First BanCorp (FBP) 2015 Q3 法說會逐字稿

Good day everyone and welcome to the First BanCorp third-quarter earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). Please also note today's event is being recorded.

I would now like to turn the conference call over to Mr. John Pelling, Investor Relations Officer. Sir, please go ahead.

Thank you, Jamie. Good morning everyone and thank you for joining First Bancorp's conference call and webcast to discuss the Company's financial results for the third quarter 2015. Joining me today as always is Aurelio Aleman, 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 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 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 webcast presentation or press release issued by First BanCorp you can access it at our website, www.FirstBankPR.com.

At this time I would like to turn the call over to our CEO, Aurelio.

Thank you, John. Good morning, everyone. Thank you for joining us to discuss our third-quarter results. On the call with me today is Orlando Berges, our CFO, who will provide the details of the financial results. Please let's start with slide five of the presentation to discuss the highlights of the quarter.

As we can see and reported, it was a fairly clean and stable quarter with no special transactions this time. Our franchise performance continued to show progress in key metrics. Economic activity in our primary market was perceived within normal levels, slight decrease in auto sales and mortgage originations in Puerto Rico while we continued to see increased lending activity in both Florida and the Virgin Islands market.

We generated $14.8 million of net income for the quarter. It was negatively impacted by increased provisioning related to government exposure in Puerto Rico. On the positive side, we achieved slight increase in the loan portfolio organically and our expense reduction initiatives can be seen as we reduced our third-quarter noninterest expense to $93.3 million approximately.

We also drove improvement in our pre-provision pretax results. Pretax pre-provision earnings now are at $50.5 million for the quarter which continue to support our growing capital base. Tangible book value is now $7.50 per share.

NPA declined 4% in the quarter largely due to improved performance of the commercial book, NPA ratio is now at 4.8%. Despite this improvement, inflows to nonperformings reflected a slight increase both in the commercial and residential portfolios.

We obviously remain cautious of the Puerto Rico fiscal situation in (inaudible). Definitely we are very well prepared to manage through potential adverse scenarios if they come into play. As I said before, we continue to focus on improving our core metrics of the franchise while operating in this challenged environment.

Please let's move now to slide six. Loan portfolio as we can see for the first time in some cycles we grew the loan portfolio organically by 39% and actually all three markets contributed to this slight growth. Definitely the regional diversification of the franchise is an important element which continue to produce results in both the loan side and the deposit generation side.

Pipelines I have to say are stable and we continue to work to sustain loan portfolios in Puerto Rico and key growth in Florida and the Eastern Caribbean regions. With the current pipeline we feel confident actually we can sustain the loan portfolios above the levels that we are today.

Please let's move now to slide seven. Deposits net of brokered increased to $75 million; net of government on brokered increased $25 million during the quarter. Government deposit actually increased $248 million. Around half of this increase we view it as temporary because we continue to increase our relationships with the municipalities and other which entities which FirstBank supports in the long side and we continue to receive deposits from those.

Our excess liquidity continues to be very strong and our government deposit remains at 61 basis points for the quarter. Further reducing our reliance in broker CDs is one of the objectives this quarter by $65 million and year to date I want to highlight we have reduced brokered by over $600 million as of the third quarter.

Now let's move to slide eight to cover our Puerto Rico government exposure. Government outstanding remained basically flat during the quarter. We continue to feel comfort with our exposure to municipalities which is more than half of the overall exposures. These municipalities are very well-managed entities and have a strong surge of repayment assigned to our facilities.

The situation in Puerto Rico we all know continued to [flourish] the uncertainty and slow progress on the execution of the plan. Next important milestones with the market informing everyone both on the (inaudible) and the (inaudible), our PREPA (inaudible) bond payment in December and bond payments in January we are very closely monitoring those. Progress has been made on PREPA negotiations and I will say significant public information was released over the past few weeks. Banks continue to be patient and we just extended a full benefit once again. I have to say we are optimistic about the current path for the solution of PREPA.

On the indirect exposure side, we are closely monitoring our exposure to hotels supported by the tourist and development fund. It is important to highlight that revenues received by the government from those hotels continued to exceed by a large margin the support provided by TDF. We are definitely confident that the capital strength, the diversification of the franchise will support the execution of our plants so we continue with the focus on our metrics improving the franchise and definitely the pipeline that we see give us comfort for the quarter to come.

