First BanCorp (FBP) 2016 Q2 法說會逐字稿

Good morning and welcome to the First BanCorp. second-quarter earnings conference call. (Operator Instructions). 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, Nicole. Good morning, everyone, and thank you for joining First BanCorp.'s conference call and webcast to discuss our second-quarter results. Joining me today are 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 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 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 the press release issued by First BanCorp., you can access it at our website. That is firstbankpr.com.

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

Thank you, John. Good morning, everyone, and thank you for joining on to discuss our second-quarter results. On the call with me today is our CFO, Orlando Berges, who will provide the details on our financials. I will walk through some highlights first. So let's turn to slide 5, so we go to the highlights.

As we can see on this page, it was a fairly clean and straightforward quarter, but before going into the numbers, I would like to comment on the macro, as in the most important event of the quarter was the passing of PROMESA. We view the passing of PROMESA by the U.S. Congress as a positive step towards reducing the levels of uncertainty in our main market.

Definitely, the expected impact on economic growth long term should have a positive impact on credit quality and growth in the future.

Our direct exposure to the targeted debt that we are being [buried] is basically relatively low when we look at the overall exposure that we have to bonds in Puerto Rico.

Going to the numbers, we generated net income of $22 million, $0.10 per share, very close to consensus, and it compares to $23 million in the first quarter. Pretax, pre-provision above the $50 million, $50.5 million, impacted by net interest income. Again, tangible book value increased $0.17 to $7.83.

The franchise continued to perform strong in spite of the macro challenges. Loan origination and renewal volume improved across all categories and actually across all regions, and the reported franchise continued to grow stronger. We're going to go in detail into the loans.

On the asset quality side, we saw a slight increase in NPA. I think it is important to highlight that we did not perform any large OREO sales during the quarter, no one completed. I have to say that we do expect increased sales activity for that commercial inventory that we have in OREO during the second half of 2016.

Net charge-offs were stable, resi increased slightly, but consumer and auto continued to decrease, and very pleased to say that our delinquencies are now at the lowest level in many, many years, obviously driven by our conservative credit underwriting policies over the last couple of years.

Now let's move to the next slide to cover some detail on the loan portfolio. Obviously, as we've said, given the uncertainty in the main market over the last quarter, we have made a conscious decision to maintain tighter credit standards. I have to say that the business is there. We have chosen to be selective, especially on the consumer side.

The [origination] volumes are healthy, but on the other hand we have larger prepayments. We have prepayment in the second quarter for $51 million, and year-to-date those prepayments are $245 million.

On the other hand, when we look at the origination in the second quarter, I think two positive, Puerto Rico increase, Florida increase, and the VI increase, but on the other hand when we look at the pipeline, it actually looks stronger.

The loan portfolio numbers went for the first time below $9 billion and also contributed to this, some reclassification of loans, of [municipal] loans that Orlando will cover later.

Moving to the next slide, very highlights on deposit, very stable, very stable core deposit in the quarter. Puerto Rico continues to grow, Florida and the VI primarily by cost optimization strategies. We see a slight increase.

Our goal of continuing with reliance on brokered CDs, we continue to achieve significant progress. We reduced this quarter by $197 million. And it is now reduced to 20% of the deposit book for the first time.

In the next slide, we like to cover the Puerto Rico government exposure. The exposure went down 40 million -- $4 million, I'm sorry, this quarter. PREPA is structured, I am not going to cover, continue its path, and I think big progress has been reported to the markets constantly. Very, very important event achieved basically in the quarter. On the municipality side, we continue to feel very comfortable with that exposures. Actually, 59% of our direct government exposure is to municipalities. This has definitely been to be a lower risk due to the support from the [assigned TDF] revenues.

While we experienced laggard growth in Puerto Rico by choosing to be cautious on the underwriting, again the second-half pipeline looks stronger. We continue -- as we saw on the expense side, we continue to implement efficiencies, and Florida and Caribbean region franchise continue to provide opportunities to improve the balance sheet, mix, and the loan portfolio. And again, we really focus on driving the bottom line here.

Before closing, again I want to reiterate the passing of PROMESA as a positive step toward lifting the veil of uncertainty that has clouded our primary market, and we are optimistic that we see a better economic environment in the months and years to come.

Now I'm going to hand the call over to Orlando to discuss the details of the financials.

Good morning, everyone. Aurelio mentioned we posted a net income of $22 million, or $0.10 a share, which compares with $23.3 million last quarter, or $0.11 a share. Total assets at the end of the quarter were $12.5 billion, slightly down from $12.7 billion at the end of March.

