Good morning, and welcome to the First BanCorp. First Quarter 2021 Results Conference Call. [Operator Instructions]. 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. 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 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 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, 1firstbank.com. At this time, I'd like to turn the call over to our CEO, Aurelio Alemán. Aurelio..

Thank you, John. Good morning to everyone, and thanks for joining our call today. Please let's move to Slide 5 to discuss some of the highlights. Before I go into detail of the quarter, as you have hopefully seen, we're really very pleased to announce earlier today the Board's approval of $300 million share repurchase program.

The repurchase may be in the open market or in privately negotiated transactions. Timing and exact amount will be subject to market conditions. Given our outside capital position and the continued earnings accretion, we are committed to return excess capital to our shareholders, 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 macro, the integration and how the pandemic is progressing in Puerto Rico. On the macro front, there was significant stimulus flowing into the Island through the CARES Act and subsequent programs, most recently approved in February.

The -- when you add all the programs, the latter estimates that we have seen from the Fiscal Board are around $45 billion, which is a material amount, is over 60% of the Island annual GDP.

Obviously, the significant stimulus continues to support the recovery, continues to strengthen our customers, is driving growth in deposits, but on the other hand, it's also softening loan demand in the near term. We're very pleased we've been able to deploy the stimulus in the Island and see how the post pandemic recovery trends are showing.

In our view, similar trend should continue this quarter and improve later in the year as the reopening takes place and as reconstruction efforts continue to pick up.

When we look at the individual metrics, the economy in Puerto Rico and actually Florida also continues to show clear signs, clear evidence of recovery, tourism, hotel occupancy, airline passengers, cement sales all showing improving trends. Recently, the government disclosed their financials.

Interim net revenue to the Commonwealth General Fund is up 21% for the first 8 months, and that's probably the first time in many, many years we have seen the government exceeding their budget revenues.

Having expanded our position in Puerto Rico and our significant presence in Florida, we're definitely very optimistic with where we are positioned to benefit from these improving economic conditions, and we're very pleased to see that finally the reconstruction efforts are gaining traction.

We have to say that the government has done a good job managing the pandemic challenges. As you might know, we’ve recently experienced a tightening in safety protocols in Puerto Rico and travel and travel rules as we experienced a pickup in cases following spring break.

While -- on the other hand, while cases spiked, the number of those vaccinated is a positive, sustaining the potential for recovery trends. As reported by the Health Department, the Island has made significant progress on the vaccination front, with 27% of the eligible population fully vaccinated and approximately 48% with the first shot.

So, we believe these are really good numbers to support the continued recovery. Moving to the integration. 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, and we have consolidated 3 branches during the quarter. Also, we implemented our second phase of the voluntary separation program, which was previously announced. So we're quite pleased with the progress and we do remain on schedule to complete the full integration by the end of the summer.

Looking forward to that date. Finally, with regard to the PPP program, it was a focus of the quarter in terms of number of applications, 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 remittance for $176 million of loans that were originated in the prior year. We will continue originating PPP loans. Pipeline has been coming down and the program will expire at end of May, so we will continue processing PPP loans through the end of the program.

And obviously, for the rest of the year, we also will support our clients processing the forgiveness applications, which will continue to flow probably until the end of the year. So let's move to Slide 6 for some highlights of the quarter. I'm not going to -- I'm just going to cover it lightly, and Orlando will cover in detail.

We did generate $61 million of earnings or $0.28 per share compared to $50 million last quarter. Definitely, the improving macroeconomic trends and forecast is a key driver of the reserve release of $50 million for the quarter.

Pretax pre-provision was basically unchanged at close to $86 million, even though this quarter had 2 fewer days of operations. Pleased to see that asset quality metrics remained stable.

I think we have mentioned in the last call that we expected some peak of NPAs as we -- as the moratoriums, expired, obviously there's a lot of liquidity supporting the market, so it's positive to see these metrics sustain or improve.

Definitely, liquidity was also the big contributor and deposit -- core deposits, excluding government, excluding broker grew $472 million, which is about 4%. So, we're very pleased with that also. And you just saw the capital ratios, they remain really strong and they are the baseline to support our buyback going forward.

Please let's move to Slide 7 to touch a little bit more on loan. Definitely, loan origination is a challenge as we see this economy being supported with all this additional liquidity, which is good.

Even though I think it was solid considering the seasonality and the programs that are happening in parallel, we're solid reaching $1.2 billion in the quarter, including credit card reach of about $1.3 billion. And definitely, there's always seasonality in the commercial deals as they gain traction through the later half of the year.

But if we look at year versus year, obviously, you see the seasonality in the graph on the top -- on the right side of the graph.

