Hello. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the First BanCorp. Fourth Quarter 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Ramon Rodriguez, Head of Investor Relations, you may begin the conference.

Thank you, Bailey. Good morning, everyone and thank you for joining First BanCorp.'s conference call and webcast to discuss the company's financial results for the fourth quarter and full-year 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 website, at 1firstbank.com. At this time, I'd like to turn the call over to our CEO, Aurelio Alemán. Aurelio Alemán: Thanks, Ramon. Good morning to everyone and thanks for joining our earnings call today. Let's start by moving to Slide 4. We closed 2021 with another record quarter for the company, clearly reflecting the strength of the franchise and also combined with the improved economic backdrop in our operating markets. During the quarter, we generated $73.6 million in net income or $0.35 per diluted share and importantly, I think a record $104.9 million in adjusted pre-tax pre-provision income. Asset quality continued to trend, the improvement trend that we had during the year, now non-performing assets reaching a decade low of 0.76% as a percent of total assets, driven by repayment of several non-accrual loans, OREO sales and obviously, less migration. The ratio of the ACL…

Good morning, everyone. Aurelio mentioned, we had very strong 2021 results. Net income was $281 million, $1.31 a share that results included improvements of $130 million in net interest income, and $10 million increase in other non-interest income. Remember that, the Santander operation, the acquisition was completed on September 1, 2020. So we had four months of Santander versus this year we had the full year. And as he also mentioned, it reflected on pre-tax pre-provision improvement, significant improvements. We went from about $300 million in 2020 to $392 million in 2021, so a significant pickup. Fourth quarter results were also very strong. We also made reference to $73.6 million in net income, $0.35 a share. The provision for the quarter was in fact the net benefit. We had a $12.2 million benefit, very similar to the $12.1 million we had in the third quarter. And again, it's overall driven by improvements in macroeconomic variables, which is both the actual and the expected, and I'll touch a little bit more on the reserve later on. The expenses for the quarter were $2.6 million lower than in the third quarter. However, we had an increase in income tax expense, with a higher level of income resulted in a change in or an increase in the mix of taxable to exempt income and effective tax rates went up by 7 basis points for the full year, resulting in an increase in taxes on the flow throughout the year. Net interest income for the quarter was $184.1 million. It's slightly lower than last quarter, but margin improved 1 basis point to 3.61%. The yield on the portfolio, the GAAP yield on the portfolio was 6.34% for the quarter, very similar to the 6.33% we had last quarter. And loans, if we look at…

Thank you. [Operator Instructions] Okay. So we do have our first question. And our first question comes from Ebrahim Poonawala from Bank of America. Ebrahim please go ahead. Aurelio Alemán: Good morning Ebrahim.

Yes. So, I guess Orlando I just wanted to first start with expenses. So, there should be a $1.4 million increase in 1Q from the minimum salary and wage increases. And then you talked about getting to a $117 million to $119 million range by the back half of 2022. Is that correct?

Yes. If you take the numbers the $111 million this quarter, it was really about $110 when you take out $110.5 when you take out the restructuring costs. And you can hear me?

Yes, I can hear you.

Okay. So, we're saying about $1.4 million it's definitely already there. There's going to be a little bit of increase that normally happens in the first quarter related to all the payroll-related expenses. I mean the payroll tax-related expenses since all the counters are reset starting the year on limits. And then clearly we don't -- that $1.9 million benefit we had on occupancy meaning on OREO expenses that should add back because we don't foresee that's going to continue to happen consistently. A lot of it has to do with properties that were moved when prices were lower at appraised values at the time and now we're being able to execute at better prices. So, that's why clearly that is the message it's going to be building up a bit. And as we close the gap on what I call close the gap on vacancies which is too high at this point that should also add some expenses in the quarter.

