First BanCorp. (FBP) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon and welcome to the First Bancorp Fourth Quarter and Fiscal Year 2014 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead.

Thank you, Garry. Good afternoon 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 fiscal year 2014. Joining me today 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 that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the Company’s business. The Company’s actual results could differ materially from the forward-looking statements made due to the important factors described in the Company’s latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release issued today, you can access it at the Company’s Web site at firstbankpr.com. At this time, I would like to turn the call over to our CEO, Aurelio Alemán. Aurelio? Aurelio Alemán: Thank you, John. Good afternoon, everyone, and thank you for joining us to discuss the fiscal year 2014 and the fourth quarter. On the call with me today as usual is Orlando Berges, our CFO. I will walk through some highlights of the year in the quarter and then Orlando will go into more detail, as we always do. Let’s go into Slide 5. This is a busy slide and it was a busy year, but I have to tell you we’re really very pleased with the year results. 2014 marked a significant milestone in our retentive profitability and the results definitely reflect improvements in our franchise in several areas, as we continue in parallel executing our strategies to improve the risk profile First Bancorp. 2014 net income was 87.8 that’s actually almost twice of our adjusted 2013 net income of 45, on a pretax per-provision basis we generated 206 million in 2014 and that’s compared to 184 in 2013. We really have been working hard also to manage our expenses and improve efficiencies and in that line will reduce approximately 24 million during 2014 and that’s excluding the bulk sales diluted in 2013, the number will be big. We also during the year analyzed and optimized our branch network knowing better and remodeling some cultures and also we made significant investments in new technology platform, new products and more importantly talent management and training. Our branch continued to grow stronger, the FirstBank branch actually -- I am proud to share with you that in the recent study by independent research our customer gave us the highest ranking or likelihood to recommend and this is among all Puerto Rican competitors. New product innovation and enhancement to the operation platform will continue and should continue to produce result as we focus in growing our core deposit base; it's been a priority of the year. We continue to replace brokered CDs with core, during the year we actually increased core by 164 million excluding the government deposit which will know since the beginning of the year we anticipated a significant reduction, while we also reduce the brokered by 255 million. On the loan side, in spite of the challenging economy in Puerto Rico that we’re still dealing with, we had what I consider a very healthy year for commercial consumer and mortgage and basically will produce around 3.5 billion in 2014 in loan activity. As I said before, we continue and we need to be focused on rebuilding our books, our commercial portfolio, also the consumer portfolio and we need to continue to explore opportunities while also leveraging the true Florida franchise which contributed to the loan growth of the year in that sector. Asset quality is really now the top priority and continues to be of the management team for 2015. We continue significant de-risking and we reduce our classified assets for the sales recognized and there is still work to do, and we need to continue to focus on opportunities to accelerate the disposition of non-performers. The capital grew stronger and that’s definitely a growth opportunities to continue cleaning on the book and looking for pursuing all the growth opportunities as some of the deals that we did in the last quarter. Now summarizing the year, as I said at the beginning, we’re really very, very pleased with the progress. Now let's look at the highlights, we'll go to Page 6 of the quarter. It's really the highest net income quarter since we return to profitability with 26.3 million, compared to 23 in the prior quarter. Pre-tax pre-provision slightly down was very strong at 49.6, improvement on [prior tax] in the quarter, again NPA and classified asset reduction, migration reduction on the NPA side, the legacy classified book. We continue to work it out and this quarter we have a 21% reduction in decline in flows of NPL is a number that we share with you in tables in the release. Our mortgage and commercial pipelines remains stable. I have to say challenging, volumes were challenging but when you look at the portfolio the decline was really primarily to the recent activities. We now saw some participation on credits of high concentration, we also reduced further our government exposure. In the core deposit net of government increased 25 million. With did reduce significant reliance on brokered certificates on the quarter. Again we remain focused and the quarter didn't show any significant sales or NPAs we did achieve some smaller sales. But we continue to see a very active market with continues investor interest and new players entering the market and we continue to be optimistic of how we move those out. Capital position further strengthen and now the tangible book is at 6.02, and our DTA evaluation is at 516 million and Orlando will expand on that later. Again going to Slide 7 more details on the loan portfolio, I want to [refer] to what you see the strong originations continues, I have to say strong because in spite of the market conditions it will continue to be an important player and show our strength in the three segments; commercial, consumer and resi, we still see a softer consumer on auto market hopefully we see a better quarter as we get into 2015 on the consumer side, and we'll remain the number one player on the banks on the auto lending side. Residential and mortgage for Puerto Rico remains challenging, but we actually are growing market share as some of the other competitors weaken their production. We grew market share for the year to about 17%. The Florida market this quarter was a nice contributor with 85 million of commercial loan origination volume compared to 71 the prior quarter. And as I said in the year summary we did in the last quarter, we did purchase a portion of loans on the mortgage book from Doral, will show an increment in the graph. But we also will allow some participation on concentration on credit where we had over 100 million. So we're acting in the risk in the portfolio also contributed to some of the reduction. And as I said we have to work harder to sustain and improve the pipeline Moving to the next page, the deposit mix. Again we grew more by 25 and year-over-year is 164, and again this is closely in spite of the government deposit which based on trend on [new loan] we announced earlier in the year that we expect that a reduction, this is going to continue and it's the way we're planning for it. We continue to focus the brand and cross selling efforts to achieve this. In addition I think it's important to highlight that the year-over-year the total deposit of core deposit will reduce down. And we continue to see opportunities smaller than prior year we continue to see opportunities in that area. Moving to Slide 9, our government exposure and outstanding again reduction in the quarter -- the outstanding of 8 million when we compare it's really over 100 million in outstanding year-over-year on the direct side and about 67 on the exposure to previous which is a indirect. So now we have 133 million on that indirect exposure. And as we say we continue to support our work together with the government and to monitor our exposure prudently. Government deposit declined [318] much in line with what we estimated at the beginning of the year. Again the Puerto Rico situation you all know about its probably on all news channel we’re getting news every day, we continue to face hurdles on the other hand in the recent decline oil prices should be a positive level to the consumer. But is really too early to determine the actual impact, we have to be watchful to the possible implications of the proposed debt reform and any potential restructuring of the public operations. Public operations we haven’t seen that yet. That said we know how to play in this market, we show our capabilities to play under these conditions. So we will continues with our consistent execution of our plan and we'll continue and looking for the opportunities in the other markets Florida and Virgin Islands. Now I'm going to hand the call to Orlando, so he can discuss the result in more detail.

