Q1 2021 First Bancorp Earnings Call
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Please note. This event is being recorded I would now like to turn the conference over to John Pelling IR Officer. Please go ahead.
Thank you Betsy and good morning, everyone and thank you for joining first Bancorp's conference call and webcast to discuss the company's financial results for the first quarter 2021, joining you today from first Bancorp are really Waldman, 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 them.
From this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements from the plans and objectives from the Companys business.
The companys actual results could differ materially from our 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. One first bank dot com at this time I'd like to turn the call over to.
Our CEO are really really low.
Thanks, John Good morning to everyone and thanks for joining our call today.
Please let's move to slide five to discuss you know some of the highlights.
Before I go into into the deal of the quarter as you have hopefully seen we are really very pleased to announce earlier today.
The board's approval of its 300 million share repurchase program.
The repurchase may be in the open market or in privately negotiated transactions.
I mean, unexciting amount will be subject to market conditions.
Given our outside capital policy issue and the continued earnings accretion we are committed to return excess capital door shareholder and we're very very pleased to move forward with this announcement.
Now before talking about financial results I'd like to touch on the Mac grill, the integration and how pandemic. It is progressing in Puerto Rico.
On the micro from you know, there's always significant stimulus flow into the island to the cares Act and the subsequent programs. The most recently approved in February.
The when you idled it broadens the Lady that estimate that we have seen from the fiscal board are around $45 billion, which is a material on my own is is.
It's over 60% of the island D D B.
He obviously the significant stimulus continues to support the recovery continues to strengthen our customers he's driving growth in deposits.
Other non he's also softening something along demand in the near term.
We were very pleased with you know being able to deploy these stimulus in the island and let's see how how the post the pandemic Reno recovery trends are showing.
In our view similar trend should continue this quarter and improve you know later in the year.
The reopening takes place on us the Preconstruction efforts continue to be cool.
When we look at the individual metrics day economy in Puerto Rico, non actually brought it also continues to show clear.
Clear signs because there was evidence of recovery tourism hotel occupancy airline passengers cement sales all showing improving trends.
Recently, the government a disclosed there their financials.
In theory net right, we need to the Commonwealth General Fund is up 21% for the first eight months.
And that that's you know probably the first time in many many years, we have seen day gorman exceeding exceedingly about getting revenue.
Hobby and expanded our position in Puerto Rico, and eat them all our significant presence in Florida that were definitely very optimistic.
With with you know, where we are positioned to benefit from these improving economic conditions and and we're very pleased to see that finally that cycled through a human airports are getting traction.
We have to say that the government has done a good job managing the pandemic challenges us as you might know we recently experienced a tightening in safety protocols in Puerto Rico and travel Unproper rules.
We experienced happy clubbing cases, following spring breakup.
E Y you know from the other hand wildfire cases spike the the number of those bossy maid vaccinated.
Is it positive you know sustaining the potential for recovery trends.
As reported by the Health Department. The Island has made significant progress on day, one the nation from with 20, 27% of the labeled population fully vaccinated.
Approximately 48% with the first shot so we believe these are really good numbers to support the continued recovery.
Moving to this day ratio you know them.
I'm happy to say that we are progressing according to schedule.
This past quarter, we converted the consumer and commercial lending platforms.
And we just finished the credit card conversion in April.
We also made some progress in the branch rationalization them, we have consolidated three branches during the quarter.
And also we implemented our second phase of the voluntary separation program, which was previously announced.
So we were quite pleased with the progress and we do remain on schedule to complete the full integration by by the end of the summer.
Looking forward to that to that day.
Finally, you know with regard to do the PPP program as well.
The focus of the quarter in terms of you know number of obligations and obviously, making the most out of it to benefit our clients, we originated 209 million actually disbursed $209 million.
And actually we also processed forgiveness for maintenance.
476 million of loans that were originated in the prior year.
We will continue originating below you know pipelines that it's been it's been coming down.
