First BanCorp (FBP) 2012 Q2 法說會逐字稿

Good day and welcome to the First BanCorp. Q2 earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to John Pelling, Investor Relations Officer. Mr. John Pelling, the floor is yours, sir.

Thank you, Mike. Good morning, everyone, and thank you for joining First BanCorp.'s conference call and webcast to discuss the Company's financial results for the second-quarter 2012. I'm John Pelling, the Investor Relations Officer. Having recently joined First BanCorp., I must say I'm very excited to be part of this team.

This is our first earnings call and webcast of what will now become a quarterly event. Joining me today are members of the management team -- Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.

As Mike indicated, we will begin the call with management's prepared remarks and then open the call to questions. However, 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 Securities and Exchange Commission 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 press release issued by First BanCorp. on Tuesday, July 31, you can access it at the Company's website at www.firstbankpr.com.

At this time I like to turn the call over to First BanCorp.'s CEO, Aurelio Aleman. Aurelio?

Thank you, John, and good morning, everyone. Thank you for joining us to discuss the second-quarter results and all recent developments I would like to update you. On the call with me today is our CFO, Orlando Berges, who will be providing details on our financial results.

As many of you know, we have not held an earnings call in many years, so we are very excited about having this call, as we continue to make progress in our general plan. We made a strategic goal to have a communication with shareholders, and definitely this is a key, an important step in such improvement. Following Orlando's presentation we will open for Q&A.

Hopefully -- we did publish results earlier this week and hopefully you all had a chance to review the announcement. It happened Tuesday morning. I want to enter into some -- highlight some details on several things that we consider were key accomplishments.

We are very pleased to report that we made a profit in the quarter. We reported net income of $9.4 million, which equates to an EPS of $0.05.

This is a significant milestone in our path to transformation. We recognize there is still much work to do in order to achieve our long-term objectives, but we are definitely very excited about the progress made since we completed the capital raise in the first quarter.

Our franchise is really very strong and getting stronger, making solid progress in pre-provision pre-tax results. Despite economic challenges we will continue to face, not only in the Puerto Rico economy but in all economies, we feel very positive [of] our operating metrics and the opportunities for [rational] improvement, either organic or opportunistic.

I would like to mention, even though we are talking about the quarter, I would like to mention some key things that I believe are important that happened over the past 12 months in terms of how we measure this progress and how we -- what we consider are significant milestones.

If we look at pre-provision pre-tax earnings, from a similar quarter last year we are up 26%. NIM we are approaching 3.5%, and last year we were at 2.6%. Core deposits are up 10%, which is significant in this market.

Loan originations are up, excluding the credit card transaction that I will talk about later. NPAs are down 6%; continues to be our key challenge, but they are down 6%. Chargeoffs are down 35% from a year ago.

During the second quarter the NPAs, our key priority, continued to show further decline. And I have to mention that this is the 10th consecutive quarter of improvement. Slowly but surely we continue to take them down.

We also had a very strong originations quarter with over $800 million. We also achieved significant core deposit growth and margin expansion. And we continue to reduce our reliance on brokered CDs, and we continue to focus on organic growth opportunities within the markets.

Before getting into detail let me touch a little bit on the Puerto Rico market, before getting into details on the quarter. We have to -- we recognize there is still weaknesses in the housing market and unemployment challenges.

But on the other hand, the Puerto Rican economy is expanding, and for the first time in some years we will see a positive GNP growth. The formal estimation of the government is 0.9%, and probably for the first time economists are agreeing to that.

Within the market, we are focused on opportunities to gain share. How we think of our market share, as the second-largest bank in the island, we think that we should not have less than 15% of any product or service that we provide.

So that is really our mark. We actually provide some of that detail in our investor presentation that we published the same day we published the results.

As a result of [concentrated] efforts we continue to gain share on the core deposit in the island, and we have been consistent since 2009, every quarter, in achieving those. How we achieve those, it's a mix of sales efforts, focus, new product offerings like electronic and mobile banking, e-statements, commercial deposit, commercial lines, cash management products.