The -- I think, obviously, when -- we expect that in the second half of the year, we have both the stimulus subsiding and we also have -- we expect full reopening of the economy and definitely some reconstruction projects that are getting traction, so we're more optimistic about second half of the year commercial activity than what we're getting now.

As I mentioned, PPP loan was also a focus. And when we look at the loan portfolio, it declined by 1%, and the primary decline was in the mortgage portfolio. As I have 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 noninterest income from the gains. We also have some repayments on commercial credit lines due to the liquidity. So if we look at credit lines, we probably have low usage compared to prior years, which also contributed to the reduction.

On the other hand, the consumer portfolio continues to pick up, both the unsecured, the credit card, debit, but definitely the auto and lease finance segment, which we are an active competitor, and we're very optimistic of being able to achieve additional growth in this sector. Florida also contributed.

We obviously will continue to be focused in Florida. It brings our geographic diversity. And this quarter, the Florida commercial and construction portfolio increased by $23 million, so activity should also pick up. On the digital front, adoption continues to grow. We continue to do investments to continue to enhance the platforms.

Digital banking registers and active users grew 6% and 9%, respectively, during the quarter. So with that, I now will turn over the call to Orlando, and I would return back for questions. Thanks to all..

Good morning, everyone. Well, Aurelio touched up on this. But just to start, the net income for the quarter was $61 million and $0.28 a share, which compares with the $50 million or $0.23 a share we had last quarter.

The quarter results had, on the positive side, the $15 million provision release for loans compared to $7.7 million provision we had last quarter. That's $0.04 per share last quarter impact as compared to this quarter. The results also include the $11 million we had on transaction expenses associated with the Santander acquisition.

As we have seen in the quarter, the expectations on some of the macroeconomic deterioration has not reflected as aggressively as was originally considering the projections. We've seen unemployment impact being less. We've seen lower impacts on home price index as well as a CRE index.

As a result, as we have seen in the market, in the general banking market, the provisioning needs have come down considerably as compared to what we saw in 2020. In net interest income, that's still a little bit of the item where we continue to see some pressure. Clearly, net interest income was down $1.5 million in the quarter.

Part of that is -- there was 2 less days in the quarter that impacted results by $2.2 million. But on the other hand, we recognized about $2.5 million more in accelerated fee income recognition on the PPP loans that were repaid in the quarter, the $175 million Aurelio mentioned. Mortgage portfolio has come down, as 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 on the other hand, the consumer portfolio was up $45 million, which increased net interest income by $1 million in the quarter. We've continued to work on the liability side.

The cost of our interest-bearing liabilities was down 8 basis points, resulting in a reduction in interest expense of $2.6 million in the quarter. 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 4 basis points to 3.91% versus the 3.95% we had last quarter. Prepayments on the investment portfolio have affected, resulting accelerated amortization of premiums, which, obviously, combined with a reduced rate of reinvestment alternatives, has led to reductions in the yield.

The yield 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. However, the funding mix have improved considerably, resulting from this increase in noninterest-bearing and low interest cost of assets, which helps offset some of the margin impact.

Liquidity levels remain extremely high, even though our investment portfolio has grown approximately $700 million from last quarter. At the end of the quarter, cash was still $80 million higher than what we had in December. So this large component of funding at a very low interest rate clearly puts a pressure on the margins for the quarter.

Noninterest income was fairly stable. We did have a couple of things.

We -- this quarter, we collected contingent insurance commissions that it happens every first quarter of the year based on the volumes originated on the prior year, and that number was $3.3 million, which offset the $1.4 million in fee income we recorded last quarter in connection with the sale of the loans originated under the Main Street lending program.

Mortgage banking income, still sustaining, but it was down $300,000 as compared to last quarter.

We have continued to originate and sell mortgages, as Aurelio mentioned, but we have seen a little bit of compression of these spreads in the market on the sales, and that has resulted in a little bit lower gains on those sales that were made in the quarter. On the expense side, expenses were $133 million, as you saw in the release.

That included $11.3 million of merger expenses and we still have the COVID expenses of $1.2 million. Last quarter, merger expenses were $12.3 million as 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 $121 million last quarter.

Main components, employee compensation was down $800,000. During the first quarter of each year, we have a higher level of payroll taxes as employees have not reached the limits. The -- for this quarter, payroll taxes were $3.4 million higher than last quarter.

But on the other hand, the quarter had 2 less days, resulting in reduced expenses of $1.1 million, which offset some of that. And we also had a higher deferred loan origination cost as a result of the volume of PPP loans that were originated in the quarter. And that resulted in that combined $800,000 reduction.

On the credit card side, we received $1.6 million in incentive payments related to volumes originated last year. And even though we have seen volumes start to normalize, we all had impacts of 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.

