Hello, everyone. Good morning, and welcome to the First BanCorp's 3Q 2021 Financial Results Call. My name is Emily, and I'll be coordinating the call today.

All participants are currently in a listen-only state; however, during the presentation, you'll have the opportunity to ask a question [Operator Instructions] I now have the pleasure of handing the call over to today's host, Ramon Rodriguez. Ramon, please go ahead..

Thank you, Emily. Good morning, everyone. Thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the third quarter of 2021. Joining you today from First BanCorp are Aurelio Alemán, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business.

The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call.

If anyone does not already have a copy of the webcast presentation or press release, you can access them at our Web site, at 1firstbank.com. At this time, I'd like to turn the call over to our CEO, Aurelio Alemán..

Thank you, Ramon. Good morning, everyone, and thanks for joining us today. Please, let's move to slide four of the presentation for covering some highlights. It was a very strong quarter for First BanCorp, I will say, both in terms of financial performance and operational progress.

I would like to cover the operational highlights before discussing our financial results. As planned, during the quarter, we completed the integration of the [acquired] (ph) operations and all remaining systems conversions.

I have to say that lots of resources and management time was required to achieve this important milestone on time and on budget, which is also important. I would like to thank all my colleagues involved in the integration for completing this very complex process, actually in less than a year after closing the transaction.

Now, the fully integrated organization with expanded sales resources and origination capacity will allow us to continue growing market share across basically all products and services. Now, going forward, our full dedication of resources will be geared towards growing the franchise and servicing the clients.

In terms of our Puerto Rico franchise, we have now the second-largest market share among banks across all products and channels. This will allow us to definitely better serve our clients and communities with additional opportunity for organic growth. Our focus on digital solutions have proven effective.

More clients continue to adopt our digital experience as online banking users grew by 12% during the quarter, and approximately 40% of all deposits were captured through digital and self-service channels.

Our expanded digital functionalities include, not only transactions, but the ability to process mortgages, credit card, personal loans' applications through our corporate portal, and on the commercial front, the loan forgiveness requests for the PPP loans that are still pending.

As we look ahead over the next years, definitely increased efforts and capabilities will be added towards enhancing the existing digital offerings, and also developing new functionalities focused on the ease of use and best-in-class customer experience, but also, we will continue to optimize our branch network across the island.

On the macro front, we're pleased to see improvements in the economic backdrop within our three operating regions. We see the improvement in Puerto Rico, including the -- obviously, all the stimulus, in the Virgin Islands, similar investments also made in reconstruction. And, obviously, Florida economy continues to be very, very solid.

Both pandemic and the [indiscernible] relief funding continue to support the economic activity. And it's important to also highlight that Puerto Rico reached one of the highest vaccination rates of any state in the U.S. jurisdiction.

This has led to an accelerated reopening of the economy, material improvement in the tourism, and an overall improvement in the business environment and consumer confidence. This should result in increased loan demand.

We're also optimistic, I have to say, about the resolution of the Puerto Rico bankruptcy [advance] (ph) settlement in the near future, which has been going on for quite some years now. So, let's move now to slide five to review some of the financials.

During the quarter, we generated $75.7 million in net income, $0.36 per share, and I think importantly, a record $103 million -- $103.6 million, to be exact, in pretax pre-provision income, clearly reflecting the benefit of our expanded franchise.

The efficiency ratio continued to trend down, to 53% during the quarter, compared to 60% registered during the second quarter. And very important as the quality metrics continued to improve during the quarter, nonperforming asset reached a decade low of 0.81% of total assets.

The reduction in NPAs was primarily driven by the risk in sale of $52 million in non-accrual residential mortgages, also there was the sale of OREOs, which were important during the quarter.

NPL sales drove the ACL ratio down also a bit to 2.59 for the quarter, but also, there were releases associated with the improvement in the macroeconomic factors. Finally, on the capital front, I think we continued to make significant progress in our capital plans, and continue to return capital to our shareholders.

During the quarter, we completed the repurchase of 4.2 million shares, amounting to $50 million. Year-to-date, that amount has reached $150 million in repurchases. Also, we announced the redemption of the 36.1 million of the preferred stock which will happen in this fourth quarter.

