First BanCorp (FBP) 2019 Q4 法說會逐字稿

Good morning. Welcome to the First BanCorp. Fourth Quarter and Fiscal Year 2019 Results Conference call. (Operator Instructions) Please note that this event is being recorded.

I'll now turn the conference over to John Pelling, IR Officer. Please go ahead.

Thank you, Kate. Good morning, everyone, and thank you for joining First BanCorp.'s conference call and webcast to discuss the company's financial results for the fourth quarter and year-end 2019. Joining me today from First BanCorp. are Aurelio Alemán, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you may access them at our website, 1firstbank.com.

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

Thank you, John. Good morning, everyone, and thank you for joining us to discuss the quarter and the year-end results.

Please, let's move to Slide 5 of the presentation. I'm going to touch on some of the highlights of the quarter, and then we will go over the annual overall performance of the corporation. But before I do that, I just want to say that our hearts go out to those impacted by the recent earthquakes in the southern region of the Puerto Rico. While it is really business as usual here in the metropolitan area, and we have seen minimal disruptions, the earthquake did impact those in the more remote regions out of the island. And we've been supporting with humanitarian efforts to those impacted, we have visited the area. From a business standpoint, very few of our clients have been affected, and we are supporting them with payment moratoriums and supporting orientation and processing their insurance claims. I think this event -- we have to compare -- it's quite different to, in terms of magnitude to the 2017 hurricane where if we'll remember most of the island was impacted and electricity, telecommunications were a big problem. Fortunately, this time, that is not a problem. Electricity was recovered very quickly, and telecommunications were not disrupted. And obviously, as a result, our operations were back to normal 1 day after the earthquake.

So far, we have been supported clients, I would say, in the hundreds, not really in the thousands. Our exposure to the region, it's about 4% in the mortgage portfolio and about 10% on the other consumer portfolios. And we are receiving calls, and we support the clients. But so far, I have to say it's been -- it's being a limited number, the ones that have been impacted by this. We will continue monitoring and we'll continue supporting them.

So now moving into our quarterly results. On the profitability front, excluding the merger and restructuring charges, we are actively working. Our adjusted net income was slightly lower than the prior quarter of $42.8 million or $0.19 per diluted share. Pretax preparation was again strong this quarter at $72 million. And I have to say that we have been consistently delivered over $70 million pretax pre-provision on a quarterly basis over the past year.

On the loan portfolio, originations or renewals were strong, exceeding the $1 billion, we reached $1.1 billion this quarter. The loan portfolio grew, we grew $31 million, and much of the growth this quarter came from the consumer portfolio. We also continue to achieve organic improvement asset quality. NPA is now -- are at 2.5%, which is the decade low that we had in the portfolio.

Core deposits grew nicely, up $261 million, growth in both Puerto Rico and a segment in the Florida market. And we continue to reduce reliance on the brokered CDs, which decreased $48 million this quarter.

Regarding capital, we -- earnings continue to accrete to our capital base, which is now at $2.2 billion. We are pleased to announce the 67% increase in the dividend last quarter. And we also look forward to use this capital as -- once we get approval, and we can close the pending acquisition.

Yes. Let's move to Slide 6. So we can review the full year performance. The -- we're definitely very pleased, when we look at the numbers of the year, and we look at the graph on Slide 6, it was really a monumental year for First BanCorp. Adding to that, the acquisition announced during the last quarter is -- on a year-over-year basis, we really -- you look at the graph, we improved all our key franchise metrics. On an annual basis, adjusted net income increased 21% compared to 2018. Pretax pre-provision increased 14%, lowering renewal increased by 24%. In this portfolio, the consumer portfolio grew 17%, which really helps supporting our margin and really minimizing the impact of the interest rate environment.

NPAs are down 32% during the year. During the year, we also grew overall deposits by 6% or $330 million. And reduced brokered CDs by 22% or $122 million. We have materially transformed the make of our deposit mix. Now noninterest-bearing represent over 25% of our deposit base and broker is below 5%.

Before I hand the call to Orlando, I really want to recognize my executive team, my officers and employees. The support of the Board, for all their hard work and achievement of the year that have really positioned the franchise well for 2020 and the future. The earning powers of the combined franchise will drive future capital generation at a faster pace. We are working hard on integrating -- integration plans or the pending acquisition and preparing to better serve our customers and be a larger competitor in the island. We look forward to 2020 as a transformational year for our company.

With that, I will turn the call to Orlando so he can cover the quarter in more detail. Thank you.