We highlight results. Basically, it is a $4.4 million decline in net interest income, which was mostly offset by a $3.5 million decrease in operating expenses. Non-interest income was up $1.3 million. Remember last quarter, we had two initial or infrequent components. Number one, we had a gain of $4.2 million on the sale of -- on the repurchase and cancellation of $10 million in trust preferred, and we also had a negative impact of $6.7 million on other-than-temporary impairment adjustments on Puerto Rico government securities. We didn't have any this quarter.

The provision was basically flat on the quarter, a net effect of $5 million increase in mortgage. The mortgage side, there was a revision of the HBI by the Fair Housing Finance Agency. That is used for purpose of our future projections of expected losses on the portfolio, that affected provision, and we also had a $1.7 million increase in the amounts allocated for possible offers on purchase impaired loans, which was basically one portfolio of the ones we acquired early in 2014 from Doral Bank to cancel some of the commercial relationships we had with them at the time.

On the other hand, provisions on the commercial side was down about $4 million, offsetting that increase, so the net effect was basically flat.

On the net interest income, which had a large impact of $4 million, it was -- total net interest income was $120.2 million and margin went down to [4.1]%, so basically 17 basis points.

There are a number of components in there. First of all, the lower portfolio affected net interest income by $1.7 million. It is about 6 basis points on the margin. The big impact in there was the $40 million reduction we had in consumer portfolio, which, as you know, are higher yield, and the effect of the prepayments Aurelio mentioned that we had over the last -- over the two quarters, which also had some impact on the numbers. The loans that were moved in the first quarter to nonaccrual status and the one that was moved in the second quarter affected margin by about 3 basis points.

We also had a large volume of prepayment on the investment portfolio side. As you know, the 10-year note was pretty low in the quarter. It went down as much as 1.34%. That affected prepayments and the impact was about $1 million, the net impact, or 3 basis points in the margin.

Our expectation is with some stability on the rates, if prepayments will go back to normal levels, clearly we will have some pick-up on the second quarter because of not needing as much amortization on premiums.

The quarter, we also had a $200 million reverse repurchase agreement we had outstanding. It was sold prior to maturity at the end of April, basically. We did not put it back in place until the end of May because of, again, the interest rate environment. And it was replaced at lower rates than the original one, and that affected margin slightly over 1 basis point for the quarter.

In addition, the higher level of average cash outstanding, cash and money market related to some of its components, also affected margins. We are trying to compensate a bit on all that and we have been doing that already by reducing the level of brokered CDs that Aurelio mentioned a bit on the funding side.

Overall, we didn't have a change. The average cost of interest-bearing deposits stayed at 76 basis points. Brokered CDs did go down. The average balance was $99 million lower. Overall, we had $280 million of brokered CDs maturing in the quarter at 97 basis points and we only replaced $82 million of those at [1.01], so that had a net impact of 2 basis points within cost, but a much lower volume.

All in all, the interest cost of all interest-bearing liabilities went up 2 basis points, partially related to the brokered CDs and to the repos. One of the things over the second half of the year, we have about $400 million of higher-cost repos that mature within the six months and should help us reduce the funding cost in the second half of the year.

Again, the strategy hasn't changed. We continue to pursue our growth in our non-brokered deposits and core deposits in our markets and improve the funded mix. At the end, it is what is going to affect the funding cost.

Non-interest income for the quarter again was $19.8 million. That compares to $18.4 million. We last quarter had the OTTI charge on the $4.2 million gain. If we exclude those items, first-quarter non-interest income was $20.9 million, compared to $19.8 million now. There, $1.2 million decreases basically related to annual contingent commissions we receive from the insurance business. That is basically based on prior-year results paid on the first quarter of the year, and that was somewhat offset by a $600,000 gain we had on the disposition of (inaudible) in our VI, Virgin Islands, operations.

The expenses, we have continued to do a lot of work on reducing the base, on identifying opportunities where we can further reduce our expenses. The obvious outliers are always credit related and the OREO expenses, given the size of the NPA book and the OREO book. But all have continued to reduce. As you saw, non-interest expenses came down by $3.5 million in the second quarter. We had reductions of $1.2 million in occupancy. That included reductions in repair costs, electricity, rental expenses, depreciation of things which depreciation lies. And we have continued to renegotiate agreements and pursue ways to reduce those expenses.

Compensation and benefits came down by $1 million, reflecting decreases mostly in payroll taxes and bonus accruals. As you all know, some of the payroll taxes are based on -- up to some limits as employees reach the salary limits. There is a decline in unemployment, Social Security, [performance] bonus, and some of those. That was partially offset by the merit increases we did in April of this year, which affected the numbers by about 600. 100 of those was one time around some payments; the other are recurring expenses.