And as we announced on Friday, we increased the common dividend by 43%, to $0.10 per share. All these capital actions are in parallel with the strength of our balance sheet and our commitment to increase shareholder value. Please, let's move to slide six, I would like to cover some details on the loan and deposits.

Loan originations, we consider they're healthy at $1.2 billion, but they're definitely still short of our goals and that's really the focus on the management team. The loan portfolio decreased largely driven by the fact of the reduction of $130 million in SBA PPP loans and the mortgage de-risking sale of $52 million.

Also, as we have mentioned before, our mortgage portfolio strategy is focused on the conforming paper which we'll continue to see some decrease in the loans - in the mortgage loans. Consumer loans grew nicely and commercial excluding PPP are finally stabilizing. Our focus will continue to be centered on consumer and commercial growth.

And that's the key objective of the management team. We have to say that [indiscernible] peaking up as government stimulus subsides and we expect that actually to continue improving during this quarter and 2022 as the economy fully reopen, and large scale disaster relief related projects begin to emerge.

Core deposits continue to grow nicely, excluding broker and government core deposit raised an increase of $288 million during the quarter. So liquidity is still out there. We're all trying to define how much is coming. With those comments, I will turn the call to Orlando to provide you more details on the financial. Thank you..

Good morning, everyone. Aurelio, did provide some details, but I'll cover some other items here. Again, not to be repetitive, but as he mentioned, net income for the quarter was $75.7 million, which is $0.36 a share compared to $0.33 a share last quarter of 2021 with $70 million.

Credit quality components continue to behave extremely well for the quarter, and as Aurelio also mentioned the projected macroeconomic variables have also continued to show improvements.

As a result, we had a net benefit of $12.1 million in the provision for credit losses, which is lower than the $26.2 million we had last quarter, but still a benefit. The after tax benefit on the provision it's approximately $0.04 per share, last quarter was about $0.08 per share.

Another significant component of results for the quarter was also as Aurelio mentioned the completion in July of the last pending system conversion. This resulted in reduction in merger and restructuring costs to $2.3 million from what we had last quarter, which was $11 million.

If we look at net interest income was basically similar to last quarter $184.7 million. Our margin was down to 360 from 381, most of it has to do with a mix of interest earning assets that has led to this reduction.

If we look at the components on a GAAP basis the combined deal on the loan portfolio was 633 for the quarter, which is very similar to 634 we have last quarter. Our loans are now 55% of average earning assets compared to 59% last quarter.

Money market and investment securities on the other hand now represent 45% of average earning assets versus 41% last quarter. The yield on this instrument is slightly down from 96 basis points in the second quarter to 92 basis points now.

Money market and short-term investments make up a large chunk of this component and we have kept the portfolios more or less shorter term based on where the market yields are now and also obviously the expectations that there could be some increases in the near term. We've continued to work on the cost of deposits.

Costs of interest-bearing deposit is down three basis points to 33 basis points. And we have also continued to grow on the non-interest bearing side which is obviously helps the margins, but not to compensate for the change in mixing the assets. If we look at our non-interest income remained relatively flat.

We had improvements in credit and debit card fees, ATM fees and POS transactions, but had some reductions on revenues for mortgage banking and [indiscernible] on deposits. This one mostly related to the process of the conversion, so we're back to normalize levels now.

On the expense side, which is large chip component that we had, we had -- expenses were $114 million, which is $16 million lower than last quarter. Merger and COVID related expenses were $2.9 million this quarter versus $12.9 million last quarter, make up $9.2 million of this reduction.

If we exclude all this items, expenses were $111 million compared to $218 million last quarter. But we did have a couple of things we don't have typically every quarter.

On one hand, we had $1.4 million in expense reimbursements and incentive we receive from a debit and a credit card processing agreement, and we had a $2.3 million in profits on OREO properties.

What we've seen in the market is sales prices have improved significantly, resulting in gains on the disposition of all real estate on properties that exceed the operating costs we had on managing all those properties.