Good afternoon, everyone. So Aurelio mentioned at the beginning the net income for the quarter was $26.3 million or $0.12 a shares that compares to 23.2 million last quarter or $0.11 a share. Looking at the specific component within income statement, let's start with provisioning. The provision for the quarter was down 3.1 million, that’s made up of 3.9 million decrease in the provision for commercial and construction loans net of recoveries. There we had improvement and risk classification as well as the reductions in charge-off level. On the residential side we also had a reduction of $2 million in provisioning needs, primarily related to the lower reserves allocated to loans and were evaluated for impairment purposes in our Florida operation. On the other hand, we did have an increase of 2.1 million in the provision for consumer loans primarily the order portfolio because of higher loss on very decent rates in the market. Net interest income significant component amounted to 129.2 million, an increase of 1.5 million when compared to the third quarter. And margin for the quarter on a GAAP basis was 418 as compared to 414. The increase for the quarter however includes the effect of 2.5 million prepayment penalty collected from a borrower to compensate for the fermentation of our interest rate swap agreement we had where it had been expense being in prior periods, as we exclude this 2.5 million prepayment penalty as well as the adjustment a fair body adjustments on derivatives of 300,000, margin was down to 409 and net interest income was 126.3 million, a decline of our 900,000 as compared to the third quarter. The margin decrease from 412 to 409 basically we had decrease in interest income, commercial loans about $2.5 million which is mostly related to a reduction in the average volume of outstanding about 147 million. And there as Aurelio mentioned we had several cases where we sold participations or achieved some reductions in outstanding balance through repayment was part of getting some of the risk profile of the portfolio down. We also had an impact of $1 million a decrease of 1 million in interest income in consumer loans mostly tied to reductions in the auto loan portfolio, it’s been soft in the market the auto portfolio origination. These two components were partially compensated by an increase of 2.9 million in interest income and residential mortgages, which is primarily a function of what Aurelio mentioned the acquisition of 123 million portfolio from a financial institution in Puerto Rico at the beginning of October of this last 2014. Cost of funds, Aurelio briefly touched upon that we have been trying to manage our funding cost based on the interest rate scenario outstanding manage to take it now. Interest-bearing core deposits decreased two basis points for the quarter, as we continue to analyze and work on our deposit cost structure and non-interest bearing deposit, I mean total interest bearing deposits went down two basis points also. Our focus remained to grow non-brokered deposits, improve the funded mix as we have mentioned in the past that hasn’t changed and as what Aurelio mentioned our brokered CDs are down 177 million as compared to September balances. Looking at the other income components, on the other income we had a lot of increases related to volumes in the quarter and two things , main thing 1 million increase in other operating income because of merchant and POS fees and increases insurance commissions volume related for the [constant season]. We also had an increase of $700,000 in revenues from our mortgage banking business, based on an increase in sales and securitization of solid portfolios that were related and subsequently sold. On the expense side, they have remained at a consistent level they went up a bit this quarter. Total expenses were 94.8 million, an increase of 1.2 million from last quarter. Main drivers in there is credit related expenses went up 700,000 which is mostly on higher legal and collection expenses some of workhouse cases we have been working on. Some of you seen some in the press, which was offset by reductions in REO losses in general. We also had increasing credit card processing expenses of $300,000 again seasonal volume driven and we had increases in business promotion which is also seasonal related to our marketing activities we typically do in the last quarter of the year. Offsetting these increases was a reduction in 600,000 in deposit insurance assessment which is driven by increases in a number of factors. Leverage commercial loans are down improvement in earnings strength, the decrease in brokered deposits we just mentioned and also there is a stronger capital