Now I'm going to hand the call over to Orlando to discuss the financial results in more detail. Thank you.

Good morning, everyone. Aurelio showed at the beginning of the third quarter, shows a net income of $14.8 million or $0.07 a share compared to a loss of $34.1 million or $0.16 per share for the second quarter. As we discussed during our last earnings call, second-quarter results included several significant and unusual items that do affect comparability specifically the $48.7 million loss we had on the bulk sale of a classified and nonperforming asset, the $12.9 million other than temporary impairment we took on the Puerto Rico government securities, and pretax cost of $2.6 million related to the conversion of a loan deposit account that were acquired from Doral.

If we look at pretax results excluding these items, pretax income for the third quarter was $19.2 million compared to an adjusted pretax income of $20.2 million for the second quarter. Also as Aurelio mentioned, pretax pre-provision earnings for the quarter were $50.5 million in comparison to our $47 million last quarter.

If we break down components start with provisioning, the provision for the quarter was $31.2 million compared to $74 million for the second quarter. Second quarter however included a $46.9 million charge-off associated with the bulk sale of nonperforming loans and assets. If we exclude this impact the provision for the quarter -- sorry -- increased by $3.9 million.

The main differences, last quarter we had $3.8 million in recoveries; $2.7 million of those were on the sale of several auto and personal loans that were fully charged off in prior periods and we also had some consumer loans reserve releases in the second quarter related to lower loss (inaudible) in the prior periods that are included on the allowance calculations.

Also as you remember in the second quarter we did have a $15.5 million charge which was related to the incorporation of the charge-offs from the bond sale in the calculation of the historical loss rates used to estimate the general reserves.

But the largest impact on provisioning in the quarter was that Aurelio mentioned, we moved one adverse classification, the $130 million in commercial mortgage loans we have extended to the hotel industry in Puerto Rico which are again made by TDF. That added an amount to the provision, a significant amount to the provision because of the size of the relationship. These loans continue to be current and continue to be in accrual status but we felt it was prudent based on the uncertainty in the market to move those relationships to an adversely classified, adverse classification back in the reserves.

Looking at net interest income for the quarter, net interest income amounted to almost $125 million, a decrease of $1.6 million when compared to the second quarter while NIM increased 1 basis point to 4.19%. $800,000 of the decrease related to reduced volumes of both consumer loans and investment securities.

On the investment portfolio side in (inaudible) we have not been able to reinvest large chunks of prepayments we have been receiving on the portfolio due to a low interest rate scenario and the expectation of possible rate increases in the foreseeable future. As we have mentioned before, we are concerned on interest rate risk and expansion. If interest rates stabilize, we could have some improvement in interest income once we are able to invest the excess cash we are holding now.

On the consumer lending side especially the auto loans, originations on the current credit policies are still not at levels to compensate for normal repayments and we could still see a bit of that for the remainder of the year.

On the commercial side, reductions reflect a couple of things. We had a $500,000 collection in the last quarter, income in the last quarter related to the commercial loans (inaudible) and also we did record $400,000 in interest income on PREPA. This was before we started applying all interest received to the principal balance back in May. At that time we moved the loan interest to principal rather than recognition on a cash basis.

Reductions on the interest income side were offset by a decrease in interest expense and it has been primarily driven by reductions on the average balance of brokered CDs. We continue to reduce brokered CDs and average balance went down by $158 million compared to the last quarter and also we had the full quarter impact of the reverse repurchase agreement we entered into in last quarter.

Cost of deposits remain at 60 basis points. However, we have seen some pressures on brokered deposit pricing as well as time-deposit pricing especially in the longer-terms both in Puerto Rico and in the Florida market. But we continue with our strategy focusing on the mix of the deposits and growing number of deposits and demand deposits and that could continue to improve our margins down the line.

On the noninterest income side, noninterest income for the third quarter was $18.8 million. That compares to $6.7 million in the second quarter. Again, those second-quarter results were affected by the $12.9 million other than temporary impairment charge on the Puerto Rico government securities and about $600,000 of losses that were loans held for sale that weren't good in the bulk sale. Excluding those, noninterest income is down $1.3 million and decreased mainly mortgage banking business is down $500,000. A large part of it has to do with realized and unrealized losses on the forward contracts that are taken to hedge the future mortgage loan sales. This obviously it is offset by higher margins on mortgage loans but as you know, the contracts are marked to market every month while the loans are held for sale at typically lower cost of market creating some timing difference in the recognition of their values.