Got it. I guess -- so that's clear what I'm trying to reconcile is, you mentioned you think efficiency ratio can get to 55% and from what was about 52% I think reported for the fourth quarter of 2021. So are you -- is the 55% just a target, but you're going to operate much lower? But I'm trying to reconcile, maybe give us a little perspective on the NII. Do you see the NII growing from here? And how much of margin expansion do you expect from those hikes? I know you mentioned the floating rate book, but you also mentioned the pressure from adding more mortgage loans to the balance sheet. So give us a sense of where the NII is headed and how we should think about that 55% efficiency ratio. Aurelio Alemán: Yeah, I just want to comment, this is Aurelio, Ebrahim. I think the 55% obviously it's a performance target we always work towards doing better than that which has been the case for the last couple of quarters. Obviously, we don't want to mislead there's still expenses coming into the line. Some of them also are related to new business volume. So yes, revenues should move in parallel, obviously, not at the same proportion. So we model the business, we model the pricing to ensure that we meet targets that are competitive. And also that relates to how much we invest. So obviously, again, the performance metric of 55% is a high-level one, but we always work towards trying to do better than that which again has been the case. But -- but I think what Orlando provided detail on what are the variances that are showing this fairly lower number as you know, as we mentioned before, we don't want to under-invest in the franchise and the growth opportunities.

Right. Aurelio Alemán: So this is a balancing act. Hopefully at the end of the day we would like to stay better than the 55% but, obviously the business is modeled considering that's the target, yeah.

Yeah. On your -- the 55% again it's -- if you take that guidance of $117 with current revenues we're basically there. You made a good point which is the one component that with rates the way they are moving we foresee the re-pricing of assets happening faster than the re-pricing of any liability. It's going to take a little bit of time. Obviously the investment pickups that we'll get are going to help, but we still have much lighter portfolio than what we invest every quarter. And there are some normal repayments on higher-yielding investments we had from the past. And obviously the re-pricing of the commercial portfolio we'll start to see with SOFR or LIBOR going up both of them as we migrate to SOFR which is the main variable we're going to be using. So how much is the pickup in margin? I'm a little bit hesitant to give you now. I feel comfortable it's going to go up. How much? It's -- we need to see how that shifts on some of the mortgage components and the speed of the reinvestment.

Understood. And just -- so we have the balances for PPP outstanding at the end of the year. What is the fees remaining that you'll accrue as those balances are forgiven?

I don't remember the number. Ebrahim, I don't have it on the top of my head. I can get you -- this quarter was about $1.5 million lower than last quarter. Part of it is also because of the acceleration with less, repayments. It was accelerated. I can get you that number. I don't remember the quarterly amount of normal amortization of the fees from the top of my head, because it's…

That's fine.

… mixed up a bit sometimes with the repayments. But I'll get that information. And make sure everyone gets it.

That's fine. And just one final question around capital return, I know you've sort of submitted the plan. Maybe you're talking to the regulators. Should we expect a bigger buyback over the next 12 months relative to what you are about to complete for the last 12 months? Aurelio Alemán: Our timeline is similar to last year. We should announce our capital actions some time during April, when we report next time as we did last year. So it's in progress. Obviously, you saw what happened over the last 12 months. We're basically completing the plan, the $300 million and we basically are at the same place where we started. So I think it's logical to assume that going further we – our goal is to sustain what we recently accomplished during 2021. So – but I cannot give you an answer, it's going to be bigger or better yet. We have to wait until April that we announced and we conclude on the process, yes. Remember, we also are looking to achieve balance sheet growth during 2022.

Got it. Noted. I’ll leave it here. Thanks for taking my questions.

Thank you, Ebrahim. The next question comes from Timur Braziler from Wells Fargo. Timur, please go ahead. We seem to have lost Timur, so we'll go on to our next question, who comes from Alex Twerdahl from Piper Sandler. Twerdahl, please go ahead.

Thanks. Good morning. Aurelio Alemán: Good morning, Alex.

Just wanted to drill in on some of your comments Aurelio on the outlook for growth. And one, I guess to start with I think you said, 75% of commercial loans that have originated in 2021 will fund in 2022. I was just wondering if you can give us a little bit more clarity on sort of how we should think about the progression of those disbursements and sort of the sizes that are potential based on what you've done so far? Aurelio Alemán: Yes I did say construction loans, okay? 75% of construction loans. And we did about $200 million in 2022 – in 2021 of the construction loans. And we expect that most of it be funded by the end of 2022.

Okay. And have you started some of the projects that we've talked about in the past, the projects related to the community development block grant by the IPG and the R3 and the passed credit. Have any of those – I know you've been working with some potential customers on taking advantage of some of those programs. Has any of that started to be disbursed yet? And – or maybe you can give us an update on sort of when we could expect some of the disbursements associated with some of those programs? Aurelio Alemán: Yes. Some of those programs some of them are being approved by credit already and we passed the filter and the great evaluation. And obviously, they're in the stages of beginning to close. And I think it's going to be through the year, very difficult to say second quarter, third quarter, fourth quarter. But we should start to see that this year, some of that this year.