These gains do include however an $800,000 profit we had on the disposition of the $20.7 million commercial OREO property that we had on the books for quite some time. If we normalize for some of these items, expenses we're talking about approximately $115 million for this quarter.

What we have seen is that we're running much higher level of awakened positions than what we normally would have, similar to what's happening in the U.S., we have experienced difficulties in hiring several positions.

Although I can say that the trends in the last few weeks are encouraging, but we're still working on reaching normalized vacancy levels.

Once we reach those normal vacancy levels and completes all the technology projects around the way I would have to say that we still believe that expenses will be on that range that we had mentioned before the 117 to 119. But obviously it's not going to happen immediately. It's going to take a little bit of time to fill out those positions.

On the asset quality Aurelio made reference to we continue to achieve significant improvements, non-performing assets decreased by $83 million in the quarter, are now $172 million from the $255 million we have last quarter. NPA now it's done on 81 basis points of total assets. Again, first time under 1% for a very long time.

That decrease was primarily the both sale of the $52 million in residential mortgage loans. And the repayment of two large residential mortgage loans that are $3.9 million which the results for the mortgage side was pretty good in the quarter.

We also under this position of the commercial OREO property I just mentioned for the $21 million [indiscernible] reduction. That obviously -- it's compensated also by the fact that we read the inflows to non-performing continued to be low, we remain basically unchanged from the second quarter at $17 million.

The allowance for credit losses as Aurelio mentioned with $300 million, if $40 million lower than last quarter, just on loans and final leases was $288 million, which is $37 million lower than what we had last quarter.

The reduction in the allowance reflects the charge offs that we're taking on the non-performing residential mortgage loans that were sold as well as the improvement trends that we continue to project on macroeconomic variables, all the variables that are used to calculate the allowance for credit loss.

As we pointed out that the charge offs that were taken on the residential mortgage loan had been substantially reserved in prior quarters. So it was a minimal impact on this quarter results.

The ratio the allowance is now at 259 versus 285 we had last quarter, and as we exclude PPP loans and what's left on the PPP it's approximately 264, it's still the healthy coverage we have on the loans.

On the capital front just to summarize again, we continue with execution of our plan, as Aurelio mentioned we repurchased $50 million in share this quarter -- $50 million in shares, which is for almost 4.2 million shares. So far we have repurchase $150 million since we started the stock repurchase program last quarter.

What's left, we will continue with the repurchase, but also he made referenced to we'll be redeeming the 36 million that remain outstanding in preferred shares during the fourth quarter. And we will -- we have already announced the increase in the common dividend to $0.10 per share per quarter, also starting in the fourth quarter.

The dividends on the preferred represent approximately $2.7 million per year, which would be around $0.13 based on current number of shares, which would improve the earnings per share for common holder.

Capital ratios continue to be high, even with the execution of the capital strategies, but strong earnings are maintained in these capital ratios significantly above the well-capitalized levels. With that, I would like to open the call for questions..

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

Thank you. Good morning, guys..

Morning, Alex..

First off, wanted to hone in a little bit on the comment you made, Aurelio, in your prepared remarks, that credit demand is picking up, and you expect that to continue. If you can give us a little bit more specifics, I guess, I'm assuming you're talking mostly about commercial and maybe also construction.

But maybe if you can give us some sort of -- just a little bit more to go on in terms of what you mean by that commentary?.

All right, when you -- obviously, liquidity in the consumer also started to subside a bit. And when you look at personal consumer loans and credit cards, we're seeing over recent months, including September, better activity.

Also, when you look at the pipeline of small loans, that that actually is improving, and I have to say that the [pipeline] (ph) on the commercial side, including construction, it's also continued to show improvement.

As you know, it takes time from pipeline to closing, but if I have to, say, compare the pipeline to where we were in the first quarter, we are, overall, in a better place in all the commercial products itself.

Order continue very strong, and I think that's, obviously -- even with the challenges on the inventory, obviously, we have a very focused strategy, and like we had before.

And we have been achieving portfolio growth and market share growth in that business for a couple of years now, that we expect that to continue to be the case based on how we're running the business and how we're executing our strategy.