These savings were a little bit of offset by -- we had some $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 was down $28 million. Same reason as mentioned before, we had a $373 million allowance for credit losses.

For the loans, the allowance was $359 million specifically, which is also down $27 million from the $386 million we had last quarter. When we look at the portfolios on the commercial loans, the allowance declined $15.9 million. That is a function of a $14.6 million reserve release and $1.3 million in charge-offs.

Release again reflects improvement on the macroeconomic variables, which correlate to this reserve, the main ones being unemployment, GDP and so on the HPI and CRE index.

On the case of residential mortgages, the allowance decreased $6.3 million, which is a $4.2 million release of provision, driven mostly by macroeconomic 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 a charge-off of $9.1 million for a net decrease on the allowance of $4.8 million. The ratio of the allowance continues to be pretty healthy, was 3.08% as of March 31 compared to 3.28% at the end of the year.

And if we exclude the PPP loans, on a 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 nonperforming loans were down $4 million.

As Aurelio 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. The migrations to NPL for the quarter were $32 million compared to $32.9 million last quarter.

The only increase we saw was residential mortgage migration increase of $4.6 million, but on commercial side was down $4.8 million. Early delinquency has also shown positive trends. 30- to 89-day delinquency decreased $5 million to -- from $149 million last quarter to $144 million.

And we saw also some reductions in TDRs of $19 million as compared to last quarter. On the capital front, regulatory capital ratios remained strong.

We did see tangible common equity and book value per share decline in the quarter as a result of the change in the market value of the investment securities that are available for sale, which as you know, are recorded through the other comprehensive income account on the capital side.

Clearly, a function of the increasing 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 the securities to maturity, thus making this impact temporary in nature. With that, I would like to open the call for questions..

[Operator Instructions]. Our first question comes from Alex Twerdahl from Piper Sandler..

First off, wanted to just ask 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 is like $75 million a quarter or do you -- would you consider doing something like an accelerated share repurchase program?.

As we mentioned, Alex, all the alternatives are on the table. And as we continue to move on and disclosures are required, we will move on. Obviously, market conditions are a driver to determine the exact amount of timing. So, as soon as we -- something comes up that we have to disclose, you will know about it immediately..

Okay.

And when can you actually start being in the market repurchasing shares?.

We expect by May 1 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. I think you alluded to some reconstruction projects, may be helping to drive that and obviously the economy reopening.

Maybe it would be helpful if you could elaborate a little bit more on some of those projects.

And then there are certainly a lot of people out there that think that as some of the stimulus wanes, that loan growth could really explode whether it's later this year or earlier next year, and maybe you can talk a little bit about how you're positioning the balance sheet over the next couple of quarters in order to really be able to make sure to monetize or to take on as much of that loan growth as you possibly can..

Well, first of all, at the end -- it's market conditions and execution. It's a combination of both. If you look at it by business, we expect the mortgage business to continue its trend of hybrid refinancing. 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 now -- are into closing and are into being delivered. Even though that doesn't necessarily achieve growth in our portfolio, obviously the runoff is being accelerated. At some point in time, that runoff will also level.

Look, at the consumer, we saw obviously, the liquidity in the consumer hands, as we all know, is extremely high when you look at the deposits. Auto sales continue to grow. They have shown sustainable increase. We expect that to continue.

And we also expect when you look at the unsecured consumer business, we see good traction in the quarter, and we expect some recovery. PPP loans, disbursements are -- will be done this quarter, so that liquidity should also help us go back to the small business lending and the commercial -- small commercial groups, which will benefit from it.

Obviously, we do expect that after that, obviously, some incremental utilization in the credit lines. Commercial deals are -- you have to be out there, you have to be competing, you have to be trying to get the deal. There's deals going on out there. They just take time to get to them and be the winner.

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 but in private projects, in schools, in new housing.

So we're starting to see the municipalities have a significant number of projects that are still related to the funds deployed for Maria. CDBG funds, the $8 billion were restated with more simplified rules a couple of weeks ago. So, we expect -- we're out there.

It's really being out there, execute, and obviously, we recognize that we're also working on integration. At the same time, we're happy to say that we completed the commercial team's integration this quarter. So obviously, incremental focus goes back to the business also. And then Florida, we continue to be an active participant in the market.

And same way, same strategies that we used prior years, you have to be on top of it and try to make -- look for opportunities to compete and grow the portfolio. I obviously -- I don't see that happening this quarter, obviously because it's not what the market is showing. Okay..

Our next question comes from Glen Manna from KBW..

Congratulations on the buyback. It's been a long time coming, and this is a recognition of all the work that you guys have done at the bank over the last 10 years..

Thanks, Glen..

