Good morning, and welcome to the FirstBank First Quarter 2021 Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. 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 Q1 of 2021. Joining you today from First Bancorp are Aurelio Aleman, President and Chief Executive Officer and Orlando Borges, 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, 1firstbank.com.
At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio?
Thanks, 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 the remainder of the quarter, as you have hopefully seen, we are really very pleased to announce earlier today the Board's approval of the $300,000,000 share repurchase program. The repurchase may be in the open market or in a 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 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 macro, the integration and how pandemic is progressing in Puerto Rico. On the macro front, there's significant stimulus flowing to the island to the CARES Act and subsequent programs, the most recently approved in February. When you add all the programs related estimates that we have seen from the fiscal board are around $45,000,000,000 which is a material amount, It's 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 on demand in the near term. We're very pleased with being able to deploy these things 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 the reconstruction efforts continue to pick up. When we look at 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, And that's probably the first time in many, many years we have seen the government exceeding the 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 this improving economic conditions. And we're very pleased to see that finally that the construction efforts are getting 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, insective protocols in Puerto Rico and travel and travel rules as we experience a pickup in cases following spring break. While on the other hand, while cases spike the number of those vaccinated is a positive, even 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 LAVO population fully vaccinated and approximately 48% with the 1st 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.
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 209,000,000 actually disbursed 209,000,000 And actually, we also processed forgiveness, remittance for $176,000,000 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 the end of May.
So we will continue processing PPP loans to 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 till 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 maybe Orlando will cover in detail. We generated $61,000,000 of earnings or $0.28 per share compared to $50,000,000 last quarter.
Definitely, the improving macroeconomic trends and forecast is a key driver of the reserve release of $2,000,000 for the quarter. Pre tax pre provision was basically unchanged at close to $86,000,000 even though this quarter have 2 fewer days of operations. Pleased to see that asset quality metric remains stable. I think we have mentioned in the last call that we expected some peak of NPAs as we as the moratorium has expired. Obviously, there's a lot of liquidity supporting the market, so it's positive to see this metric being sustained or improved.
Definitely, liquidity was also a big contributor and deposit core deposit excluding government, excluding broker grew $472,000,000 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 loans. Definitely, loan origination is a challenge as we see this economy being supported with all theizational liquidity, which is good.
Even though I think it was solid considering the seasonality and the progress that are happening in part of it, it was solid reaching $1,200,000,000 in the quarter, including credit card reach about $1,200,000,000 And definitely, there's always seasonality in the commercial deals as they gain traction through the later half of the year. But if you look at year versus year, obviously, you see a seasonality on 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 fully we expect reopening of the economy and definitely some of the construction 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 non interest 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 contribute to the ratio. On the other hand, the consumer portfolio continues to pick up, both the unsecured, the credit card a bit, 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 grew by $23,000,000 So activity should also be good. On the digital front, adoption continues to grow.
We continue to do investments to continue to invest the platforms. Digital banking investors 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 will return back for questions. Thanks to all.
Good morning, everyone. Aurelio touched upon this, but just to start, the net income for the quarter was $61,000,000 and $0.28 a share, which compares with the $50,000,000 or $0.23 a share we had last quarter. The quarter results had on the positive side, the $15,000,000 provision release for loans compared to $7,700,000 provision we had last quarter. That's $0.04 per share last quarter impact as compared to this quarter. The results also include the $11,000,000 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 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. 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 $1,500,000 in the quarter. Part of that is that there was 2 less days in the quarter that impacted results by 2,200,000 But on the other hand, we recognized about $2,500,000 more in accelerated fee income recognition on the PPP loans that were repaid in the quarter, the $175,000,000 already that Margarado mentioned. Mortgage portfolio has come down. As he also mentioned, on average, the portfolio was down $121,000,000 which resulted in a reduction in interest income of $2,400,000 for the quarter. But on the other hand, the consumer portfolio was up $45,000,000 which increased net interest income by $1,000,000 in the quarter.
We've continued to work on the liability side. Because of our interest bearing liabilities, we're down 8 basis points, resulting in a reduction in interest expense of $2,600,000 in the quarter. And if you consider all deposits, the overall cost of deposits for the quarter is down from 41 basis points we had in the Q4 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 in accelerated amortization of premiums, which obviously, combined with the reduced rate of reinvestment alternatives that led to the auctions in the deal, the deal of the investment portfolio was 97 basis points in the 4th 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 deposits, which have offset some of the margin impact. Liquidity levels remain extremely high even though our investment portfolio has grown approximately $700,000,000 from last quarter. At the end of the quarter, cash was still $80,000,000 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. This quarter, we collected convenient insurance commissions, but it happens every Q1 of the year based on the volumes originated on the prior year, and that number was $3,300,000 which offset the $1,400,000 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 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 in the quarter.
On the expense side, expenses were $133,000,000 as you saw in the release. That included $11,300,000 of merger expenses, and we still have, call it, expenses is $1,200,000 Last quarter, merger expenses were $12,300,000 as compared to what we had this quarter. On a non GAAP basis, excluding the guidance expenses, were $120,000,000 in the Q1 compared to $121,000,000 last quarter. Main components, employee compensation was down $800,000 During the Q1 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 $3,400,000 higher than last quarter.
But on the other hand, the quarter had 2 less days, resulting in reduced expenses of $1,100,000 which has 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 $1,600,000 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, they're not fully at levels that we had pre pandemic, but it's still worth trying to see normalization on volumes.