Finally, the other large component is that we had a $1.6 million reduction in other expenses, which is due in large part to a limited amount of additional provision needed for unfunded commitments.

Our goal, as we have mentioned to you, is to keep expenses under 90, excluding OREO, and we're pursuing to do more to compensate for any reductions we see on the other parts of the business.

On the nonperforming side, we had an increase of $19 million. Total nonperforming were $756 million for the quarter. That included -- the nonperforming held for sale included one facility of $35 million, which resulted -- it was basically two components, $14 million in C&I and $21 million in commercial mortgage, but again one relationship, but most of them nonperforming.

This was a classified asset, but it was up to date as of March, but the Company filed for bankruptcy in the second quarter, so it was a move to nonperforming. That impact was partially offset by a $8.5 million decrease in nonperforming residential mortgage loans.

Inflows for the quarter were $78 million, which included that $35 million relationship I just mentioned. It is a decrease of $99 million from prior quarter. However, remember that first quarter included this $128.6 million exposure to the commercial loans guaranteed by TDF. If we exclude those components, total inflows were up $29 million.

We did see a reduction of $5 million in inflows of residential mortgage. It went down to $20 million. It has been -- which is a low level compared to prior quarters. OREO decreased by $3.7 million, basically net effect of adjustments of sales and transfers. But as Aurelio mentioned, we did not complete any large OREO sales in the quarter. We do expect to complete a couple in the second half of the year.

Also, Aurelio did mention that early delinquency, 30 to 89 days delinquency, was down 13% in the quarter, compared to last quarter, which by itself was down about 9% compared to the December quarter, so we have seen some reductions on those early delinquency trends.

Net charge-offs have remained fairly stable over the last four quarters. Net charge-off for the second quarter was $24.7 million, annualized 1.11% of loans compared to $23.6 million last quarter, 1.05%. Basically, the increase was in the residential mortgage loans resulting from updated appraisals on those loans that are evaluated for impairment.

On the other hand, we had decreases of $1.6 million in charge-off on the consumer portfolio, but continue to come down, and a $1.1 million decrease in the commercial portfolio net charge-off.

The allowance on nonperformings remains relatively flat at [264] compared to [65] as of March. And the ratio of allowance to nonperforming went down a bit to 39.2% as compared to 41%, basically reflecting the impact of that migration of the $35 million loan to nonperforming.

As of March, the reserve ratio to cover exposures on the government side was about the same, about 19.5%, basically close to the 20%. It is a function of those revolving lines that go up or down a bit each quarter.

Capital remains strong, continue to grow. Capital -- the corporation's tangible common equity ratio was 13.65% at the end of the quarter. The Tier 1, 17.12%, and the total, it is 20.72%.

We should be filing [BCOF] at the end of this month, as required, and the results will be published as required the second half of the month of October, so you should be able to see results once they have been filed and reviewed with the regulatory world. Now I would like to open the call for questions.

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

A couple of questions for me. First off, you cited the early-stage delinquencies as being down 13%. Can you give us the actual dollar amount for the early-stage delinquencies?

The number is about -- the dollar -- the total dollar amount, you mean, or the amount they went down?

The total dollar amount that they were at the end of June.

Yes, it is going to be shown on the Q, but it is about $212 million, the number that we had as of the end of June.

Okay, and that's (multiple speakers)

It was about $245 million or so at the end of March.

30 to 89.

30 to 89, yes. 30 to 89 days past due on all portfolios, the combination of all portfolios.

Okay, great. And then, secondly, just as I look out at NII, which declined a little bit and had to replace some of that income, and I guess loan growth would be the most ideal way to do it did and the only real loan growth you have had has been in Florida. Are the pipelines in Florida -- are they sufficient or do you think loan growth in Florida could get close to covering continued runoff in Puerto Rico?

Yes, I think, Alex, if you really -- if you held back the prepayments on repayments we had that were unexpected for the first half, if you add back the $145 million, what you see is that we actually -- when you go back to the beginning of the year, we -- the origination levels that we have for the first half were actually going to replace the overall portfolio, between Florida and Puerto Rico.

Last quarter, Florida was the only component that grew I think like $11 million or so, and the other two components reduced. To be honest, as I mentioned, the pipeline for Puerto Rico and the VI looks stronger in the second half, and for Florida, it has been strong through the year and it looks a similar level for the second half.

So, I will say our ability to sustain the loan above the levels they are today also has to do with the repayments. But we feel good about the origination volumes for the second half. Obviously, what we cannot anticipate or is very difficult is really some of the prepayments.