position helps on here. On asset quality, Aurelio mentioned the asset quality; non-performing assets went down 27.7 million for the quarter reaching $717 million compared to 744 million at the end of September. Non-performing loans are down 35.6 million or 5% as compared with last quarter. In the case of non-performing loans most of its cash collections on non-performing commercial and construction loans charge-offs and in some cases were restored accrual status based on [TDRs] combined with all the firms. OREO balances however did go off because we achieved in spite they went up 11.2 million because we achieved several collateral completion foreclosure completion of collateral, the near one was a 21.1 million commercial mortgage loans which we just completed the process at the end of the quarter, that was offset by our 15 million of sales and adjustments in the quarter. The inflows to non-performing loans held for investments were $64.2 million, they are down 17 million or 21% compared to the last quarter where we had 81 million of inflow with couple of quarters of reductions we’ve had so far. Obviously you know that this is bit lumpy but we like the trend as we see in the last couple of quarters. That reduction you can see on the chart on the right side of their -- on the lower right-hand side where 8 million and commercial and we also had 8 million also in residential, so it was fairly split off above the portfolios. [TDRs] held for investments were 695 million at the end of December that was 7 million lower than what he had at the end of September. Net charge-offs, net charge-offs for the quarter were 26.9 million or 1.13% of loans that compared with 42.7 million or 1.80 last quarter. The decrease was mostly in the commercial and industrial loan portfolio, last quarter included 6 million charge-offs related to two collateral dependent relations in Puerto Rico, we didn’t have any of those large items this quarter. Recoveries of amounts previously charged-off were higher last quarter. We had 6.7 million in the quarter as compared to 11 million last quarter. The allowance ratio it’s down to 2.40 of loan, it’s slightly up 42.45% of non-performing, that was 40.2% last quarter and it was 2.42 of loan quarter, held at very healthy levels. And as we discussed in the past, you can see on the chart on the right-hand side the recurring amount of non-performing commercial portfolios are $0.58 on the lower. Capital position continues to be strong obviously growing with the additional revenues. The tangible common equity ratio went up from 9.82, last quarter to 10.35. Tier 1 went up from 17.30 to 17.89 and basic Tier 1 common it’s up from 14.39 to 14.93. And as we have mentioned the last filings that if we compare ratios to full fledge implementation of the Basel III which is really completed by the end of 2019, we have liked the [old school] Tier 1 would be 14.62 today so it would be still extremely comfortable based on fund of capital requirements. Before we move to open the call for questions, I think that it’s important that you have asked me many times DTA over the last years. And we included some comments in the release, but I think it’s important that I have mentioned a bit of what’s going on. Clearly with this quarter we thought we have now completed six consecutive quarters of portability and as required by accounting rules we have proceeded two of the eight with the most recent quarter information our assessment and all of our documentations of what's called positive and negative evidence to determine, based on the weight of such evidence whether evaluation allowance is needed for some portion or all the portions of the DTA. That includes documentation of historical trends to give you some examples comparing actual versus projected result for several years, through years if you know these calculations, modeling will keep a utilization of the net and our carry forward over the sedentary carry forward periods on their several financial scenarios which include different assumptions to see sensitivities of different scenario. And that is a fairly lengthy process of documentation and analysis. As of now the results we are presenting here do not reflect any adjustments related to the reversal of the corporations DTA at all and we have a -- it's an ongoing process, when we complete this process we determine that that any adjustment it's applicable to the fourth quarter, we will proceed to follow appropriate disclosures and we will reflect those results in open filing of the 10-K which is due mid-March. With that, I would like to open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Erik Najarian from Bank of America. Please go ahead.