And these are giving us traction in growing our core deposit base. We have to remember that this was not necessarily the focus of the Corporation prior to 2009.

As we mentioned during the last quarter, we were going to re-energize loan production in areas like residential and consumer. We operated for two years, 2010 and '11, on a de-leverage mode. We are not operating under that mode any longer after the capital raise.

So specifically, we achieved progress in mortgage originations, auto finance, personal loans, and the recently announced acquisition of the credit card portfolio, which really provides excellent cross-sell opportunities in addition, [too]. As we look into the loan portfolio, how we think about the portfolio, the size of the portfolio has remained relatively constant; the mix continued to change.

And really our focus is profitable loan growth. The portfolio should remain in similar size, but the mix will change, replacing NPLs with performing loans and looking for higher-yielding relationships.

We have seen some run-off in the commercial book, specifically in the C&I in the quarter. We experienced a decline of $300 million; in large part it was driven by [maturities] and repayments.

And I have to mention that significant part of this decline was planned, due to our internal yield requirements. And there are certain loans that don't meet our yield requirements, and we are allowing them to run off for that reason.

That said, the C&I originations increased by $151 million, which is a strong number. We have a strong commercial lending team, and through relationships we continue to build a pipeline. It is over $400 million today.

When we look in detail at some of the increase by line of business, residential increased about $32 million in the quarter; auto loans close to $30 million; personal loans another 30%. And then we have new volume of credit card activity, which all contributed to the NIM and the yields on the improvement on the portfolio.

Let me highlight why -- I mentioned, credit card. Let me highlight what we consider was a significant transaction for us in the second quarter.

We closed the transaction in May, so what you see on the quarter only reflects one month of the impact of this very positive transaction for us. We acquired $406 million of FirstBank branded consumer credit card portfolio.

The transaction definitely increased our earning capacity, deepened relationship with our customers, and continued to help us expand in products and markets that we serve today. There is about 140,000 active clients, and we have some inactive clients that we need to work on improving activation.

We are not contractually able to disclose the purchase price, but we can report that we've recorded an initial fair value of $369 million, and recognized an intangible asset of $24 million approximately. Orlando will discuss some of the impact to the margin, but I just want to highlight that this transaction is a positive contributor to margin, non-interest income, and efficiency ratio since the first month of operation.

Lastly, before I hand the call to Orlando, let me -- I would like to expand a little bit on one of our key strategies of the plan, which is the core deposit plan. Grow was $148 million, net of brokered. In addition, we continue to achieved -- we continue to see the market reducing the cost of core deposits, approaching more to the US. Probably one of the big differences in this market to US community banks, we still have opportunities to continue reducing the cost of the core deposit.

Deposit grow is a key strategy. It is a very important for us. If we look at market share, we are strong number two in assets and in loans, but we don't have a second position in deposits. We would like to get there.

[Cocolu] the acquisition with a new customer base, our current customer base, we will continue to focus on expanding that.

We also continue our reduction of the reliance on brokered CDs, now down by approximately $150 million in the quarter. It is a long-term achievement. We are coming from 60% brokered CDs in the [base of] deposit in 2009; now it is around 35%, so we consider that also an achievement.

Now I'm going to hand the call to Orlando so he can go over some of the details, and then we'll return for some Q&A. Thanks.

Good morning, everyone. As Aurelio mentioned, as you can see in this chart, net income for the quarter was $9.4 million. That is on assets of about $12.9 billion. It compares with a loss of $13.1 million, $13.2 million last quarter on assets of $12.8 billion.

We saw improvements in pre-tax pre-provision, reaching $37.9 million compared to $34.8 million achieved last quarter. As you can see in this chart, the key drivers was, first of all, an improvement of $6.8 million in net interest income; I will discuss some more detail in the next slides.

