First BanCorp (FBP) 2018 Q2 法說會逐字稿

Good morning, and welcome to the First BanCorp's 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, Investor Relations Officer. Please go ahead.

Thank you, Debbie. 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 2018. Joining today from FBP are Aurelio Aleman, Chief Executive Officer and President; 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 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 issued by First BanCorp, you can access them at our website firstbankpr.com.

At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio?

Thank you, John. Good morning, everyone, and thank you for joining us today. Please let’s begin with a highlight for the quarter by moving to Slide 5 of the deck. We’re very pleased with the core results of the quarter. They were really good for our market. Our core business and operating metrics continued to move in the right direction from a profitability standpoint. It was really a good quarter. Net income at $31 million, up 14% per share (sic) [$0.14] per share and preprovision tax -- preprovisional income reach a new level for the second consecutive quarter at $61.4 million.

Definitely the recovery in Puerto Rico continues at a steady pace and our franchise continue to benefit and deliver solid core results. Net income margin improved, driven by higher loan yields and a more favorable funding mix. Credit quality continues to move in the right direction as delinquency trends on EPN levels show improvement, slight improvement during the quarter. Core deposit growth was definitely strong again this quarter. The most significant role was non-interest income, non-interest bearing demand deposit, which increased 15% or $297 million.

We continue tracking the various economic activity indicators, unemployment numbers, which are definitely showing improving trends. There is definitely positive evidence of economic recovery, demonstrated this time by several indicators such as unemployment, cement sales, retail sales, auto sales, imports/exports, and more importantly the overall strengthening of the consumer confidence, demonstrated by incremental loan demand on the consumer segment.

On the asset quality front, NPAs declined slightly, $16 million and NPLs are down [$2 million]. We continue to see increasing investor interest in asset we have for sale, which actually contributed to some of the reductions during the quarter. And as I was mentioning improving asset quality metrics remains a top priority at the bank. We grew our capital base and our tangible to value per common share grew to $8.40 this quarter.

Let’s talk about the portfolio in Slide 6. Long range on volumes show decent growth versus prior quarter by increasing $126 million approximately. It is approaching pre-hurricane levels in some of the areas. Definite economic activity is contributing to stronger pipeline for the remainder of 2018. If we look at the graph on the right side of the slide, it shows considerable increase in all the main categories, in residential, commercial and consumers over the last 2 quarters. Consumer originations were already above pre-hurricane levels, mainly driven by auto lending, which increased around 40% versus prior quarter. Florida operation is also contributing to the increasing origination activity, which for Florida was up 22% this quarter. (inaudible) for the second half of the year is building stronger, I have to say and should reflect improvement during the second half of 2018.

On the other hand, the overall portfolio decreased this quarter. There was a lot of activity and Orlando will go in detail. Lead to pay-off, note sales, and repayments as everybody thought where we’re also actively selling NPA notes or NPL notes. While, this resulted in reductions in commercial, the consumer portfolio showed positive growth during the quarter. It is important to know that even though we increased by $20 million residential originations, the portfolio went down. Obviously, this is driven by our continuous focus on originating conforming mortgages, which we sell in a secondary market. So ultimately have to say that we think economic trends that we are more predicting of a long growth opportunity for the remainder of 2018.

On the deposit front, it was a really great quarter. The highlight, it really the $287 million growth of the non-interest bearing deposits, which definitely contributed to our main improvement. Most of the growth actually in our sector is from retail and commercial deposit this quarter. It was around 75% of the growth came from those. A portion came from the government and if we had to attribute to some of the cash flow generated by insurance company we estimate around 20% is coming from insurance sources.

Moving to Slide 8, to quickly touch on the capital ratios, as we see capital levels continue to build up. We ended the quarter with 14.8% tangible common equity, Tier 1 of 22% sic [20.2%] and total capital 23.5%. That's really, definitely very strong. We did continue to make payments in TruPS and dividends on our preferred security piece. And importantly while we no longer have the filing requirements for Dodd-Frank on DFAST, we will -- we're planning to complete the process in the coming weeks and use our results for ongoing capital planning purpose. And we're planning to also share those results in the upcoming investor presentations.

At this point, we don't really have news from the capital deployment. It remains a priority. We're definitely pleased to see regulatory posture on capital from our competitors. For now, we look to deploy that capital in looking for opportunity for growth and focus on this whether they be organic or non-organic.