Good morning, everyone. As you saw in the earnings release, we generated $36.4 million of earnings in the quarter, which compares to $46 million we had last quarter. But as Aurelio mentioned, the fourth quarter included $10.9 million in merger and restructuring costs of our recently announced transaction with Santander, including voluntary separation program we offer at FirstBank in December, and I'll touch upon those a bit later. If we exclude these items, and some of other things that are not necessarily core from our perspective, our non-GAAP adjusted net income for the quarter was $42.8 million or $0.19 a share, which compares to a non-GAAP adjusted net income of $45 million in the third quarter.

Pretax pre provision, as Aurelio also mentioned, continues to be strong at $72 million, and it's been consistent over the last few quarters. The quarter -- provision for loan losses in the quarter was $8.5 million, which is $1.1 million higher than last quarter, mostly on residential mortgage loans that are driven by some of the charge-offs taken on loans that migrated to nonperforming and evaluated on impairment.

Also, I'd like to point out, as you saw on the release that during this first quarter, Corporation is adopting the new standard for credit losses, famous CECL. And based on -- we expect so far based on all that we've done, an increase of approximately $93 million on the allowance for credit losses, that includes loans, debt securities held to maturity, our balance sheet and any other credit-related items.

Our net interest income for the quarter came under pressure, as we had mentioned before, as a result of the decline in interest rates. Net interest income was down $4.5 million compared to the third quarter. However, if you remember, last quarter, we had a onetime item of $3 million related to an accelerated discount accretion on the payoff of a large commercial loan. But in addition to that, we did have about $1.1 million reduction associated with the repricing of the variable rate commercial loans. We do have, as I had mentioned in prior calls, we do have about 44% of the commercial portfolio, all commercial construction and CRE and all of them. It's floating with LIBOR and another 20%, it's floating with Prime.

Margin for the quarter was 4.70%, which compares to 4.89% last quarter. But that is kind of question I mentioned improved that margin by 10 basis points. So if we adjust last quarter margin to normalized levels, we would have seen a decline of 9 basis points this quarter as compared to last quarter.

Going forward, margin impact at the end depends on rate movement on the asset mix. The new forward rate indications are slightly higher than prior forecast. And the expectation is that we might not see the original rate cut that was expected for 2020. Under these assumptions, additional reductions in margins would not be high. It could be a little bit, but not a lot going forward, but it depends on this expected movements on the rates.

Noninterest income for the quarter was good at $24 million. It increased $3 million. $2.1 million of that was related to a gain on a sale of a nonperforming commercial mortgage loan, we had held for sale for some time. That was the last nonperforming held for sale loan we had on the portfolio at this point. And we also had some impact -- positive impact from charges taken last quarter on a private-label MBS that we didn't have to take any this quarter.

On the expenses. Total expenses were $102.3 million, which is $9.5 million higher than last quarter. But out of that, $9.6 million of the increase was related to -- I'm sorry, $10.3 million of the increase was related to the merger and restructuring costs that I mentioned before. Included there are the typical, all the legal fees, financial consultant fees, other consultants we use for the transaction as well as we initiated during the quarter, a voluntary separation program with FirstBank employees to accelerate our position and try to capitalize as quickly as possible and expected efficiencies from the upcoming transaction. So we started moving in that front. And that's going to reduce some of the expenses during the year.

Overall expenses, I would say that if we look at what's happened toward the end of 2020 and -- I mean 2019 and during 2020. We have completed or are about to complete a number of technology projects that tend to increase our expense base, it will increase our expense base. These projects are all driven towards the improvement of services and products that we have. So if we look at the expense levels going forward, we expect that excluding OREO, those expenses are going to be more closer to the $89 million to $90 million range, that -- the $87 million to $88 million that we had seen before. And obviously, that excludes any expenses associated with continuing to complete the transaction -- the ongoing transaction that we have on the table.

Nonperforming assets, decrease of $14.5 million -- $14.7 million for the quarter to $317 million total nonperforming assets. Nonperforming loans decreased by $12.4 million. We saw reductions of $7.9 million in commercial and construction and $5.6 million in nonaccrual residential mortgage loans. As I mentioned, we completed a sale of $6.7 million of a non-accrual commercial mortgage loan held for sale. And we also collected or brought current an additional $6.2 million in the commercial nonperforming portfolios. However, we did see a migration of $6 million construction relationship in the Virgin Islands that offset some of the reductions.

OREO portfolios have continued to decrease as slower migration. However, if you look at inflows, overall inflows were a bit higher, $33.7 million -- $33.5 million, which is $1.7 million higher than last quarter. But that was highly driven by the 1 case, a $6 million case construction portfolio. In the quarter, we also saw reductions of adversely classified assets of $34 million in the quarter.

Net charge-offs in the quarter were almost $19 million, $18.9 million. It's about 84 basis points of average loans compared to about $14 million last quarter or 61 basis points of loan, with mostly -- $2.7 million of that was the consumer portfolio, which a lot has to do with the fact that the portfolio has been growing. So we have a much higher portfolio. And that would yield some increases dollar-wise on charge not necessarily percentage-wise.