We had a reduction in provisioning needs of $11 million. Non-interest income grew by $1.8 million. We had a reduction in the non-cash charge for the equity in the unconsolidated subsidiaries of $3.7 million. And then on the other hand, we had an offset of increasing expenses of $1.7 million, which we will discuss briefly also.

The increase in net interest income, it is mostly due to a $1 million improvement in credit card related interchange and other fees, as well as a reduction of $1.1 million in other-than-temporary-impairment charges associated with the private-label MBS that we have had in the investment portfolio for quite some time.

The expense side was fairly stable in most categories, except that we had an increase of $3.343 million on other real estate expenses. That is related to valuation adjustments in the quarter, and the fact that in the first quarter you remember we had -- we sold three commercial properties at a gain of $1.5 million, which offset some of the expenses for that quarter.

In this quarter we also had, obviously, a credit card processing expenses and some marketing expenses associated with credit cards as well as the loyalty program expenses, which we didn't have before. As Aurelio mentioned, just to remind you, that the credit card transaction was completed at the end of May; therefore, we are showing results of that transaction of only one month in this quarter.

Before going to net interest income I think it is important to explain to you a bit the non-cash charges on the equity in the unconsolidated entities, because that has created some variability over the quarters and, unfortunately, will continue to do so.

As you know, we sold a series of nonperforming and classified loans in the first quarter of 2011 to a joint venture, where we hold 35%. Our ownership is subordinated through the primary owners of the venture.

Therefore, under accounting rules, we are required to account for this instrument or this investment under what is called a hypothetical book liquidation model. The venture keeps the loans and the assets at fair value in the books, where fair value is basically discounted cash flows.

The hypothetical book liquidation assumes that you have to, at the end of each quarter, liquidate the venture, going through the cash flow waterfall that we have under the contract. So in essence, the discounted cash flows, which are much less than the full amount of cash flows, are assumed; and we have to consider things like interest that would be paid, the order in which the interest would be paid to each of the owners, and so on.

So that creates variability, especially at the beginning that the venture is in the process of selling some of these assets and eventually will stabilize. But again, it is a variability component. Again, the charge is a non-cash charge, so it is not necessarily affecting any cash flows.

Looking at margins, as I mentioned, net interest income grew $6.8 million. It is a combination of an improvement of $1.5 million in interest income and a reduction of $5.3 million in interest expenses.

Net interest margin for the quarter grew to 3.46%, as compared to 3.20%. If we exclude valuations, net interest margin was 3.44% compared to 3.20% also.

You can see in the chart that we are showing now the strategies that we have implemented have led to a consistent improvement in margin, going from 2.60% the second quarter of 2011 to a 3.45% we are showing now.

On the asset side, loan deals grew 18 basis points, mostly associated with an increase of 67 basis points in the consumer portfolio yield, due to the acquisition of the credit card portfolio and the higher level of originations on all consumer loan products that Aurelio mentioned, the auto loans and the personal loans.

On the right side of the balance sheet, on the liabilities side, we have done a lot of work controlling our expense -- our interest expense component. This quarter you saw in the release, we -- cost of interest-bearing deposits went down by 12 basis points; the cost of brokered CDs went down by 12 basis points.

The cost of other borrowed funds, [where] we had repos and advances from the Federal Home Loan Bank, went down by 20 basis points mostly due to -- we had a $100 million repo mature at a cost of 4.38%. We had some CDs, government CDs, that matured also at 4.66%. So there were fairly high-cost funding sources that matured.

We expect to continue to achieve some improvements in the cost of funds. As an example, our brokered CD portfolio, there are $2.2 billion in brokered CDs that mature within the next 12 months, and they have a -- they carry a rate of 2.04%.

Today, we are replacing brokered CDs at somewhere between 75 and 125 basis points. So assuming interest rates stay at this level, we basically can achieve somewhere between 75 to 100 basis points reduction in costs -- on the cost of funds of brokered CDs.