So with that, I will just turn the call to Orlando to cover the highlights in more detail.

Good morning, everyone. The earnings release we put out provides you fairly good color on results on the quarter. It was straight forward in many sense. But I'll touch up on some of the key items that Aurelio mentioned. We posted a net income of $31 million, $0.14 a share compared to a $33 million or $0.15 a share we had last quarter. We look at results. There is improvement in net interest income. We have higher levels of mortgage banking revenues. We had higher merchant and credit card piece for the quarter and we also had some increases in OREO expenses.

The provision for the quarter was $19.5 million, which includes a net release of about $2.1 million in hurricane-related reserves for the commercial portfolios, based on the revised assessment of the portfolios, which compares with our $20 million of provision and some $6 million released last quarter. As of June, the hurricane-related qualitative allowance we have left, it's $42.2 million to cover future losses.

Taxes for the quarter were higher. Basically, last quarter we had a $1.8 million excess tax benefit on some shares that were grounded in prior periods and vested last quarter. And also last quarter we had sort of one-time gains on the sale of the crops and some seasonal contingent commissions, which happened on entities have had some other loss components that upset some of these revenues.

Revised calculations of effective tax rate, it's about 25% excluding those entities with pretax losses, which slightly lower than what we discussed last quarter. Basically change of mix of income and some of the interrelation of the partial DTA with the amount of charge-offs and provision that we see for the next few quarters. Just to point out, we still have about $145 million of net valuation on the deferred tax asset on our banking operation, which is one that has been subject to change.

Net interest income for the quarter was strong. We had $130 million, which is $5.8 million higher than last quarter. The increase reflects improvement of $3.3 million on the commercial portfolios, primarily repricing variable rate loans and we did collect about $1.2 million of non-performing interest on a non-performing loan in the quarter. As Aurelio pointed out, the one thing that we did see some large repayments of loans and some loans paid off in the quarter. We had $63 million in loans paid off, commercial loans I refer to and $32 million in large repayments, which obviously we used the average balance outstanding and affect the numbers. And we did sell our $10 million of mortgage loans in the Florida market. It's part of the overall strategy of positioning our residential mortgage portfolio.

The quarter, in terms of interest income, also we had a pickup of $1.8 million on basically investment securities, higher level of portfolios and cash balances, interest-bearing cash balances with the improvement on the interest -- on the federal funds target rate and increase in balances. Those amounts came up by the $1.8 million.

The consumer portfolio interest income increase about $1.6 million. It's lower impact from non-performing, the effect of one extra day and we had some increases in some of the portfolios as Aurelio mentioned. These increases were sort of offset partially with about $500,000 impact on the residential mortgage side because of the smaller portfolio size.

Margin increased 9 basis points 4.49%, which includes the impact of the repricing of the variable rate commercial loans. The interest collected on the non-performing commercial that I mentioned, that improved the margin by about 4 basis points and clearly it improved funding mix with a large increase in the non-interest bearing deposits.

Non-interest income for the quarter was basically in line with last quarter. We exclude the $2.3 million gain we had last quarter from the repurchase of $24 million in cross preferreds. But the mix changed a bit in terms of we had higher level of mortgage originations and obviously sales that increased mortgage bank and income. We had higher merchant transactions, higher credit and debit card fees than [quit] -- both show increases and we're seeing levels similar to those pre-hurricane. And we had higher service charges on deposits with increased volume of our transaction accounts. That offset the fact that we had the $1.6 million, $1.7 million of contingent insurance commission last quarter that happens once a year.

On the expense side, expenses amounted to $90.2 million for the quarter. That's an increase of $4.2 million from last quarter. And included in the expenses in the first quarter, there were $1.6 million of hurricane-related and the second quarter we had $700,000. We exclude these items, expenses for the quarter were $89.6 million and that compares with $84.4 million. The increase was basically all associated with REO properties. We had $5.4 million on fair value adjustments on several commercial OREO properties, mostly concentrated on 4 properties. Excluding OREO, expenses were very much in line quarter to quarter at approximately $84 million, which has been consistent with our guidance and targets.