Okay, and --

No, I was just going to add -- Alex, this is John. Obviously, we expected some reductions in the quarter because of the reductions we had seen on the commercial side of repayments in the first quarter and the fact that we have seen some reductions on the consumer portfolio.

The consumer portfolio reduction was probably a bit higher than we expected in the quarter, and obviously I was not expecting the note was paid down that much. That affected the investment portfolio and the reinvestment capacity, as well as that reverse repo, so there was some component. We are trying to compensate.

The other component that I mentioned, obviously we're going to get some benefits in the second half by the maturity of those reverse -- I mean, those repos that -- the $400 million that mature. It is about $100 million in the third quarter and $300 million in the fourth quarter.

Okay, and then when you cite the pipeline being stronger in Puerto Rico for the second half, is any of that, do you think, related to in anyway just what is happening on a macro level with PROMESA and with some of the things that have passed towards the end of the second quarter, or is it just too early to see any real impact from that?

I think in general people are -- there is less uncertainty surrounding it, so some of the investors that are [the silent], we will see them -- we are already seeing them coming back to look at the same deals that they will consider anymore or it's early investment in their business.

So when you look at the environment on the volumes, on the business activity, it has been, we have to say, stable, but obviously the reduced uncertainty should bring some of these potential investors back to the table.

Okay. And then, I just have one final question here, and that's just over the last six months we have seen two, quote, unquote, capital actions, I think, with the repurchase of the trust preferreds in the first quarter and then becoming current on the whole trust preferred portfolio in the second quarter. Can you just talk a little bit about how the process has worked with those actions and the interactions that you have had with your regulators, specifically surrounding the written agreement that is still outstanding with the Fed?

Alex, unfortunately, conversations with the regulators are strictly confidential, and obviously as we see -- on the other hand, as we see -- we'd like to build a capital path here and those steps are -- always lead towards getting to be able to achieve return to our shareholders at the end of the day.

So as we can continue to make progress in line with the limitation of the Fed agreement and work together with the regulators on it, we should see some progress. That's what we're trying to -- where we are aiming.

Okay, that's all my questions for now. Thank you.

Brett Rabatin, Piper Jaffray.

I missed a little bit of the conversation on the one large credit on the commercial side. Can you go back and just give me a little color on that situation? And then, obviously I think everybody is hoping that PROMESA helps the overall environment in Puerto Rico. I guess I am just looking for any color as well around how you feel about the potential for charge-offs to decline, given what you have done in terms of actions the past few quarters and the early stage and current NPA levels?

Well, there is multiple pieces here. Let me try to get all of them. Your question has multiple components. First of all, as Orlando covered, it was a large relationship that was already adversely classified and filed bankruptcy during the quarter, so it went to -- into nonperforming.

That obviously -- it is reflected in whatever adjustment -- whatever adjustment needed in terms of operation was covered during the prior quarters. That is, it was moving from classifications in obviously the current quarter by going to nonperforming.

Remember, always remember we still have some large credits in our portfolio and so we still have classified books that we report in our Q that we continue to manage proactively. On the other hand, that book is actually -- the migration of that book is showing, as well as the delinquency, the classified book is also showing some improvement.

So, it has been -- it is a mature book. Primarily, it has been worked out for a long time, and obviously we feel and obviously the net (inaudible) that we use, we feel it's properly -- properly we serve our mark.

The NPAs, as shown there, the commercial NPAs, which is a large portion, it is around $0.61 on the dollar, and the OREOs are actually lower, so the OREOs is really where the focus that we said -- as I said that we would like to move similarly (inaudible) on the balance sheet in the short term. And those OREOs are a significant portion of our commercial OREOs.

In terms of the PROMESA, it was -- many people were very concerned about the macro and the potential implications, and the potential scenarios, short scenarios, that Puerto Rico could experience. We believe obviously PROMESA reduces, it doesn't eliminate, but reduces the potential shock scenario that we -- it could have had in Puerto Rico.

On the other hand, we have seen the markets already reacting on the downside and bank stocks are basically moving the bonds in this environment. So, at the end of the day, we see this as a more orderly process, a better framework, that make people feel more comfortable of how we're going to bring to the solution. We still have to work on picking up the economy, which is the most important part, but obviously we have the attention of Congress, we have the attention of everyone in the island, and in government and private industry in trying to achieve that. So it is just a more positive framework with better control and discipline to move the island forward.

And I think, just to clarify, that facility was adversely classified as of March, so if you look at the balance of adversely classified for March through June on the commercial side, it is down about $2.5 million, so we didn't have anything large coming into that [basically classified].