Also, with the deposit strategy as Aurelio mentioned, the cost of total deposits went down to 99 basis points. That is also due to improvement in some of the non-interest-bearing deposits.

Looking at asset quality, nonperforming assets for the quarter decreased $24 million, while nonperforming loans decreased $54 million. The difference was due to completion during the quarter of several foreclosures of commercial properties that were transferred to REOs, due to the efforts of our Special Assets Group.

The group has been focusing on alternative resolutions to foreclosures, as if -- deed-in-lieu of foreclosures or forbearance agreements. That, obviously ends up increasing the OREO component; but it allows us a lot more flexibility in executing the [debt imposition] strategy. So we like the fact that we are starting to see some of those efforts completed.

Nonperformings have shown steady pace of reduction over the last quarters, as you see in the chart. Not as fast as we would like to, honestly, but clearly there is still some migration coming in. Even though it has been also going down -- this quarter, for example, migration was 15% less than last quarter, but we still see some migration.

We have a number of complex cases that take time to resolve and the Special Asset Group is making a lot of progress. We continue to expect some more progress in some of the [slighted] cases, to allows us flexibility.

Included in nonperforming assets is also the legal case, the securities pledge to Lehman that is currently under a legal case, and it is still outstanding. It is pending resolution of the legal case, and final impact will depend on that resolution. So we continue to wait for that and work closely with our legal counsel.

Notwithstanding, I think it's important to mention, as you see in the lower side of the chart, that nonperforming commercial loans are now carried on the books at a $0.58 on the dollar. That is when we take into account chargeoffs that have been taken on that portfolio and any allocated reserves, specifically allocated reserves to the portfolio. Therefore, we see the level of future risk associated with those loans being reduced.

Chargeoffs for the quarter amounted to $52 million, slightly higher than last quarter. But still if you go back a couple of years, you will see a consistent trend of reductions. It was more than twice that amount eight quarters ago.

The increase was mostly on the residential portfolio, due to a higher level of properties subject to updated appraisals. We appraise all nonperforming assets annually, and the consumer -- the residential portfolio goes through the same process.

The increase in chargeoffs, however, didn't require a large increase in provision because two-thirds of the chargeoffs taken [weren't] specific reserves that we had on the portfolio, that -- based on the [estimation] process of our credit risk group -- had already been reserved.

The allowance at the end of the quarter was 4.44% of loans compared to about 4.70% at the end of last quarter. And, obviously, the reduction is based on the provisioning needs.

The [DDA] factors, as chargeoffs go down, will continue to go down and require less provisioning. However, keep in mind that now included in the portfolio -- it's a credit card portfolio, those $369 million that Aurelio mentioned that are fair value at acquisition. Therefore, at this point, they don't require much allowance because of the fact that their fair value reflects expected losses on the portfolio.

If we exclude that, the reserve coverage would really be 4.57% of loans. As a percentage of nonperforming, the allowance represents 42.9% compared to 43.2% at the end of last quarter.

In terms of capital, capital levels continue to be strong, well above regulatory requirements. I know many of you have been asking our about our Basel III impacts. At this point, we have been analyzing the impact.

Specifically the most complex part of the process is measuring the impact on risk-weighted assets. Basel III requires a lot of detail work. So we are not in a position to give you an impact.

We (inaudible) the ratios will remain strong, but we will let the market know when we complete the full analysis of the process. With that, I would like to turn the call back to Aurelio, and at the end we will answer all of your questions. Thanks.

Thank you, Orlando. As Orlando mentioned, the capital ratios are strong. Summarizing what we consider our key (inaudible) asset quality continues to be our number-one focus. Our (inaudible) [strategy] is making progress. We are resolving cases into REO that will be closer to a sale, and we will continue to move on putting resources on the Special Asset Team to deal with the NPA challenge.