And the program will expire on May So we will continue brothers and BBB low too to be able to brought them and obviously for the rest of the year. We also will support our clients brought us in the forgiveness obligations.
Which will continue to flow broadly till the end of the year.
So let's move to slide six.
For some highlights of the quarter.
I'm not going to I'm, just going to cover lightly Orlando will cover in detail.
You know, we did generate day 61, 8 million barrels of earnings or 28 cents per share compared to 50 million last quarter.
Definitely the improving macroeconomic trends and forecasts.
It's a key driver of the of the or the reserve release of 50 million for deepwater.
Pretax pre provision was basically unchanged.
Close to $86 million, even though this quarter half to two fewer days of operations.
Pleased to see that asset quality metrics remained stable and I think we have mentioned in the last call that we expected from some big goals with M. P. As a as we.
The moratoriums expire.
Obviously, you know there was a lot of liquidity to support the market. So it's positive to see these metrics being sustained or improve.
He definitely liquidity was also a big contributor and deposit growth.
Deposits, excluding ballroom and excluding broker grew 470, Damelio, which is about 4%. So we're very pleased with that also.
And you saw the capital ratios they remain really strong on and they are the base line to support our buyback going forward.
Please let's move to slide seven to touch.
A little bit more alone definitely you know low marine actually was a challenge.
So we see you know this this economy is being supported with the all deflation on liquidity, which is good.
Even though I think it was solid considering the seasonality on the brothers are are happening in parallel.
With solid reaching $1 2 billion in the quarter, including credit card reach over one 3 billion.
And definitely there's always seasonality in the commercial deals.
They gained traction through the later half of the year, but if we look at you know a year versus year, obviously, you'll see less seasonality in the graph.
On the right side of the graph.
The you know I think obviously, one when we expect that in the second half of the year.
You know we have both a stimulus subsiding and we also have four we expect fully caught up with reopening of the economy and definitely some rig construction projects that are getting traction. So we were more optimistic about second half a day year commercial activity.
From what we're getting now.
As I mentioned, you know PPP loan was also a focus.
And when we look at the low portfolio declined by 1% and Brian might decline you know it was in the mortgage portfolio as I had mentioned before our focus is to originate conforming mortgages, which we sell in the secondary market.
And it was also a good quarter in mortgage originations and non interest income from the gangs.
We also have some from repayments on commercial credit lines due to illiquidity.
We look at a credit line as you know, we probably have you know low usage compared to prior years, which also contributes to the real on the other hand, the consumer portfolio continues to pick up.
Both the all secure the credit card a bit well definitely the auto lease finance segment, which we are an active competitor.
They miss the Gulf or being able to achieve additional growth in this in this sector.
Florida also contributed.
We obviously will continue to be focused.
In Florida, It brings our geographic diversity and in this quarter, the Florida in commercial and construction portfolio and growth like don't anybody medium. So activity should also pick up.
On the lethal from adoption continues to grow and we continue to do investments to continue to enhance our platforms.
The banking racers.
And active users grew 6% and 9% respectively during the quarter.
So so with that I now will turn over the quarters Orlando and I will return back for question. Thanks Joel.
Good morning, everyone.
But I would tell you I'll touch upon this but yes to start.
Net income for the quarter was 61 million and 28 cents a share.
Which compares with $50 million.23, a share we had last quarter.
What are we sold.
On the positive side, the 15 million provision.
Provision release Oh for loans.
Compared to $7 7 million provision, we had last quarter.
That's up <unk> <unk> per share last quarter impact as compared to two two this quarter.
The net result also include the 11 million we had on.
Transaction expenses.
Associated with the with the Santander.
Position.
As we have seen in the quarter the.
<unk> on some of the macroeconomic deterioration has not reflected us us aggressively at whats.
Originally considering the projections.
We've seen unemployment impact being less we've seen lower impacts on home price index as well as CRE.