Also we had a couple of other smaller items, a decrease of $300,000 in insurance commissions, commercial policies tend to have some variability and some $300,000 in income we had last quarter on the change of SunTrust preferred securities.

On the expense side, noninterest expenses for the quarter were $93.3 million, came down $9.5 million from the $102.8 million recorded in the second quarter. Again, second-quarter results included $2.6 million on nonrecurring acquisition and conversion costs related to the Doral accounts that were converted to our system in the second quarter and $1.2 million in expenses and losses related to the bulk sale.

If we exclude these items, noninterest expenses decreased by $5.8 million in the quarter.

Main drivers. First, last quarter had $1.6 million in excess interim servicing cost related again to the loan and deposit accounts from Doral over our internal processing costs. We converted these accounts in May as you remember, we had a couple of months of interim servicing costs.

We also had $1.3 million in consulting and legal fees incurred in the second quarter for special projects as well as strategic and stress testing, capital planning matter we didn't have this quarter. Legal fees are down this quarter by $1.1 million related to total loan resolution efforts that we have completed a number of cases over the quarter and there was a decrease in employee compensation as some employees have reached maximum payroll limits and incentive accruals have been adjusted based on current volumes.

Important to mention, you remember there was a change in legislation back in the middle of the year where sales tax were increased. This legislation included a new business to business tax that was effective on October 1. So a 4% tax just became effective. We expect an impact somewhere in the $800,000 to $1 million range depending on the level of professional services and obviously we continue to take measures to mitigate this impact as part of our expense management process that we continue to have.

Our goal as we have mentioned before is to keep those expenses at the $95 million range or below and we expect to continue to do that.

On the nonperforming, if you look at asset quality now, our nonperforming assets decreased $27 million to $617 million. Our nonperforming loans came down by $30 million or 6%. This decrease in nonperforming mainly related to one loan that was returned to accrual status based on the borrowers' sustained repayment performance and the credit evaluation on the facility.

We did have a slight increase in inflows however as you saw in the numbers. (inaudible) were $50.8 million as compared to $44.9 million. It was a bit divided the increase in the commercial side inflows for the quarter were $10.3 million compared to $6.4 million last quarter and on the residential side, inflows were $27 million compared to $25 million last quarter. No significant large items came in this quarter but there was some variability.

OREO did increase a bit by $2 million driven by additions in the quarter primarily residential. We completed $10 million in foreclosures in the quarter compared to slightly over $5 million last quarter. That is part of the increase.

One thing I would like to point out if you look at the number, it appears as if construction nonperforming went up by $40 million but in reality the corporation, we asked the corporation to change the intent on a $40 million construction loan to the Virgin Islands that was held for sale upon signing of a new loan agreement with a borrower. Therefore the $40 million loan was transferred back to held for investment from held for sale. So you can see the $40 million increase in construction on the $40 million reduction in held for sale.

Net charge-offs for the quarter were almost $24 million, 102% of loans which compares to the $79 million we had last quarter. Last quarter obviously was affected by the loan sale which added $61.4 million in charge-offs. Excluding this impact, charge-offs were $6 million higher this quarter. $2.9 million of the increase was related to a consumer portfolio, a large extent $2.7 million I mentioned before on loss recoveries we had on the sale of several loans that had been fully charged off in the prior periods. We had an increase of $1.8 million in commercial and construction again primarily related to a $1.1 million recovery we had in the Florida market last quarter and residential was increased by $1.6 million and it related to increased volume of foreclosures we did have in the quarter.

We haven't seen any increased patterns of charge-offs. It has been consistent with other quarters. The ratio of the allowance for loans held for investment was 2.46% compared to 2.40%. We did provide a provision that was higher than charge-offs for the quarter mainly related to the classification of the $130 million facility.

The allowance ratio to nonperforming was 48.4% compared to 47.8% which is similar to -- just slightly increased from last quarter.

Capital position, to mention it, it remains strong as you have seen on the ratios, the corporation's total capital ratio was 19.7% and the Tier 1 capital ratio at 16.6%. Tangible common equity ratio increased to 12.6% all related to earnings for the quarter and some improvement in [OCI].

Now I turn the call back to Aurelio and we will open to questions and answers.