We are very proud to have achieved profitability with $9.4 million. We need to do more, and we will continue toward that direction. Pre-provision pre-tax [growing], approaching $38 million now. Margin expanding.

The credit card acquisition will continue to contribute. We only saw one month; we will see full impact this quarter.

The lending team is very focused on bringing relationships with core balances and core transaction services. We continue to execute on the cross-sell opportunities. We continue to enhance the product offering, and we will continue to reduce brokered CDs as we increase our core deposits.

[Manning] the NPA book closely, including REOs, NPLs, and other assets as Orlando mentioned, however, we are very confident that the core banking metrics will continue to improve through the remainder of the year. Now I would like to open the call for questions. Mike?

(Operator Instructions) Joe Gladue, B. Riley.

Good morning. I guess, first off I would like to, I guess, ask a question, follow up on one of Orlando's comments. I think you had said something to the effect of a potential further reduction of 75 to 100 basis points in the cost of brokered CDs. Just wondering what time frame you expect that to occur over.

Well, what I mentioned, Joe, is that within the next 12 months we have $2.2 billion of brokered CDs that mature, and they have a cost of 2.04%. Obviously that is spread out through the 12 months.

As we replace -- and even though it's not exactly the same amount every quarter, we tend to have similar amounts per quarter. As we replace those, assuming rates stay where they are, it is where we will start seeing some of those reductions in cost. So the full benefit will have achieved in 12 months, but clearly every quarter we will see part of that reduction being achieved.

Okay. I would like to, I guess, touch a little bit on the balance sheet and the mix of assets. Still a little bit of a reduction in overall assets, even with the addition of the credit card portfolio. Certainly most of that is in securities.

But just wondering if you could give us where you think -- does the balance sheet continue to shrink a little bit? Or do you think you will start expanding it at some point?

Joe, I will tell you that [admittedly] we have significant maturities this quarter. (inaudible) will continue to be -- to have the same experience in maturities. You should think about the balance sheet for the next couple of quarters around the same size.

We are trying to change the mix of looking for more profitable loan growth rather than lower yielding assets. You know what the other part of the balance sheet is, the securities portfolio. There has not been much to do in the market. So it's really similar size. but making sure that we have improve the NIM and we (inaudible) on the two sides of the equation by improving the yield and reducing the cost of the deposits.

Okay. Just in terms of the loan growth, very impressive increase in loan originations. Just wondering if you could give a little more color on how you achieves that. Was there additions to personnel, or any change in underwriting standards, or just what drove that big increase?

We have to attribute of also the growth of some of the shrinkage that we intentionally did in the past two years. We operated 2010 and '11 on a deleverage mode, as you know.

And we have not changed policies. We continue to have -- actually we change policies a couple of years ago to more stricter rules based on the quality of [assets] that we wanted to originate.

And we -- what you see is really the effort of expanding the sales channels. There are resources, there's marketing dollars in the auto side. We are an indirect lender, so we continue to expand that channel.

On the personal loans and mortgage, it is really originators and going after the market. On the mortgage side, we still only have 10% of the originations. And even though we have -- we are selling a lot of it on the secondary market, why not reaching more and look for the fees, not necessarily growing the balance sheet significantly.

So we really concerted sales efforts going after -- we have the capacity. We always have the very effective production lines in both the consumer and the mortgage businesses.

And the C&I, as you know, it is more seasonal. Deals will come some quarters, not necessarily others. We are also building the middle-market business on the commercial side, which we didn't -- we were not active before.

So it's a combination. But the focus is really on reaching out and expanding the channels.

Okay. I think, Orlando also touched on appraisals and getting them done annually. But just wondering; in the past on the island there has been some, I guess, difficulty getting timely appraisals. Is there still a backlog of appraisals? Are you pretty up to date on them?

The appraisals, as you mentioned, it has been a backlog. What we have done is try to start asking -- requesting the appraisals a little bit ahead of time. So the lead-time will basically put us close to that time frame. That is the only way to control it.