And it was not affected by this because it was already classified. We did see reductions, as you saw in the numbers, on the nonperforming, on the consumer, and the residential side, which are also part of the overall adversely classified portfolio.

Okay. And then, I guess the other thing I was curious to hear more about is the expansion in Florida and maybe if you could just talk some more about what your plans from here might be to further propel that franchise.

We continue to be primarily a wholesale play. We have rebuilt our branches in better places, in better facilities. Now we have locations in all the -- Miami-Dade, Broward County -- areas that we would like to be. The teams are in place and we continue to hire quality officers to continue to improve our participation in the market in the different segments.

Now we have a complete sales group on the resi, on the commercial, and on the corporate banking side, and what you see is really the work of a lot of internal marketing, getting interrelated into the business community, and looking for deals to participate, in, trying to build a core or working to build what we consider core business within the Miami-Dade, Broward County area.

Part of the deposit franchise is changing, as we have been reporting, obviously growing DDAs, growing fees, and growing cash management services, and obviously trying not to compete on the high end of the purchase (inaudible) or not grow that segment of the deposit book.

Okay, thanks for all the color.

Joe Gladue, Merion Capital Group.

Just wondering, I guess the TDF loans let that were put on nonaccrual last quarter, just wondering if you could give us an update on the underlying loans. Do they get seasoned? Do we see any favorable trends on the cash flows on those loans underlying that or is it a bad season to tell that?

As you know, it is made up of three loans to hotels. Up to now, two of those loans have remained current. Their operations are generating the cash flows to cover payments. The other one is not, and obviously that is the one that was needing more support from TDF.

So it is early to tell because we need to see now the loan season coming in, what is going to happen with those cash flows of the other two hotels that were covering the payments. But until we get to a final resolution of how the government is going to deal with it at this time, the (inaudible) put a hold on the funds that TDF has that are held by [GDD].

Therefore, they are not being released to cover any payments, so for now we don't see the loans moving out of nonperforming until the whole thing with the government is settled and a clarification comes out of what is going to happen with GDD bonds, then we will have a better picture. In the meantime, we hope that those two facilities continue, with interest being applied to principal and the balance has been reduced over the second quarter, and hopefully we will continue to see that in the next quarter.

All right, I think my other question has been answered. Thank you.

Brian Klock, Keefe, Bruyette, & Woods.

So, just a couple of things. I think you guys have already touched on a lot of the details from the quarter. With all the challenges that have happened, I think when you look at pretax, pre-provision earnings, you guys continue to grow that and then even up pretty significantly year over year. So even with the challenges, with the spread and this interest rate environment, you guys are still growing pretax, pre-provision.

I guess with everything you talked about with some of the moving parts that are going in and out of NII and you have got some expense levers, I think -- do you think the second half of this year we can still see that growth in the pretax, pre-provision earnings number?

I think we mentioned before that we aim to keep it above $50 million, and as you say, it hasn't been easy. It is a lot of moving parts, not only the local market, but the interest-rate environment, as you well said. We still have the goal that how we continue to work to keep it above that $50 million level. It has been pretty consistent on that over the last four quarters, so it hasn't been easy.

Yes, I hear you. I hear you. And I guess just a follow-up on the asset quality side. I know you mentioned the ORE balances. I know you talked about some of the -- what the carrying amounts are related to the other NPLs, the commercial NPLs. Can you remind us, I guess, what you are carrying the ORE properties at? And is there an opportunity, maybe, do you think, with a little bit of maybe better feeling about post PROMESA that maybe you might get some more bids and maybe there is a way to maybe clear out some of that OREO?

I did mention on the call that we feel we're going to have a better second half. We are moving those OREO rates on the level of activity that we see on those commercial properties, yes.

Yes, in general, I do not have the final, final number for the quarter, but we had the ORE on the commercial side was about $0.40 on the dollar. That was the carrying amount.

On the residential side, basically we have been -- what we have mentioned is that we've been losing all in about $0.43 on the dollar on ultimate disposition of those loans that go through nonperforming and get to foreclosure. So that's on the average what we carry them on the OREO portfolio.

Great, thanks. That's helpful. Thanks for your time.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to John Pelling for any closing remarks.

Thank you, Nicole. We will be on the road next week. We are attending the KBW conference in New York August 2 and 3, and then we are going out on the road with Joe Gladue at Merion Capital in Philadelphia on August 4. So, we look forward to seeing some of you then.

Thank you for your time and appreciate your interest in First BanCorp. This will conclude the call.

Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.