On the asset quality side, nonperformance are down almost $16 million to $621 million nonperforming assets I mean, compared to $637 million last quarter. Nonperforming loans were down about $3 million. Inflows to nonperforming for the quarter were $105 million, driven by 2 large commercial mortgage loans totaling almost $70 million, which are related to one legacy commercial loan relationship we have with operations in both Florida and Puerto Rico. The 2, the $70 million splits and $47 million in the Florida market and $23 million in Puerto Rico. However, we saw inflows of residential mortgage loans come down by $10 million and those of consumer loans come down by $1.5 million compared with last quarter.

But even though inflows were higher than last quarter, we also had significant outflow activity during the quarter of which amounted to our $108 million on the nonperforming loan side and we also had our $11.2 million re-auctioning in OREOs. Included in the outflows are $51 million in loans that restore to accrual status, including one split loan restructuring of $34 million where charge-offs had been taken in prior periods. We sold $10 million of the loans that were held for sale, nonperforming loans held for sale. We also had $14 million in collections and repayments this quarter of nonperforming, which is very good. And we achieved our $13 million in sales in REO, which included one large commercial property for $3.9 million. So it was significant outflow activity that we saw in the quarter, in line with what Aurelio was mentioning with investor activity.

Net charge-offs for the quarter were $23.4 million or 1.07% on loans compared to $26 million, 1.21% of loans last quarter. Last quarter charge-offs did include our $9.7 million on loans that were transferred to held for sale. The ratio of the allowance to nonperforming it's at around 53% and as compared to 54% last quarter. And commercial NPLs are being carried at 53% of unpaid principal balance.

That is like a summary of all the key things. So we'd like to open the call for questions now and clarify some of the other things you might like to discuss.

(Operator Instructions) The first question comes from Brett Rabatin with Piper Jaffray.

Wanted to I guess first make sure I understood the 2 loans, the $47 million and the $23 million, are they related and can you maybe give us a little more color on kind of what happened with those loans, I guess is the first part?

Yes, those loans I think we cover well those loans on the Florida side on the last call. You know these are relationships that dated 2006, 2007, and it was a real estate -- one is a real estate facility that renewal, at renewal time of the loan, the cash flows are not supportive of the overall debt and even though it has cash flow. So we're currently working out the relationship to bring it back to a performing portion. That's the Florida segment. The smaller one in Puerto Rico is also a maturity on the restructuring terms. You know they've been classified for some time, adversely classify. So it's really a long legacy work that has been done in these 2. Yes, I think it's important to highlight, Brett, that we -- for years we have very long, a very large list of large loans in that [barely] classified category. There's actually only 2 remaining, about $10 million, which I see is quite a different profile of what we had before in terms of the potential pipeline for migration. So it's been a big tree that we've been chopping for so many years now. It's finally getting to conclusion from our point of views.

It's same order but 2 independent properties that operate with independent cash flows.

Definite companies.

That's good to hear. Then on the pipeline, maybe you can talk about the classified loans and I know you got rid of the $10.4 million credit in the quarter. You know any thoughts around being more aggressive? You mentioned note sales. Any thoughts on being more aggressive with lowering the level of classified assets, maybe say an SPV or some vehicle to try and reduce the classified assets at a faster pace?

Well, I think the market is providing the conditions for that to happen. There is a lot of investor interest I have to say and we have more LOIs and agreements on some of the properties. We do have for-sale loans and REOs that add close to $200 million, so that is a primary focus of those classified assets that are not performing and you know some of the resolution of the quarter was due to that. On the other hand, we're also seeing some potential upgrade based on the conditions of the borrowers and some of them improving conditions that we could allow that to happen. So we are -- have to say that we are much more optimistic on that front with the remainder of the year as we continue to see investor interest increasing, which is really the driver of capital to bring those assets to resolution.

And then on the margin, it looked like your margin could continue to improve, kind of given the low deposit base that you're experiencing and the strong inflows of core deposits. Is there anything that would mitigate that over the back half of this year?

Well, as long as the deposit trend continues and there is a market as you say, it's a market characteristic that we're living through after the impact of the hurricane and all the cash that is coming in between the different sources of funds, of funding, it is expected that when you look at the fiscal plan and based on our estimate, the majority of the funds have not yet been seen in the market. So we're expecting that, that continues but it's very difficult to predict at what levels it will continue and what's the timing of it. So from that perspective, I have to say that as long as we continue to see money flowing, average balance on our accounts increasing, opening more accounts, that's our goal. That definitely we -- it will support that [need] improvement. On the other hand, we also see the consumer business bringing more demand from the consumer, which is our higher yielding loans. So that also contributes to the margin. So there is some evidence that and trends that should support that.