CRE index as a result.
We have seen in the market in general banking market.
The provisioning needs have come down considerably as compared to what we saw in 2020.
And net interest income.
That's still a little bit of the of the item, where we continue to see some some pressure.
Clearly net interest income was down one 5 million in the water.
Part of that it said.
There were two less days in the quarter that impacted results by $2 2 million.
On the other hand, we recognize.
Our $2 5 million more in accelerated.
The accelerated fee income recognition on the PPP loans that were repaid in the quarter.
$175 million Aurelio.
Mentioned.
Mortgage portfolio has come down.
He also mentioned on average the portfolio was down $121 million.
Which resulted in a reduction in interest income of $2 4 million for the quarter, but are they only had the consumer portfolio was up $45 million.
Which increased our net interest.
By $1 million in the quarter.
We've continued to work on the liability side because of our interest bearing liabilities was down eight basis points.
Bolting and reduction in interest expense of $2 6 million in the water and if we consider all deposits. The overall cost of deposits for the quarter is down from 41 basis points. We had in the fourth quarter of 2020 to 32 basis points this quarter.
Margin for the quarter was down four basis points from 391 versus a 390.
295, we had last quarter.
Prepayments on the investment portfolio.
Affected resulting accelerated amortization of premiums.
Which obviously combined with a reduce our rate of reimbursement alternatives has led to reductions in the deal.
The deal a day part of the investment portfolio was 97 basis points in the fourth quarter and it's down to 91 basis points this quarter.
Therefore affecting the margin.
Our.
Funding mix have improved considerably.
We told them from this increase in non interest bearing and low interest cost deposits, which helps offset offset some of the margin impact.
Liquidity levels remain extremely high.
Even though our investment portfolio has grown approximately $700 million from last quarter.
The end of the quarter cash, we're still $80 million higher than what we had in December. So this large component of our funding at a very low interest rate clearly put some pressure on the margins.
For the quarter.
Non interest income was fairly stable. We did have a couple of things. We this quarter, we collect data and convenient insurance commissions that it happens every first quarter of the year based on the volume so originated on the prior year.
That number was $3 3 million, which offset the the one 4 million in fee income we recorded last quarter in connection with the sale of loans originated under the main street lending program.
Mortgage banking income.
Still skilled sustaining but it was down $300000 as compared to last quarter.
We have continued to originate and sell mortgages as Aurelio mentioned, but.
But we have seen a little bit of compression of the spreads in the market on the sales.
And we sold it in a little bit lower gains on those sales that were made in the quarter.
On the expense side and expense.
Sales were $133 million you saw in the in the release.
That included $11 3 million of merger expenses.
And we still have.
The COVID-19 expenses of $1 2 million.
Last quarter merger expenses were $12 3 million.
Compared to what we had this quarter.
On a non-GAAP basis, excluding these items expenses were $120 million in the first quarter compared to 1120 $1 billion last quarter.
Main components employee compensation was down 800000.
During the first quarter of each year, we have a higher level of payroll taxes as employees have not reached the limits.
For this quarter payroll taxes were three $4 million higher than last quarter, but are they all around the quarter had two less days, resulting in reduced expenses of $1 1 million, which offset offset some of that and we also had higher deferred loan origination cost as a result of the volume of PPP loans.
That were originated in the quarter.
And that resulted in combined net home without I'm not a reduction.
On the credit card side.
We received $1 6 million in incentive payments related to volume originated last year.
And even though we have seen volumes start to normalize.
You know Paul we all had impacts of the pandemic impact during 2020 still not fully at levels that we had pre pandemic, but it's still we're starting to see normalization of volumes.
Uh huh.
These savings were a little bit of offset by by we had some one $1 3 million increase in Oreo expenses related to some valuation on some properties that we had in the Oreo side.
The allowance for credit losses.
Which is down 28 million same reason I mentioned before.
We had a three.
$373 million allowance for credit losses.