Okay. We all look forward to seeing some of those loans come online. A couple of more questions from me. Just when I look at the net fee income, it looks like the service charge fee kind of popped up. Is that due to seasonality, or is that at a more sustainable level?

That is not so much seasonality, the one on deposit accounts you mean, or you mean the other one? Because the credit card fee kind of income, there is a little bit of seasonality, because obviously you have increased purchases on the last quarter. But on the deposit accounts, that's more of an ongoing kind of thing at the level of normalization on the operation, the type of transaction. And so we're seeing that with – also combined with the increase in deposit accounts. But that's more of a normalized kind of fee generation.

Okay. And then just back to expenses, you're running at sort of double the level of vacancies. And I know that you don't want to underinvest in the franchise. But you've obviously been doing pretty well with even an elevated level of vacancy. Do all these positions have to be filled? I mean maybe you can run with just kind of a more lean workforce? Aurelio Alemán: Well, it's part of our day-to-day job to try to be as efficient as possible. So, believe me, there's a lot of discipline behind how we go about the hiring and the quantitative and qualitative factors behind it. So, so definitely we always look for opportunities and some of it could be linked to volumes. And it's variable if volume comes or not. And so it's a whole sort of decisions behind it. So, but the way we design it to achieve those if those will be needed a portion of those.

And keep in mind that we have the challenge of the Omicron variant and we lose people for a few days every so often now and that affects service. So we need to keep that. We want to make sure that service is not affected.

Got it. And then just also on expenses, and I know that you're kind of expecting that normalized run rate towards the back half of the year. You said there's some tech investments that haven't started to amortize yet or be capitalized yet. Do you have a sense on when those will come online so we can kind of just figure out sort of the pace of expenses over the next couple of quarters?

Yeah. There are two fronts there. Number one would be on the facility side. We've completed some projects that are going to be done probably at the end of this month beginning of February. There is a little bit there. And there is a second chunk that is going to be completed in the second half. So, full effect on facilities is probably going to be seen on the second half of the year. What I mean it's going to be completed in the second quarter I meant to say, but some of these full implications would happen in the second half of the year. In the case of technology projects, it's a combination because there are some projects that we're starting that have a larger component that is expense-based. So they will happen -- they will start happening some time at the end of February beginning of March as we roll with some of the projects we had. The ones that are being capitalized we wouldn't see the impact until clearly the probably the fourth quarter or end of the third quarter. That's why the normalized component, I believe, the first couple of quarters would be lower than that guidance. And then we'll start getting through our guidance by the end of the year.

Okay. And then just one final question just going back to loan growth and just the residential portfolio. Do you have a sense for or can you give us a sense for the amount of that residential runoff that was refis versus just sort of a normal amortization of that portfolio?

I'm trying to remember the numbers Alex. Remember what's happening with refis is that a lot of loans are qualifying for FHA funny kind of programs now with the levels. But I can't recall from the top of my head. I need to get for you that also what's the normal repayment on the existing portfolio, so I can give you a better indication on that.

Okay. Thanks for taking my questions. Aurelio Alemán: Thank you, Alex.

Thank you, Alex. Our next question comes from Timur Braziler from Wells Fargo. Timur, please go ahead.

Hi. Good morning. Sorry about the technical difficulties earlier. Aurelio Alemán: No problem. How are you?