The next question comes from Joe Gladue of Merion Capital Group.

Yes, let me follow up on, a little bit on Brett's questions on margin. Just first off on the deposit side, it looks like there was really strong growth in noninterest bearing accounts and I imagine some of that was affected by the rise in government deposits. But it looks like even without that, there was strong growth. Just wondering if you have a sense of where that was coming from? If some of it was insurance proceeds from customers or what? And like to get an idea of how sustainable that is.

Yes, we estimate at 20%, 22% is identify as sources of insurance proceed. The remainder is really average balance activity that we see in our accounts and in actually both the retail and the commercial. There's some increase in the retail, in retail accounts in terms of number of accounts and customers also that have contribute to that. You know obviously there's a lot of economic activity going on that is related to a rebuilding of the island and that's, as we all know, that rebuilding is just in early stages.

Yes, let me clarify, the $290 million on noninterest bearing deposit growth we had in the quarter that Aurelio mentioned, it's all retail and commercial customers. On top of that, we had about $100 million growth on the government side. So those were 2 independent components on the growth. On the other hand, we did eliminate our $100 million of broker CDs in the quarter. So that excess funding is helping to change the mix of the funding profile of the institution.

And I guess while we're on the funding side, the interest cost, any further opportunities to I guess reduce the trust preferreds?

Trust preferred, it's one of those chances that happen once in a while. It's difficult to say that it's something we can control based on the way it's distributed. Once in a while we do get the opportunity, like we did in the last quarter and some last year and there are some, we'll pursue them. But it's -- I cannot tell you that that's going to happen.

And I'll just do one other, I guess loan yields. It looks like average loan yields up about 20 basis points or so from -- compared to first quarter. And just wondering if some of that is just related to loan prepayment penalties or some related to some of the loan sales, were they lower yielding loans? Just trying to figure out the source of that jump.

The jump it's number one, re-pricing. We have a fairly large commercial variable portfolio that reprices with LIBOR. So with the LIBOR increases, mostly a 3-month LIBOR increase has helped. We did collect some nonperforming interest that you saw in the release in the quarter that helped the margin and the other component was what Aurelio mentioned that we've seen growth on the personal, on auto loan side of the business, which both carry higher yields. So those combined helped put the yield on the loans a little bit higher. We again as he mentioned also, the mortgage lending side, even though the yields have increased a little bit on the originations and reality [modes] of what we're doing, it's conforming paper but it's been sold. So the portfolio, it has come down a bit and we did sell some amounts in the Florida market based on the way we want to position our mortgage portfolios as a percentage of all our lending portfolios.

The next question comes from Arren Cyganovich with Citigroup.

With the OREO costs were up for the quarter. Is that kind of a catch up from moratorium? What was that related to and how should that progress as we go through the rest of the year?

We had, this quarter OREOs are reappraised once a year. That's a general policy we follow. We had 4 properties that were due for appraisal this quarter, commercial properties. Those 4 properties, we had a bunch of properties that were due for reappraisal. But these 4 properties are the main driver for the increase. One of them it's a land loan that took a blunt of the hit of this change on -- it's on the westward side of the island, which market it's moving a little bit different. And that affected more than typically you would see because of the composition of the properties that were subject to reappraisal. There is still volatility on values in the market. And that would happen once in a while with properties. On the other hand, as we mentioned, we did sell one commercial property for $3.9 million, which was sold at just above carrying amount. We did sell the other nonperforming loan. That was a node that was also sold at just above carrying amount. So it all depends on the kind of property and there could be some volatility but I would say that this one is a little bit higher. There may be 1 or 2 properties that still can experience that, but most of it probably it's more of a normal kind of variation in values.

And then on the capital return potential, you continue to run with a high amount of excess capital. I'm just curious as to why you haven't been a little bit more aggressive with respect to getting that capital return? And just I think you addressed this at the beginning of the call, just what's the timing expectation there when you might address this?

