter we repurchased 7.96 million shares for approximately $100 million under the previously announced $300 million repurchase program. So we are very pleased with how the quarter.
[Audio Gap]
Pardon me. This is your operator. You may proceed with your presentation.
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.
It looks good.
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 [ph] 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.
So with that, I will turn the call over to Orlando to go cover the financials in more detail.
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 [ph], 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.
Non-interest income was fairly like two things, three main things. Number one, last quarter we had a $3.3 million contingent insurance commission we received, that’s received in the first quarter of every year based on the prior year volumes. We didn't have any of that last [ph] quarter. Mortgage banking revenue was a bit down based on the volume of originations, but on the other hand, we continue to see the transaction volumes on debit and credit cards go up, getting close to what they were pre-pandemic and that increased that fee income base on those transactions.
On the expense side, expenses decreased by $3 million, total expenses to $130.2 million. As I mentioned, that includes $11 million in merger expenses compared to $11.3 million last quarter and includes $1.1 million in COVID related expenses, which is very similar to $1.2 million we had in the first quarter. On a non-GAAP basis excluding these items, expenses were $118 million for the second quarter compared to $120 million in the first quarter for a $2.8 reduction.
The quarter employee compensation is down $1.5 million. We are starting to achieve the savings from the voluntary and involuntary separation programs that were implemented at the end of last year and during the first quarter, resulting in additional savings of about $800,000. Total savings for the quarter under this were $1.7 million. First quarter we had a savings of about $900,000. Also we had a decrease in payroll taxes of $1.5 million as employees reached payroll limits.
Our OREO expenses were also down $2 million, primarily $2.2 million write-down, related to a $2.2 million write-down we had on the value of our commercial property in the first quarter, and we also saw reductions in professional fees of $900,000, mostly associated with the PPP origination platform, that cost viable component. But on the other hand we had an increase on debit and credit card costs, a combination of the higher volumes and the fact that we received some incentive payments in the first quarter related to the 2020 volumes.
Our efficiency ratio Aurelio made reference to was 60.6%, but if we exclude the merger related costs, the ratio improved to 55.5% percent, which as we go, continue to complete the conversion processes, those merger related expenses will start to disappear. We are expecting reduction, significant reduction this quarter of those costs.
On a question we get frequently and it's been one of the difficult components to respond. We continue to achieve savings from this. Something thereof I mentioned on the BSP's and voluntary separation and involuntary separations.
We can give you some indication, we will leave expenses, excluding OREO and transaction expenses will normalize in a range of $117 million to $119 million per quarter in the near term. Keep in mind that we have several technology projects that are still in process and that's part of the ultimate cause of this – some of these projects. It's being included in our estimates, but they're still being fully determined, the ultimate cost.
On reserve levels and credit quality, we have seen that significant improvement on projected macroeconomic variables over the last two quarters, both at the national level and in Puerto Rico. Unemployment rate is projected to continue to improve, as well as the home price index and the commercial real estate index which are both leading indicators.
As have been told, the allowance for credit losses, the total allowance for credit losses as of June 30 was $339 million, which is down $34 million from the prior quarter. This reduction in allowance led to the $26 million provision benefit in the quarter I mentioned before.
In the quarter we also had a $5 million recovery on a non-performing commercial loan that was paid off, thus the result in net charge offs were $7.6 million as compared to $12.5 million we had last quarter. If we look at the allowance just on loans, excluding some of the other components was $325 million, which is also down $34 million from last quarter.
Looking at it by portfolio, on the commercial loans the allowance declined $22 million. In the case of residential mortgages the allowance, its down $1.2 million and in the case of consumer loans decreased $10.7 million, which basically was the charge offs that were taken in the quarter. We didn’t need to add much in terms of provision, small provision in the quarter for the consumer side.
The ratio of the allowance to total loans held for investment was 285 as of June 30, compared to 308 as of March 31. We did not locate any allowance towards PPP loans since they are basically fully guaranteed. We exclude those on a non-GAAP basis. The ratio, the allowance to loans was 294 compared to 320 in March. Still we have you know significant reserve coverage ratios on the portfolio.
On the asset quality, as we continue, we continue to execute our strategy, reducing the non-performing levels. Total non-performing assets decreased by $29.3 million in the quarter to $256 million and total non-accrual loans decreased by $18.4 million to $183 million. This reduction includes the sale of a $10 million commercial property, OREO commercial property in Puerto Rico, and we had decreases of $10.6 million in non-accrual residential mortgage loans, basically collections of non-performing loans and loans broad current, and consumer loans also we saw a decrease of $6 million, part of it related to some of the charge-offs.
In flows to non-accrual were down to $16.8 million compared to $32 million we had last quarter and basically all categories had reductions. Also improvements, we saw improvements in early delinquencies, 30 to 89 main days was down by $60 million from $144 million we had last quarter to $84 million this quarter.
Resulting non-performing assets now represent 1.2% of assets and loans, non-performing loans 2%, 1.6% of total loans in the portfolio. PDRs continue to come down; were under $450 million as of June, which is $10 million lower than what we had as of March.
On the capital front, Aurelio already made reference to this, but not without being repetitive, just to mention capital obviously it remains very strong. We completed the $100 million acquisition. Overall the capital decreased less because of the revenues we had in the quarter and the OCI improvement on the value of the securities.
If we look at the repurchase through a couple of days ago, we have repurchased $118 million. That includes the $100 million of repurchase. As of June an additional $18 million we have repurchased in and the repurchase as of June represent that approximately $0.10 per share, just – yes, close to 1%. But obviously all of this was made up by the revenues, the earnings we had in the quarter and the OCI improvement, so we ended up with tangible book value per share increasing $0.30 in the quarter.
With that, I like to open the call for questions.
Thank you. [Operator Instructions] Our first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.
Hey! Good morning.
Good morning Ebrahim.
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.
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.
Understood. And remind me if you could please, what was the merger expenses that are outstanding that you expect to record in the back half of the year?
The merger restructuring charges in the back half of the year.
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.
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?
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.
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?
[Inaudible]. 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.
Got it. Thanks for taking my questions.
Thank you.
Thanks Ebi.
[Operator Instructions] Our next question comes from Alex Twerdahl with Piper Sandler. Please go ahead.
Hey! Good morning guys.
Hey Alex!
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.
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, [inaudible] 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.
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.
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.
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?
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.
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?
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.
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?
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.
This concludes our question-and-answer session. I would like to turn the conference back over to John Pelling for any closing remarks.
Thank you, Sarah. On the IR front we have Piper Sandler coming down for an investor field trip in person September 23 and 24. We greatly appreciate your continued support and with that we will conclude the call. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.