For the loans the allowance was $359 million, specifically, which is also down $27 million from the 386.
386 million, we had last quarter.
When we look at the portfolio.
Elliot.
On the commercial loans, the allowance declined $15 9 million that that it's a function of a $14 6 million reserve release.
$1 3 million in charge offs.
Released again reflects improvement on the macroeconomic variables.
Which correlate to this reserve.
Yes.
Main ones being unemployment GDP.
GDP and so on the on the HB CRE index.
On the guidance on residential mortgage is the allowance increased $6 3 million.
Which is a four.
$4 2 million relief.
Provision driven mostly by microeconomic and obviously in this case the reduction on the size of the portfolio.
On the consumer side, we had a provision of $4 3 million.
But we had charge of $9 1 million for a net decrease on the on the allowance.
$4 8 million.
The ratio of the allowance.
<unk> continues to be pretty healthy with.
<unk> <unk> hundred eight as of March 31st compare compared to $3 28 at the end of the year.
And if we exclude the PPP loans.
Non-GAAP basis that number would be $3 20, which is still a very healthy coverage on the allowance.
On the asset quality nonperforming decreased $8 6 million in the quarter.
Down to $285 million.
The non performing loans were down four 4 million.
<unk> mentioned before we were expecting some spike in Npls in the first half of the year.
As a result of loans coming out of the moratoriums, but.
So far we have seen fairly normal trends that migrations to NPL for the quarter were $32 million.
Compared to $32 9 million last quarter.
The only increase we saw was a residential mortgage migration increase up $4 6 million, but the commercial side was down $4 8 million.
Early delinquency has also shown positive trends.
30 to 89 day delinquency decreased $5 million two from from $149 million last quarter to 144, and we saw also some reductions in <unk>.
Up $19 million as compared to last quarter.
On the capital front.
Capital ratios remained strong.
We did see tangible common equity and book value per share declined in the quarter.
Result of this change in the market value of the investment securities.
That are available for sale.
As you know are recorded through other comprehensive income account on the on the capital side.
Clearly a function of the increase in rates on the longer end of the curve.
During February and March which resulted in reductions on the market value of some of the securities that we have purchased over the last few months.
But in reality, we do have the ability and the intention of holding these securities to maturity.
Making this impact temporary in nature.
With that I would like to open the call for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Alex <unk> from Piper Sandler. Please go ahead.
Hey, good morning, guys.
Hey, Alex how are you running Alex.
Well, Thanks first off wanted to.
Just asking about the buyback the $300 million you guys authorized it looks like it expires in a little bit over a year is the intention to kind of use that at like 75 million Bucks a quarter or do you think would you consider doing something like an accelerated share repurchase program.
As we mentioned Alex you know all the alternatives are on the table.
First we continue to move on and and disclosures are required.
We will move on obviously.
Market conditions are a driver.
To determine the exact amount on timing so to us.
As soon as we something comes up that we have to this growth you will you will know about it.
Okay.
Can you actually start being in the market repurchasing shares.
Yeah.
We expect by by May 1st to be to be in the market.
We expect.
Okay, Great and then I wanted to drill in a little bit more on some of your commentary on the potential rebound for loan growth in the second half.
You alluded to some reconstruction projects, maybe helping to drive that obviously the economy reopening maybe it'd be helpful. If you could elaborate a little bit more on some of those projects and then there.
There are certainly a lot of people out there and I think that at some of the stimulus wanes that loan growth could really explode, whether it's later this year earlier next year and maybe you can talk a little bit about how you are positioning the balance sheet over the next couple of quarters in order to really be able to make sure to two.
To monetize or to take on as much of that loan growth as you possibly can.
Well.
First of all.
It's market conditions on execution is a combination of both.
If you look at it by business.
You know the mortgage business to continue to continue its trend of hybrid right refinancing in and actually we have seen an increase in purchases.