Let's open the Q&A.

(Operator Instructions). Alex Twerdahl, Sandler O'Neill.

Good morning, guys. First, could you share with us the actual amount of the provision that was associated with the TDF loans during the quarter?

Alex, as a practice we have never disclosed specific reserves on loans. Obviously I can tell you that an adverse classification, a standard classification does carry a double-digit reserve number but we have not disclosed that in the past and we are not disclosing specific reserves on loans.

Okay. Did anything change with respect to the payments this quarter? Is it just purely due to what has happened at a macro level that makes you nervous about how much of those payments could potentially be made in the future?

Nothing changed on the payments. It is just obviously about the macro. Revenues on those properties meaning room tax. casino revenues that the government receives on the properties continues to be significantly higher to what they contributed so nothing has changed on payment behaviors.

Okay. Can you just talk a little bit more about -- maybe I missed in your prepared comments but the $40 million construction loan that was transferred back to held for investment, did you say that was refinanced to a new borrower during the quarter or what exactly changed that makes it something that you are now going to keep versus selling?

This case has been in the press for a long time. It is a Scrub Island case and what happened is you know that case went through a court process. We ended up signing a new agreement with court support with the borrower and we plan to hold the loan for now. They are expecting new investor monies to come in and we feel that with the strategy to supply the properties could improve in value so we decided to change the strategy on selling them versus holding them.

Okay. And then the $800,000 to $1 million per quarter that you mentioned for the business to business tax, is that per quarter or per year?

That is per quarter. It is important to clarify though that remember that the business to business tax is 4% coming in now in October and will be like that through March 31. According to the regulation, to the inflation it could go up to 10.5% in April 1. The secretary does have the discretion to postpone the time. We are hearing that there is a possibility that they could postpone at least through the end of June or the beginning of June but it could change so the number could go up if it stays the way it is.

Okay. With that in mind, can you talk about some of the opportunities you have in 2016 to increase that pretax pre-provision net revenue number both on the expense side and also on the revenue side?

When you look at the expense side in the Puerto Rico case in 2015, very significant what we would consider onetime events. So when you talk about legal, you talk about consulting, professional services, actually some of the lift up in branches when we acquired Doral, which actually increased expenses. We just realized some of the consolidation opportunities that you are actually are going to see reflected in the first quarter.

So the improvements in the different areas, those expenses, we are working on it and we feel fairly confident that we will mitigate that increase on the tax side and actually the target is to show a better number.

On the revenue side, I think I mentioned the pipeline, the pipeline actually looks good in Puerto Rico and it actually looks very good in Florida and the Virgin Islands. So the portfolio on the revenue side, there is some non-interest income opportunities when talk about account fees and charges which we are closely monitoring and certain new services that we could probably mention later on when we are ready.

But we feel good about the above $200 million pre-provision pretax, Alex.

And then just final question can you remind us when we can possibly see some reassessment of that remaining DTA evaluation allowance?

We have to go through the analysis every year as you know. We will undertake that process this quarter. That doesn't mean that we will see some changes on the information because obviously some of it was based on the strategies we had analyzed on revenue streams and how things change over time.

We feel comfortable that we -- the analysis we had done to recognize the [DTA] last year included situations on the market and included sensitivities on charge-offs that would reflect adequately what we have seen in 2015.

To be able to say that the recognition of the remaining amount, I would have to say that it is something that it is a 2015 event.

Great. Thanks for taking my questions.

(Operator Instructions). Brian Klock, Keefe, Bruyette & Woods.

Good morning, gentlemen. I wanted to follow up a little bit on the TDF loans that you guys put into classified. Just remind us, these guarantees are I guess I would view it as a third source of payment right because you've got the cash flows from the hotels, then you've got the collateral. And then we have to go through that before the guarantees come into play. So I guess maybe talk about that process and again these are current so I just want to make sure I understand the process and how these things are accruing currently?

Okay, the way the guarantee works is that it is two things but it is obviously the primary responsibility is from the borrower which is the hotel and TDF comes in as a secondary responsibility to cover payment and performance on the loan. You remember at the filing of the 10-Q, we had indicated that we have received $4.8 million of payments from TDF through 2015 through June 30 on payment and performance in this facility. So that tells you that the hotel facility is not fully compliant covering the debt payments. That is why the TDF guarantee is an important component on supporting the full payment. They have continued to make payments normally and the loans are current. We haven't had any issues on timing of payments. But in reality, TDF continues to be part of the government, part of GDB and we feel there is enough uncertainty on GDB to warrant the classification.