The ratio of the allowance to nonaccrual loans stayed high at 73.6%. That was slightly down from the 76.5% we had last quarter. And our commercial nonperforming are carried at $0.42 on the dollar as you can see on the presentation.

Just briefly on the year, Aurelio already mentioned that we believe 2019 was an excellent year for our institution. We saw improvements in all key metrics. You saw some of the components that were listed in there. Earnings-wise, the full year net income was $167 million or $0.76 a share, which compares to $201 million last year. However, remember that last year, we had a $63 million benefit from the partial reversal of the DTA valuation allowance. If we adjust the items, again, that are noncore in both years, the non-GAAP adjusted net income for 2019 was $165.6 million, which is $0.75 a share, which compares to adjusted net income of $137 million or $0.62 a share in 2018. Overall, the 22% improvement year-over-year on the (inaudible) adjusted non-GAAP basis.

ROA, adjusted ROA also was pretty healthy this year with up to 1.33% from 1.12% last year. So significant improvements in the earning components of the institution.

With that, I think that we will open the call for questions and attend some of your pending items.

(Operator Instructions) Our first question is from Ebrahim Poonawala from Bank of America Securities.

I guess just first question, it would be helpful to get a little bit of an update in terms of the activity on the island, just what it means for your loan and deposit growth as we think about, on a core basis going forward? And if -- because of the recent events, you see some of the federal fund inflows and just private sector activity slowing down over the coming quarters.

So far -- it's actually probably too early to really tell, but we haven't seen a real impact outside from the other -- from the impacted area, which is the south region of Puerto Rico. And when you look at the overall island, the size of the island, the size of the population in the areas nearby that south west region compared to where the most of the economic activity takes place. So that's why when we look at the numbers of total exposure on our portfolios, they are what we consider low. Obviously, there will be some impact in the region. I think the other effect that could have over all this tourism, which it's also too early to tell. But I have to say that we have to think about the compensating factors also, which are the additional reconstruction effort and funds that will be in the island to continue supporting the reconstruction of the area.

Obviously, the timing -- how much additional time if we continue to have recurrence or not of earthquakes of the similar magnitude. That's another factor, which since basically January 7, have been limited to lower severity. So far on the other regions, we have not seen a change in what we do every day for the month of January in terms of business volumes and activity, considering the seasonality of January, which is always a slower month than December, as an example. But so far, in general, we don't expect any significant impact to the economy on this. It's quite different magnitude to what we experienced in 2017. We have to be conscious of that. And I think the fact that electricity and telecommunications were back to normal in a very short period has also to do with the disruption that was created before, which was the majority of the routes of the issues where the lack of electricity and telecommunications.

Got it. And just on a separate note, period end noninterest-bearing deposits were very, very strong, just wondering if we should expect some seasonality and outflows of what we saw in the fourth quarter coming into the bank? And just Orlando, in terms of when you think about the margin outlook, do you expect things to stabilize with the Fed on the sidelines? Or do you expect additional compression?

On the deposit, we divided a bit here. It's -- we have a good growth in both Puerto Rico and Florida. Florida tends to be a little bit more volatile in terms of those accounts where a lot of money comes in and out. So we could see a bit of that. Puerto Rico, there's always some additional inflows during the latter part of the year that are used at the beginning of the year. But so far, we've seen pretty consistent penetration on the deposit front in Puerto Rico.

Regarding margins, I -- the answer is yes. At the end, we -- again, the 60-plus percent portfolio floating has been affected by the commercial portfolio, by the decline in rates. Assuming most recent expectations, the LIBOR component that we use, it's typically 3-month LIBOR. So the expectation of LIBOR is not going down. It's staying flat or slightly up. And if there were no additional Fed fund rate cuts, clearly, Prime would say, at least at current levels, that would limit the exposures a bit that we have on the margin. Remember, at the end, there is a little bit of a mix also because if we continue to achieve deposit growth, which we want to achieve and then it goes tight with volume growth and portfolio -- investment portfolio. But clearly, from the net interest income perspective, the rates would stay flat, the impact on margins would be smaller.

(Operator Instructions) Our next question is from Alex Twerdahl from Piper Sandler.

First off, I'm just wondering if you can give us any sort of help on how we should be thinking about provisioning in 2020, I guess pre-Santander and post-CECL, just kind of take into account what's happened to your reserve and expectations for loan growth, et cetera?

That's a 64,000-dollar question. So I mean at the end, remember that once you are up CECL, in essence, we're taking lifetime losses. Lifetime losses are a function of expected economic scenario going forward. And as expected and loss -- historical loss and correlation of factors in our market, there are factors such as unemployment, home price index that are critical factors in those losses. Assuming those components would stay consistent from quarter-to-quarter, your implications would be then volume, either growth or reduction, not so much in terms of your loss component.