You know we really cannot give you timing. There are conversation, it's a priority. But really we're not in a position to create an expectation. We like to see that capital deployed in growth. We'd like to see that capital deployed in growth organically or nonorganically. And obviously we'd like to see the opportunity of providence on the distribution of it. But at this point and it's a priority for both the board and the management team. But at this point I cannot give you a timeframe.

I mean I can -- I understand and would be great to see in growth but with the size of excess capital that you have, it's hard to believe that you'd be able to get that down to a meaningful or a more reasonable level of capital just through growth unless you had a fairly sizeable acquisition.

Keep in mind that obviously from where we're coming as an institution and there are conversations that we've had with our regulators over the last few years trying to move in that direction. But our informal agreements still require regulatory approvals. So that's part of the discussion process that we have and how the composition of the nonperforming portfolio behaves.

The next question comes from Glen Manna with Keefe, Bruyette, & Woods.

I just wanted to drill down into the brokered CDs a little bit better or a little bit more. When you look at the runoff in the quarter, it seems to imply that that CD book has a year and a half duration. I guess is that correct? And if you continue to see good deposit trends on the island, do you have the ability to gather deposits and enough excess liquidity to fund future growth and continue to let that brokered CD book run down?

Definitely we have excess liquidity and we have seen our capacity to gather deposits and that's been the reason, one of the reasons why brokered CDs have been coming down. Also, keep in mind that brokered CDs have become more expensive in the market. If you remember a few, 6, 7 years ago, the broker CD market was much cheaper than the Puerto Rico market. That has changed. So, clearly, you are correct that the average life it's in that 1.5 to 1.8 years and we continue to -- and that was spread out in the sense that we managed the portfolio, the brokered CD portfolio to a consistent amount of maturities per quarter to -- so that the process of reissuing was easier. So that allows us as deposit growth to continue to take those -- the broker deposits down. And that's the plan to continue to do so.

And Orlando, I was writing quickly. Did you give tax rate guidance for the second half of 2018 or the full year 2018?

Yes, the revised guidance on taxable entities, it's like 25%. When I mean that there are some entities that have some losses or like for example the holding company, which is an operating entity. And whenever you have some gains like the sale of the trust, could affect the number. But in general, should be in that 25% to 26% range based on the projected composition of revenues and expenses.

And on an FTE basis, what would that be?

On what, on what you said? Sorry.

On a fully taxable equivalent basis, would that be something higher?

Well, the marginal rate is 39% in Puerto Rico. But remember that we, in general, the industry, it's always had the benefit of tax by law of how the investment portfolios are treated or operations that we run from other kinds of entities like IBEs that have special tax treatments. So, you'll never get to those 39%. It's mostly going to be in that 25% to 30% range, depending on the mix.

[Operation Instructions) Next, we have a follow-up question from Brett Rabatin with Piper Jaffray.

I just wanted to follow up on the classified assets and just thinking about getting those down to 20% of capital or so. Can you maybe just give us an idea of the timeframe that you're hoping to accomplish that and what that might entail, particularly in the back half of this year?

You know time frame today, not a commitment but it's a priority. And we're looking at no later than the second half of next year, than the first half of this year, maybe next year.

Although 20% is aggressive but…

Yes, well that's where we're planning to.

I'm sorry. What's the time frame?

No later than the second quarter of next year.

Second quarter next year, okay, okay.

It's an aggressive 20%.

And then just I guess just thinking about the back half of this year, you know you had a little better trends in some of the fee income, line items. Should we expect that to continue in 3Q in particular?

So the fee income if you divided clearly everything related to transaction volume, meaning credit cards, debit cards, merchant transactions. We're seeing those levels get back to normal and that is the reason for the increase in the fee component. So we expect that to continue throughout the year. The mortgage banking revenues, it's a function of originations, of originations that increase this quarter. And we feel that we can sustain originations at these levels for the rest of the year. The market in general, it's down from what it was a year ago and we expect it to be down from what -- if you look back a couple of years. But these current levels are sustainable. Obviously, you have to take out the unusual ones like the continued insurance commission that happen once a year, basically first quarter or early second quarter some amounts. And any other kind of special things like the TruPS or the sale of the branch we had in the first quarter or the physical location we sold in the first quarter. So taking those out, I would say that we feel it's going to be consistent with some opportunities for some growth.

This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.