And then, when you look at mortgages, that that, obviously, it's two important components, rates, which drive the refinancing volume which are still high and should start to come down as long-term rates move up. But on the other hand, it's really our strategy to continue to focus on the origination side, on the conforming.

I have to say that the prepayment of mortgages is higher than we estimated when you look at the year numbers, which also contributed to some of the contraction of our loan portfolio, but, in general, a lot going on, a lot of new investments, new investors coming into the market. So, we feel very optimistic that that would translate into loan demand..

That's great. I guess two more questions, kind of related. One, in terms of line utilizations, I think last time we spoke they were running well below normalized levels.

Have you seen -- starting to see those pick up or any indication that those would be picking up any time soon?.

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

Okay, and then the other --.

I think the wildcard is the other -- the wildcard is the liquidity, how much -- we're really monitoring how the liquidity is moving. Our focus is not in government deposits, it's really in the core businesses.

So, we're doing -- dedicating a lot of time to make sure that we monitor individual clients, different type of products on the deposit front so we get a better forecast of when liquidity, overall, will subside or not. And then there is also a lot of funds coming into the construction sector which will capture some of those too, yes..

Great. And then the other piece is the paydowns, which are still elevated, and I know there are some large paydowns, but that worked against your origination volume this quarter.

Do you have any line of sight on to any larger paydowns that are coming in the next couple months?.

No, we monitor refinance, that, obviously, some of that also is part of the corporate portfolio that we have in Florida of participation, so the refi activity -- is linked to the refi activity and the rates. I think the more the rates continue to move up the less paydowns and the less refinancing activity we will see in the commercial market.

That that's definitely -- is a reduction versus what we had in the first two quarters, when you look at the paydowns that we had in the third quarter, yes. And we don't have anything on the horizon that we say could come in this quarter, to be honest with you. I don't -- but then, sometimes they come as a surprise too.

So, to be realistic -- have to be realistic..

Okay, perfect. And then switching gears a little bit to the bankruptcy and sort of the macro. We've seen some headlines; I think the senate has postponed their vote on the new debt until tomorrow.

I was wondering if you just had any line of sight or any more information on to how close the senate vote was or anything else you can kind of give us in terms of what here to go off of other than the headlines on the expectations for the bankruptcy?.

Well now, there was a lot of local articles over the weekend. Obviously, there is no perfect deal when you're dealing with bankruptcy. But I think this is a balanced deal. This is a balanced deal that everybody have time to negotiate, put their views.

We know there is an important hearing today with all members of executive and also legislative and the fiscal board with the judge. So, I have to say that we're optimistic that this should move forward, and we think it's a balanced deal for -- and is a great milestone if Puerto Rico could achieve this in the short-term.

And would probably be -- it's the closest we've been with all the parties dedicating their time, focus, and effort in making efforts to get it done.

So, I think everyone here is trying to get it done; it's just, obviously, different views on how much goes where, and how much it costs to the different entities involved in this very complex negotiation. So, I have to say that we haven't seen it closer to where it is today, and that's why we feel optimistic about it..

Great, thanks. And just a final question for me just on capital, as I think about the amount or the sort of the pace of capital deployment via the buyback, you saw $100 million in the second quarter, $50 million in the third. Going into the fourth quarter, I guess two questions.

One is how should we think about the pace of capital deployment via the buyback? And as part of that, is the preferred redemption, does that count towards the overall capital deployment plan such that we could see a much lower level of buyback in the fourth quarter as a result of that $36 million being used towards the preferred redemption?.

Yes, the first -- I'm going to answer the first. Yes, when we announced the buyback, we did included the $36 million as part of the $300 million, that's -- answers that question. Our goal this quarter is to try to reach $250 million of the overall $300 million, that's our goal. And then, obviously, we'll move from there.

But that's our goal this quarter. So, you will include the $36 million plus another $60 million-something. Yes, that's our goal..

Great. Thank you for taking our questions..

Thank you, Alex..

We currently have no further questions, so this now concludes today's call. Thank you, everyone, very much for joining us today. And you may now disconnect your lines..

Thank you..

Thank you..