There is actually new construction in Puerto Rico for the first time in many years that are being are we now are into closing in our two into being delivered even though that doesn't line has already achieved growth in our portfolio.
Obviously, the run off it's being accelerated some point in time that runoff will slow level.
We look at the consumer we saw.
Asleep.
The liquidity in Nichols from your hands is well known is extremely high when you look at the deposits.
Auto sales continued to grow they have shown sustainable increase we expect that to continue.
We also have this big when you look at the unsecured consumer business.
We see good traction in the quarter and we.
We expect from recovery PPP loans.
Disbursements are or will be done will be done this quarter. So that liquidity should also help us go back to the small business lending and in commercial small commercial groups, which were benefited from me. Obviously, we do expect that after that obviously some from some.
Incremental utilization line great lengths.
First of our deals are you have to be out there you have to be competing and you have to be trying to win the deal.
Deals going on out there.
And they just take time to get to them in the winter.
We have a large portfolio, which we also have to protect and take care of our clients.
We're also looking into opportunities there is reconstruction in Puerto Rico going on not only in infrastructure quality private projects.
The schools.
Housing.
We're starting to see the municipalities have significant number of projects that are still related to the funds deploy for Maria.
<unk> phones, the $8 billion were re restated with more simplified rules.
A couple of weeks ago. So we expect world there it really being out there execute.
And obviously, we recognize that we also are working on integration at the same time, we were happy to say that we completed the commercial teams integration.
Voters will obviously grow mental focus.
With respect to the business also so.
And then Florida, we continue to be an active participant in the market.
And the same way same strategies that we use prior years.
You have to be on top of it and try to make.
Look look for opportunities to compete in and grow the portfolio, obviously I don't see that happening.
Quarter, obviously, because it's not it's not what the market is showing.
Okay.
Our next.
<unk> comes from Glen Manna from K B W. Please go ahead.
Hi, good morning.
Hey, Glenn good morning Congrats.
Well congratulations on the buyback it's been a long time coming and this is a recognition of all the work that you guys have been at the bank over the last 10 years.
So some of your.
Competitors have said that.
Long term capital ratio, specifically CET, one on the island could be entering kind of a new inflection point given all the stimulus on the island and returning to growth. This is.
Moving out of.
Perennial state of recession, and I know, we just got the buyback today, but thinking forward. How do you think about long term capital on the island and could.
Could it go down to the 12% range CET one over time.
Well.
Again look at the economic cycles as always has been.
<unk>, Puerto Rico had very beneficial economy.
For banks to be in a different position.
We've been in the money.
Many top line for the last 15 years.
And obviously, it's about time to do the recovery.
To show and we probably have.
Opportunity to lead to that level that you mentioned.
On the on the what is the designated funds and the activity that we're seeing so.
So very difficult to predict but when you look at all the evidence on elements that are taking place.
<unk> ability.
Yes, I don't see any.
Any reason why <unk> seen significant improvement rents or over the years.
In a number of components so.
Continuous we definitely see the need for high high capital ratios.
Not being there as much as it was before.
So we see a space.
On some of these.
Key ratios line.
Common equity tier one that you mentioned.
Okay.
And as we kind of look through wind and assess credit and we've been moving our banks down to that kind of seasonal day, one level, how would you compare the assumptions in your current level of reserving vs. What you were assuming at T cell day, one back in January 2020.
Still.
What you have to look at components.
The the <unk>.
CRE index, it's still.
Worse than what we were seeing before when we did see some day one.
It's moving in there.
<unk> on the new projections are moving in the same direction, we're going to get there on employment.
The unemployment levels, we feel are going to be at similar levels.
Going forward so.
We still see there is a little bit of all of we want to be able to see that the trends continue to show that same way.
As being projected.
And that will take us there but.
With the expectation on the economic front, then assuming there is no.
Unexpected things with.
Virus that changes.
Lockdowns, we've seen more normalization of the economy and all of that so we are seeing that we should be able to get to those levels.