This quarter it was a number of properties, not the fact that appraisals were late, but it's a higher level of properties subject to reappraisal. And that's basically how we manage it.

Because if you wait for the 12-month period and ask for the appraisal, you will be three months late. So we need to start -- we have been forced to start asking for the appraisals ahead of time, to be able to have it by the time frame we want to have it.

Just in general, when you are selling properties, OREO properties and such, are they -- what has the trend been in how closely those match the carrying values?

In the case of residential, keep in mind that for reserve purposes we use historical information on what happened when a loan goes all the way through foreclosure and sells as an REO. So, in essence that is updated every quarter, so they tend to be closer.

Obviously it changes with properties that -- if by any chance you have properties that are sitting there for over 12 months, most of the time you get some hit in there. But then you sell some others that are more current and you don't get any hit on those. So, it is a mix.

On the commercial side, it is a little bit tougher. Some of the properties, the appraisers and the market aren't necessarily aligned. But in general, I would say that we are within the amounts we have been taking those OREO properties down.

You saw some expenses this quarter. We had some increases in fair value adjustments on some properties. As we have some commercial properties coming in, that creates some impact. Not a perfect science, but we attempt to use all historical information on the trends to try to create the required allowances to cover those losses.

All right. Thank you. I'll step back now.

(Operator Instructions) Michael Sarcone, Sandler O'Neill.

Hey, good morning, guys. My first question, on the margin, I understand you expect continued improvement. But do you guys have a specific target number in mind for the margin?

Let's say after these $2 billion of brokered CDs run off or re-price lower, and you reach your goal for core deposits, do you have an idea of where the margin may stand at that point?

Mike, we don't have a specific number, I just can assure you it is going to go north.

Well, our target we have said before, Mike, our target for the year was to try to reach a 3.50% margin at the end of the year. We have been moving towards that. We will continue to move towards that.

Further down the line, clearly margins vary with the mix and interest rate scenarios. But in the meantime we will continue to work towards assuring that we have that average 3.5% margin.

Okay, thanks. Then I had a few questions on the credit card portfolio purchase. In 2Q, what was the portion of fee income related to interchange on the card portfolio? I am just trying to get a sense for what the full-quarter impact may be of additional interchange revenue?

Interchange and other fees, credit card related fees were about $1 million for this quarter, which is -- it was one month in the quarter.

Got it, and was that basically the same for the business promotion expense that's related to the credit card rewards programs?

Yes, the operating costs on that -- you have three basic components (inaudible). Management, the operating management of that function; the loyalty program expenses; and then some marketing expenses.

This quarter, the operating expense and the loyalty was close to $1 million. The marketing, it is a function of the strategies we put in place; we could change this. This quarter was not that large because we just started; we will see some more in the second quarter.

Okay. Thank you, guys.

Keep in mind that the loyalty program expense is part of the marketing expense.

Joe Gladue, B. Riley.

Yes, hi again. Just wondering, just performing TDRs, where did they end up versus first quarter?

Yes, Mike, we will look the data we have. Orlando is searching it. Just give him one little second.

Sure.

It's been consistent. It's not too different. But let me give you exact amounts.

I had it $411.9 million at the end of the first quarters.

Joe, do you have any other questions while Orlando looks for that one?

I have the information. The performing TDRs -- that's what you asked for, only performing?

Yes.

We had about $469 million performing TDRs.

Okay, all right. That was my last question. Thanks.

Well, it appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Aurelio Aleman for any closing remarks. Sir?

Thank you, Mike. Well, it is all about execution. We will continue with a focus on accountability in making sure the core (inaudible) metrics will get stronger, market shares improve, and I will [keep at] the NPA book, and that is really the focus for the remainder of the year.

So now, I really thank you for joining us this morning and your interest in the Company. We will look forward to talking to you again. At this time, we will end the call.

Thank you, sir, and to the rest of management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and have a great day.