Aurelio did mention Brian that if you look at revenue collections on the hotels that the government gets with the amount of payments they are covering, it is significantly higher the revenue collections so we feel it is in the best interest of the government to continue to support the hotels but we cannot ignore the uncertainty surrounding GDB.

Okay, I guess I think about it so there is a risk that the TDF guarantee, those cash flows that you are getting so far may not -- whatever happens with the GDP, those cash flows could be at risk but the underlying mortgage payments, principle and interest, you still have collateral and you still have cash flow that is coming up from those hotels as the first and primary source, right?

That is correct.

Just wanted to make sure. I think you did answer a lot of the other questions. Go ahead.

Yes, that is why we call it indirect exposure.

Exactly. When I think about the direct exposure, some pretty good trends in the underlying asset quality, some of your higher severity commercial, you continue to work down the NPAs there so I like that. And net interest margin was pretty stable so some good loan growth we saw as you talked about the first time we have seen some positive loan growth organically in a while. So maybe talk about what you are seeing from the stability in the margin and the good loan growth organically?

Well it is really -- we call it a 3 by 3, it really consumer, commercial and mortgage in the three regions, Puerto Rico, Florida and the Virgin Islands. If you look at the graph that is on one of the pages when we talk about the loan portfolio and you look at the trend for the last few years, we actually if you exclude the loan sales and all the related noise, it has been fairly stable. I mean (inaudible) the $800 million and at the level that we had over the last two quarters, the portfolio will continue to grow.

So it is really a threefold strategy commercial, consumer and mortgage, understanding the sensitivities of Puerto Rico, keeping the credit policies very tight in these primary markets. You are going to see as Orlando mentioned still some attrition of the consumer book because we continue to keep tighter policies. There is a lot of obligations on paper; obviously approval ratios remain cautious.

On the other hand, the Virgin Islands have shown we have reduced our portfolio significantly. It was above $1 billion five years ago, it is below $700 million. So we see some opportunities on that market. And Florida, as I mentioned before, the teams continue to improve the pipeline. We have expanded the staffing in the Florida team in all the commercial, corporate and mortgage areas. So it is a combination with really the power of the franchise as a loan originator of three main core businesses and three regions.

And one thing Brian, the loan growth that we saw in the quarter on the commercial side was basically happened at the end of the quarter so we didn't see the full impact of those loan growth revenues in the quarter.

Yes. The closings on the commercial side took place in the last months of the quarter.

That is a good point. Thanks for highlighting that and good work in a tough quarter and thanks for your time.

(Operator Instructions). Taylor Brodarick, Guggenheim Securities.

I think just one left for me. What could you tell us about -- I know you can't give too many details by conversations with regulators. But looking at the payments at the end of the year that the government entities have due, what do you think is the most important inflection point to think about possibly getting the Fed kind of shifting more toward allowing for more capital deployment?

I think it is two different questions to the honest. For Puerto Rico, there is three very important milestones here now. I think PREPA is a milestone. Why? Because it is kind of the first domino here. A resolution with PREPA will give market some confidence and will be a positive step toward outside of the court system or the legal system achieving a good transaction toward the future of a very important (inaudible).

And then secondly, liquidity is really the most important event. There is still a lot of noise regarding what GBD is doing in the short term versus the long-term. But in the short term, it is really the December payment and the January payment. I think it is really the ripple effect of those into economy which will give more confidence to everyone and the regulatory bodies. It is how the macro is going to unveil, it is what we are all trying to define here. As we said, we do have a lot of capital. We are well aware of the math on how actively we will be buying shares will be at this stage. But we have to be at this stage, we cannot anticipate when the environment will allow us to move forward on any capital actions.

Thank you, Aurelio. Appreciate it.

Ladies and gentlemen, at this time I'm showing no additional questions. I would like to turn the conference call back over to Mr. Pelling for any closing remarks.

We thank you for your continued interest in First BanCorp. We have a busy November and December attending the Sandler conference in Palm Beach November 7; the Bank of America conference in New York November 17; and the KBW investor field trip in December. We look forward to seeing you then. Thank you. This will conclude the call.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.