That we saw before in terms of project economic macroeconomic numbers.
So it would it would.
Not yet there, but we are on track in that direction.
Okay, and then just two quick cleanup questions. It looks like you've recognized about $36 million pre tax.
Merger charges.
$48 million was the original projection is is that it's still a good projection and then on the premium amortization how much premium am.
Could be left in a in the Securities book.
Yes.
I Couldnt understand your first question you said merger taxes.
The pre tax merger charges, when you announced the merger I think you said that would be $48 million and I think you have about 75% of those in now.
No we have a good number.
What we had announced with about $76 million.
For expenses associated with the transaction.
The 48 million with more broadly you are calculating synergies synergies based on what we had mentioned the synergies based on funds from them there.
Ongoing running expenses.
So it was $76 million and expenses of what we were expecting.
Which started in.
In 2019 Glenn.
So that's still a good number that 76 million.
Yes.
In the fourth.
Okay.
And on the premium am.
How much is left on that.
Could we sell go Darrin.
Premium premium amortization, you mean related to what Youre.
You look at our portfolio investment portfolio or you're talking about.
Or something else.
Yeah, I'm talking to you about the investment portfolio.
The thing is that.
There is there is premium.
Most most recent purchases.
Will a premium associated with with the coupons that were available in the market.
So it's a.
As a function of what happens with the transient rates I E.
See I can see with our rates coming back down a little bit of reduction I don't I don't have exact the number of premiums we have on the on the portfolio at this point.
I'm going to give you that number.
Would need to check that in.
And broadly I'll include something on the Q then to disclose that since we haven't specifically mentioned the number on releases but.
But there is a level of premiums because though most portfolio purchases over the last few months have heightened level of premium involved in all of them.
Okay. Thank you for taking my questions.
Thanks Glenn.
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Our next question comes from Jonathan <unk> from Roubaix Capital management.
Please go ahead.
Hi, gents.
There's a lot going on in Washington D C with the new administration and it seems like.
<unk> has a good partner in the White house and congressional leadership.
Whether its efforts increased pharmaceutical manufacturing or infrastructure spending but.
What are the what are the key areas I guess that you folks are watching that will affect the business here as far as our Washington D C and various initiatives there.
Well definitely the obviously every time they talk about tax reform.
We opened our eyes.
This has been this has been.
Long term matter.
The corporations.
Tax benefit that apply to corporations that specifically in manufacturing more than anything else. So.
It's always been a it's been a risk for some time as we mitigated I think this time.
Better than average broadly there's a lot more.
<unk> of the challenges of Puerto Rico faces and how does.
These potential changes could impact so so I think we all have to make sure that we provide the right feedback on the right allocation and we understand this is also a focus on the fiscal board.
Manufacturing still 45% of the GDP, so its a key component plus plus the supply chain.
It is behind it so it is a.
It is important obviously, we know tourism is growing and is a future opportunity.
Net investment from a 'twenty one 'twenty two are also an opportunity. So I will say those are the two elements.
But we have to continue washing them provided feedback on making sure that the.
Private sectors.
Provide feedback to Congress in terms of what potential implications club in Puerto Rico I think everybody is aware of the challenge is what is the objective.
Obviously.
You brought in tactical.
Tactical elections in the U S or increasing.
To pay for differently.
Very expensive stimulus that we have that we have received so definitely as a priority.
The amount of factoring sectors will be our primary concern.
This concludes our question and answer session I would like to turn the conference back over to John Pelling for any closing remarks.
Okay. Thank you Betsy on the Investor Relations front, we will be participating in the seaport financial virtual conference on May 15th.
Even though.
Yes, I just wanted to add that you know again, how pleased we are to reach this milestone and be able to to initiate our announce our buyback program that will be able to initiate these this capital deployment initiatives. So thanks to all our investors. Thank you.
At this point, we will conclude the call.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.