Maybe just – good. Thank you. Maybe just circling back to the last question. More broadly on the resi runoff when does that subside? Are we getting pretty close in the cycle now where we're going to start reaching an inflection point in that portfolio will it at least go from being a headwind to overall loan growth? Aurelio Alemán: Yeah. Let me take that. Obviously there is many factors in the movement of the portfolio overall. In the resi definitely higher, if you look at rates what happened in the last 30 days, definitely there's a shifting of -- there's going to be a shifting of the reduction in refi. At some point in time we were like 55% refi, 45% new money. That will definitely shift now on the refi side, and it's driven by the rates, it depends on the speed. But there's significant movement happening in the last -- since the late December to January. So, we should start seeing that in the origination side this quarter I expect and we can provide more detail next quarter. But then you have -- there's an element that on the other hand the levels of conforming, the levels of mortgages in terms of dollar amount, maximum amount of mortgage also which adjusted up. So, some of the mortgages that were non-conforming could become conforming now by that factor. So it's a combination of factors that could take that. Obviously, I think we have record levels prepayments on the mortgage portfolio, because of the rates that should not be present in 2022. Same thing happened in the commercial book. When you look at the originations of the quarter or the year, they were truly quite strong. The challenge was the commercial book received significant prepayments, which again, we also expect those to reduce going forward. And then you take the consumer sector, auto is very strong. And when you look at credit card activity, it was actually very strong in the year in terms of origination activity, but also we have very high prepayments of those balances. So I think in the overall what we are working towards growing the loan portfolio this year, we feel fairly confident that that will happen. And obviously, because of the different initiatives, pipeline and actions that we're taking in the business side. Obviously, last year, we will also spent a lot of time in integration activities, management focus. Management focus now is really growth. So I think those are the elements. I cannot give you specific numbers, but I can give you what are the drivers. I can talk about the drivers in each of the different business that is giving us a lot more confidence this year for achieving loan growth.

That's great color. Thank you for that. Maybe switching gears, looking at the allowance ratio and putting that kind of into context with the expectation for -- hopefully for accelerating loan growth. I guess, how are you thinking about further economic improvement as a backdrop in CECL? The near-term blip hopefully with Omicron kind of slowing that improvement, and then the ability to further reduce allowances and have new loan growth kind of eat into the allowance, and then maybe even reduce allowances on top of that. How should we be thinking about allowance levels going from here?

Okay. The challenge is Omicron to be honest. But in terms of we do have qualitative components on our reserves. If Omicron -- the expectation is that we have in the market is that Omicron would be a temporary impact assuming no other variants show up. And that would help keep or get the trends on improvement back. If that's the case, we will see some reductions in reserve needs on existing portfolios, obviously, added for next year. We do believe that we won't see the level of releases that we had last year. A lot of 2021 releases also had to do with the fact that we all were facing significant possible implications from COVID in 2020. But clearly, we still feel that we would have provisioning levels that are lower than what would be a normal trend on a year in 2022. But not -- over the year, we won't -- we don't expect to see the level of releases clearly that we had this year.

Okay. And then last question for me on credit. Obviously, we had some NPL sales in the third quarter, broader asset prices continue to do quite well, and continues getting favorable attention. Is there any incremental opportunity to sell off some of the troubled assets here at these levels and kind of further improve the asset quality of the franchise, or was much of that taken care of in the prior quarter? Aurelio Alemán: It's something that we constantly with the eyes open. It's been a lot of that over the last years as you see in the chart. And obviously, the investor interest continues to be positive in the island. Values is reflected in the values. So again, we always have the policy that we trade at the right price in general. So, there's not a lot more to dispose to be honest. And it will continue to be individually as prices come in and out on things that are in the for-sale category.

Great. Thank you for the questions.

Thank you, Timur. [Operator Instructions] We now have a follow-up question from Ebrahim Poonawala from Bank of America. Ebrahim, please go ahead.

Thanks. Hey, just one quick follow-up. Aurelio, you mentioned $150 million runoff coming out of the restructuring that you expect some time in the second quarter. Is that essentially the magnitude of runoff that you expect as a function of the bankruptcy is it, or are there more deposits that could leave the balance sheet once all is said and done? Aurelio Alemán: No regarding -- related to the bankruptcy, that's it. That's what we have. We don't have -- the famous treasury account is not in our balance sheet from the Department of Treasury of Puerto Rico is not in our balance sheet. We just have some agencies, some of the public operations, small balances that could be -- could have that impact here. So our focus is the government strategy -- yeah, we’re focusing the government strategy as being core transaction services.

All right. Thank you. Aurelio Alemán: Thank you.

Thank you, Ebrahim. There are no further questions at this time. So I'd like to turn the call back over to the presenters.

Thanks, everybody. We're going to be participating in -- in February, most likely on the KBW conference. So any of the participants on the call that would like to see us, we're available. Thank you very much for your time. Aurelio Alemán: Thank you.

Thank you.

Thank you. This concludes today's First BanCorp.'s Fourth Quarter 2021 Results Conference Call. You may now disconnect your lines.