Some of your competitors have said that long-term capital ratio, specifically CET1 on the Island, could be entering kind of a new inflection point given all the stimulus on the Island, the return to growth. This is moving out of a 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 it go down to the 12% range CET1 over time?.

Well, again, look at the economy cycles as always has been. At some point in time, Puerto Rico had very beneficial economy for banks to be in a different position. Obviously, we've been [indiscernible] money in tough times for the last 15 years, and obviously it's about time to do the recovery.

If it continues to show and we probably have the better opportunity to get to that level that you mentioned based on the -- what is the designated funds and the activity that we're seeing. So, very difficult to predict, but when you look at all the evidence and elements that are taking place, it's a possibility..

Yes. I don't see any reason why not. It's seen significant improvement trends over the years and in the number of components. So as that continues, we definitely see the need for high capital ratios not being there as much as it was before. So, we see a space on some of these key regions like the Common Equity Tier 1 that you mentioned..

Okay.

And as we kind of look through and assess credit and we've been moving our banks down to that kind of CECL day 1 level, how would you compare the assumptions in your current level of reserving versus what you were assuming at CECL day 1 back in January 2020?.

Still, you have to look at components. The CRE index, it's still worse than what we were seeing before when we did CECL day 1. HPI, it's moving in the direction, and the new projections are moving in the same direction. We're going to get there. Unemployment, the unemployment levels, we feel, are going to be at similar levels going forward.

So we still see -- I mean, there is a little bit 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 and assuming there is no unexpected thing with the virus that changes the 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 projected economic -- macroeconomic numbers.

So 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 in pretax merger charges. $48 million was the original projection.

Is that still a good projection? And then on the premium amortization, how much premium am could be left in the securities book?.

I couldn't understand your first question.

You said merger taxes?.

No, the pretax merger charges. When you announced the merger, I think you said there would be $48 million and I think you have about 75% of those in now.

Is $48 million still a good number?.

What we had announced was about $76 million of expenses associated with the transaction. The $48 million was more probably you were calculating....

The synergies..

Synergies based on what we had mentioned, the synergies based on Santander and ongoing running expenses. So it was $76 million in expenses, what we were expecting..

Which started in 2019, Glen..

Right.

So that's still a good number, that $76 million?.

Yes. And the $48 million also..

Okay.

And on the premium am, how much is left on that? Could we see it go down?.

Premium amortization, you mean, related to what, to the -- you're talking about portfolio, investment portfolio or are you talking about something else?.

Yes, I'm talking about the investment portfolio, yes..

The thing is that there is premiums on -- most recent purchases have a level of premium associated with the coupons that were available in the market. So it's a function of what happens with the trends in rates. I can see, with the rates coming back down, a little bit of reduction.

I don't have exactly the number of premiums we have on the portfolio at this point, not going to give you that number. I would need to check that, and probably I'll include something on the Q then to disclose that since we haven't specifically mentioned the number on releases.

But there is a level of premiums because most portfolio purchases over the last few months have had a level of premium involved in all of them..

[Operator Instructions]. Our next question comes from Jonathan Krautmann from Rubric Capital Management..

There's a lot going on in Washington, D.C. with the new administration, and it seems like PR has a good partner in the White House and congressional leadership, whether it's efforts to increase pharmaceutical manufacturing or infrastructure spending.

But what are the key areas, I guess, that you folks are watching that will affect the business here as far as Washington, D.C.

and various initiatives there?.

Well, definitely, the -- obviously, every time they talk about tax reform, we open our eyes. This has been a long-term matter. The corporations that -- the tax benefit that applies to corporations that specifically manufacturing more than anything else. So it's always been -- it's been a risk for some time.

It's been mitigated, I think this time, better than ever. Probably there's a lot more visibility of the challenges that Puerto Rico faces and how these potential changes could impact. So I think we all have to make sure that we provide the right feedback and the right education, and we understand this is also a focus on the Fiscal Board.

Manufacturing, still 45% of the GDP, so it's a key component, plus the supply chain that is behind it. So it is important. Obviously, we know tourism is growing and it's a future opportunity. Foreign investment from Act 20/22 are also an opportunity.

So I would say those are the 2 elements that we have to continue watching and providing feedback and making sure that the private sectors provide feedback to Congress in terms of what potential implications it could have in Puerto Rico. I think everybody is aware of the challenges.

What is the objective of, obviously, improving tax collections in the U.S. or increasing to pay for definitely the very expensive stimulus that we have all received. So definitely, it's a priority, but yes, the manufacturing sector will be our primary concern..

That 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 15.

Do you have any comments to add?.

Yes. I just want to add that, again, how pleased we are to reach this milestone and be able to initiate our -- announce our buyback program and be able to initiate these capital deployment initiatives. So thanks to all our investors..

Thank you. At this point, we'll conclude the call..

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