This is Ibrahim here. Can you give us some clarification on your comments around DTA? Is it safe to assume then there as you go through this process through end of March, we should expect that there is a good likelihood that some of the DTA if not all will be recaptured as of year-end earnings?

Well, as we go to the process, but we’re going through as we have to determine exactly what you said, whether the fact support, the facts and circumstances as of December 31st support or not reversal, it must be -- is completed that is the case, we would definitely be required to include that because where events the status of the analyst as of the date of the financials, but that is the ongoing process as we speak.

I guess what I am trying to understand is what is the risk component is the fact that you have an elevated level of non-performing assets still creates an uncertainty in terms of forward earnings when you are sort of doing this analysis which could be one of the reasons, because as you said you’ve completed six quarters of GAAP profitability. So, I am just trying to understand what sort of the negative just the Puerto Rico macro riff or is it higher, still high level of NPAs that may cause you not to be able to recapture any of the DTA?

Well, remember that we just turned six quarters that’s not the only rule, it's also forward looking thing that you'll have to include a number of estimates on forecast, forecast of all the markets, forecast of the bank. So, as long as those different scenarios of sensitivity shows that you can recapture NOL then you can do it, if you don’t, you're unable to recapture NOLs then you would be limited. But it's a function of completion of those analysis and that include that sensitivity on the different scenarios.

And I guess this was a separate topic in terms of I guess coming into last year there was expectation that for of loan balances would begin to stabilize during this of -- middle of the year, I guess as we look into the first quarter and into '15, do you expect loan balances to remain stable and if you can give us some color on expectations around both originations and our net loan growth for fourth quarter and for 2015? Aurelio Alemán: Well, the goal is to stabilize the portfolio not only with the volume that we generated in Puerto Rico but as we continue to use the balance sheet of our enhanced franchise in Florida which is doing a contribution. As I mentioned, we don’t provide forward-looking statement but our goals is to originate enough loans in the three sectors commercial, mortgage or consumer and also look forward other non-organic opportunities to effectively grow the loan portfolio as we did in the last quarter. We had some objectives of de-risking and we compensated with buying a portfolio that was not in original plan. So, we’re open to look for alternatives to sustain the loan portfolio at the levels that we mentioned before, we'll like to see in our portfolio closer to 9.5 billion than lower than that.

The next question comes from Brian Klock from Keefe, Bruyette & Woods. Please go ahead.

So, I think what’s kind of interesting is a slide that kind of struck me, as you look at Slide 18 which shows your capital position. It is very strong but just the year-over-year growth in it and it just kind of feel like, you’ve got a lot of capital put to work. So I guess maybe you can kind of help me think about how are you guys prioritizing, you did mention some of the loan growth opportunities and maybe even inorganic. So maybe you can just help us prioritize how you're looking at capital appointment in 2015, as far as organic growth factors into that the inorganic opportunities and even the potential a buyback, if you could do such a thing getting into with your DFAST Submission this year?

Well, eventually important thing as we discussed before, I know you were going to ask me this question. We discussed before, an important step in the capital plan is the submission of DFAST and getting the final picture from the regulatory environment is much crucial they like to see. Obviously we feel comfortable with the exercise on the capital that we have. But again as we did in the last quarter we will continue to look for opportunities to grow our loan portfolio and organic or non-organic, because definitely we have some room of capital that we can use in any scenario to achieve that. So it's yes to both, but the finance planning on using the capital to dividends or to repurchase it's much further down the road. It's not in the immediate plan because for that one we need to complete, get through the middle of the year get the [credit] back on DFAST and then we can have a there plan in place.

So when you guys go through the DFAST process, you'll have I guess more feedback on what's there and where the stress levels are and you can then manage your excess capital at that point. Aurelio Alemán: Yes in the short-term we're looking.