These savings were a little bit of offset by we had some $1,300,000 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 $28,000,000 same reason as mentioned before. We had a $373,000,000 allowance for credit losses For the loans, the allowance was $359,000,000 specifically, which is also down $27,000,000 from $386,000,000 we had last quarter. And when we look at the portfolios on the commercial loans, the allowance declined $15,900,000 that it's a function of a $14,600,000 reserve release and $1,300,000 in charge offs. Release, again, reflects improvement on the macroeconomic variables, which correlate to this reserve.
That main ones being unemployment, GDP and so on the HPI and CRE index. On the case of residential mortgages, the allowance decreased 6,300,000 dollars which is a $4,200,000 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 $4,300,000 but we had charge off of $9,100,000 for a net decrease on the allowance of $4,800,000 The ratio of the allowance continues to be pretty healthy, was $308,000,000 as of March 31 compared to $328,000,000 at the end of the year. And if we exclude the PPP loans on an ongoing basis, that number would be $320,000,000 which is still a very healthy coverage on the allowance. On the asset quality, nonperforming decreased 8,600,000 in the quarter, down to $285,000,000 The nonperforming loans were down $4,000,000 So 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 NPLs for the quarter were $32,000,000 compared to $32,900,000 last quarter. The only increase we saw was our residential mortgage migration increase of $4,600,000 but our commercial side was down $4,800,000 Early delinquency has also shown positive trends. 30 to 89 day delinquency decreased $5,000,000 to from $149,000,000 last quarter to $144,000,000 And we saw also some reductions in TDRs of $19,000,000 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 investments and 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 increasing rates on the longer end of the curve during February March, which resulted in reductions on the market value of some of these 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.
Our first question comes from Alex Twerdahl from Piper Sandler. Please go ahead.
Hey, good morning, guys. Hey, Alex. How are you? Good morning, Alex. I'm well, thanks.
First off, wanted to just ask about the buyback, the $300,000,000 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 $75,000,000 a quarter? Or do you think we'd be considered 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 getting 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 maybe 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, 1st 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 high 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 into closing and are into being delivered. Even though that not necessarily achieved 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 landscape, as we have known, is extremely high when you look at the deposits. Auto sales continue to grow. They have shown sustainable increase. We expect that to continue.
We also expect when you look at the unsecured consumer business, we see good traction in the quarter. I mean, 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 small commercial groups, which will benefit from it. Obviously, we do expect that after that, obviously, some incremental utilization in the current 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, and 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, schools, in housing.
So we're starting to see the municipalities have significant number of projects that are still related to the funds deployed for Maria, CBDG funds, the $8,000,000,000 where we stated with more simplified rules a couple of weeks ago. So we expect we're out there. It's really being out there executing. 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. So and then Florida, we continue to be an active participant in the market. And same way, same strategy 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 Glenn Manna from KBW. Please go ahead.
Hi, good morning.
Hi, Glenn. Good morning, Glenn.
I'm doing 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 done at the bank over the last 10 years. 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 in 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 in the money in tough time for the last 15 years. And obviously, it's about time to the recovery to show. And we probably have the better opportunity to get to that level that you mentioned based on 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 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 ratios like the Permanente Area 1 that you mentioned.
Okay. 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, the but 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 their direction. The new projections are moving in the same direction. We're going to get there.
And 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 in the economy and all of that. So we are seeing that we should be able to get to those levels that we saw before terms of projected economic macroeconomic numbers.
So it would not yet there, but we're in track in that direction. Okay.
And then just two quick cleanup questions. It looks like you've recognized about $36,000,000 in pretax merger charges, dollars 48,000,000 was the original projection. Is that still a good projection? And then on the premium amortization, how much premium amortization 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 $48,000,000 And I think you have about 75% of those in now. Is $48,000,000 still a good number?
We what we had announced was about $76,000,000 of expenses at the beginning of the transaction. The $48,000,000 was more probably you were calculating the synergies based on what we had mentioned, the synergies based on some and their ongoing running expenses.
So it was $76,000,000 in expenses that we were expecting. Which started in 2019, Glenn.
Right. So that's still a good number, that $76,000,000
Yes. And the full year is also
Okay. And on the premium M, how much is left on that? Could we see it go down?
Premium amortization, you mean related to what? To 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 at 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 rates coming back down a little bit of reduction. I don't have exact the number of premiums we have on the portfolio at this point. I'm trying to give you that number.
I would need to check that and probably I'll include something on the queue then to disclose that because 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.
Our next question comes from Jonathan Krotman from Rubik Capital Management. Please go ahead.
Hi, gents. There's a lot going on in Washington, D. C. With the new administration. It seems like PR has a good partner in the White House and congressional leadership, whether it's efforts 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 a it's been a risk for some time. It's been mitigated.
I think this time better than ever, probably there is 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 of the fiscal board. Manufacturing is 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 is a future opportunity for an investment from Act 20 and 2022 are also an opportunity.
So I would say those are the two 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 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, that we have already received. So definitely it's a priority, but yes, the manufacturing sector will be our primary concern.
This concludes our question and answer session. I would like to turn the conference back over to John Pelham 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 13.
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 this capital deployment initiative. So thanks to all our investors.
Thank you. At this time, we'll conclude the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.