So in reality, Alex, first quarter, well, I would say that other than -- or any significant change in economic assumptions, which are not something that you typically see dramatically from quarter-to-quarter, a lot would have to do with the -- how the portfolio moves. I think that I had mentioned that assuming a normalized thing of growth, I wouldn't expect CECL to be a huge difference in terms of provisioning for the years as compared to prior year. The onetime hit, obviously, would be the large component. But it depends a lot. If we achieve a lot more in growth, then we'll see some of that impact. But that would be compensated by revenues on the mortgage side -- on the loan side. So it's a stop to really give you a very, very concrete win. But again, assuming stabilized assumptions, economic assumptions and unemployment components in Puerto Rico, I would say that it's a volume-related movement.

Okay. And then as we think about loan growth in 2020, and I know you guys have shown some probably some pretty decent trends, especially since you've been jogging against the runoff in the residential portfolio and NPA reductions, et cetera. One, do you foresee the residential loan reductions coming to an end anytime soon or at least slowing? And then, two, kind of as you look at your pipelines, right now and kind of what you know on the island and sort of go heading into 2020? How do you feel about that loan growth outlook over the next couple of quarters?

We -- if you look at the plan itself, how we view it and how we -- our loan strategy. Yes, the mortgage portfolio should continue to accrete a bit. The -- probably the rate of reduction is going to slow down at some point in time later in the year, originations could be closer to repayments. We're doing a strong originations, but we're focused on the conforming side of the equation, which is reflected in the gain on sale on the noninterest income. The -- on the consumer, we still see additional opportunities for continue growing the portfolio as we did over the last couple of years. And on the commercial side, we have significantly less nonperforming loans to move out. So if the pipelines translate into closings, we should see an increase in the commercial book at better rate than prior years because some of the growth that we achieved in prior years was offset by the reduction in NPLs that we also achieved. So we don't have that large NPLs reduction targeted for this year because we're really approaching -- we still have some work to do there, but we're approaching a normalized portfolio. So from that perspective, yes, the answer is we should see better growth on the commercial, if the pipelines materialize. We haven't seen indications yet. That's not going to happen, but the environment can change. Yes.

Got it. And then just a final question. As you continue to move closer to the closing of the Santander transaction, do you foresee any meaningful balance sheet cleanup as being necessary before the deal closes?

No, if you look at the math of the deal that we shared back in October, those numbers stand. Obviously, there is some balance sheet optimization that any deal will require at the point. I will say more have to do probably with government deposits or securities portfolio. But remember, we're not buying NPAs in this deal. So there's not a lot more than those other matters that will be done for IRR or liquidity, just to make sure I'm optimizing the balance sheet and income statement. But it looks like the picture that we presented back in October.

Okay. And in terms of the timing of the deal closing, do we have a better sense on when that might actually -- the exact date?

No. No. It's -- there's no exact dates here. It's just a sequence of events. We continue to work on the approval. And I think we stand by our best estimate is what we project -- what we proposed in the October presentation, somewhere near the last part of the second quarter.

Our next question is from Glen Manna from KBW.

I had to jump on the call late. So Orlando, I missed most of your commentary on the NIM. I guess if you look at the moving parts, and 10 basis points was from the interesting cost recoveries in last quarter. Maybe 6 or 7 basis points from the actual interest rate environment. What do you expect for the trajectory of the NIM here? Could we see stabilization into 1Q '19? Or would you expect some kind of modest further deterioration?

What I was mentioning is if we assume the expected -- the most recent scenario, it's probably an expectation that there is not going to be another rate cut and that there will be some stability with some improvement in the LIBOR. If that were to happen, my opinion is the margin impact, it's small from where we are now. Since we do have a large chunk of the commercial portfolio. That's -- as you probably saw in the release, it's 44%. It's a LIBOR-based and 20%, it's Prime-based. So those 2 components move quickly if rates go down. So at the end, it's a bit of mix also on the assets. But with those assumptions, the impact of margin shouldn't be much. It could be a little bit, but not a lot, based on where things have been repriced recently.

This concludes our question-and-answer session. I would now like to turn the conference back to John Pelling for closing remarks.

Thank you, Kate. On the investor front, we have the KBW conference in Boca coming up on February 13. We are also attending the Crédit Suisse conference in (inaudible) on February 27 as well as the KBW Investor Tour to Puerto Rico on March 16. And in addition, we're hosting a number of individual investor meetings here in the island. It's -- weather is beautiful here. So if you're tired of the cold up north, come down and visit us. We appreciate your continued support and look forward to seeing many of you in the coming months. Thank you.

At this point, we'll conclude the call.

Thank you all.

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