So I guess you see opportunities in Puerto Rico that would inorganic opportunities or opportunities in Florida? Is there anything that from the regulatory orders that you have in place that would limit you from pursuing some of the inorganic opportunities? Aurelio Alemán: We've have been able to achieve certain things with the concerned order. As you can see we continue to make progress. It's a very private conversation with the regulators every time we want to do something. But definitely we feel that we have opportunities and we will continue to have conservation when we see those opportunities. So far we've been able to execute in the portfolios that are here in the few years including the credit card purchase and with the overall activities that we've been in last year, branch openings and expansion with the Florida business. So we have a good case to continue moving forward.

That’s good, you've actually been pretty active this past year. And I have one real follow up question really quickly; hate to do this to you Orlando but another DTA question. Can you just or I guess it's a two part one where is the NOL carry forward balance today and can you break it out how much is in the mainland versus in Puerto Rico?

Well let me start with the second part first. Remember that we are only one legal entity being the bank and the Florida operation it really branches of FirstBank. We're required to file worldwide income for FirstBank within Puerto Rico. So even though we could have NOLs in this place, specifically on that operation, the end results with the NOLs where we have in Puerto Rico. So in essence what you are seeing there are NOL in Puerto Rico and those NOL are basically following the limitations of the Puerto Rico type laws that you might recall it's basically 12 years up to 2012. And anything after that is 10 years. So even though we do some of the space the number you are seeing in our disclosure is really the Puerto Rico bank which at the end captures everything. So how much are NOLs? I don’t have exactly the amount with me Brain but it’s approximately $900 million in that we've had in NOLs between 2009 and 2013 which are the year we didn’t have any NOLs before 2009. So that was the first year, since first expiring NOL would be 2021, based on those losses. I can provide you that later, that’s something we disclose any way in our 10-K, so we can provide an exact NOL for it. It's in the range of 900 million.

I guess I was thinking the portion of the NOL that the third quarter I thought it was somewhere around 374 million. So that I guess something of a different number.

Well that’s the fact component NOLs are the total losses but we have -- if you remind the tax rate which is marginal rate is 39 that would give you the number which is one the year phasing. What goes in the books would be a tax effect of the NOLs, that’s why the NOLs or the full DTA evaluation is about 490 million now in the bank, and out of that the two-thirds of it were sold will be the NOLs. Operator [Operator Instructions]. The next question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Just one final question on the DTA for you guys. When you're analyzing all these various scenarios for the potential recovery of the NOL carry forwards. Is the goal to make it so that whatever reversal whatever happens is just a one-time event? Or is it possible that based on your analysis today you come to one conclusion? And then is it possible that it could revisited say along with your 10-K, you said okay we're going to reverse 75% of the annual carry forwards along with the DTA. And then in other years time for example would it be possible them to reserve the remainder of that or is that something that you are trying to avoid?

Now the process effect as you described. You are supposed to run analysis, run sensitivities and reach a conclusion, whatever is the conclusion, if it’s not 100%, clearly you're supposed to revisit because the NOLs don’t go away, you can still continue to use those NOLs. So you can revisit your assumptions but you're required to revisit your assumptions anyway as part of your oral assessment most likely you need a number of events. So every year you would analyze and if your assumptions are the or the basis in which you base it change you can definitely view -- and they won’t decide it, we didn't do a 100%, so frequently you decide it can be done to 100% then you can change and reverse the remaining amount. So it’s not a one-time process, it’s an ongoing process.

And then I was wondering if you can give me a little bit more color on the $21 million commercial real-estate loan that you guys foreclosed upon during the quarter. I am just wondering how long it took from the time and once you decided to foreclose upon it to actually foreclose on it? Aurelio Alemán: Actually this one has a value, was difficult one, was actually less than six months, because we reached an agreement with the borrower, we have some other cases that have taken two years. And to tell you this one was not a difficult one.

If you have to put a projection on the timeframe to actually dispose to that foreclosed property or sell that foreclosed property. I mean do you think another six months another year? I mean what’s the realistic timeframe for the disposition of the actual properties once you have them, once you've foreclosed upon them? Aurelio Alemán: I will say this was to be a couple of quarters, estimated based on the attractiveness of the property. But sometimes the more we wait the more value we get. So again it’s the trade off that we apply to each of the deals that we negotiate.

I mean just to get a sense for what the market is like down there. I mean you can project there being processed last couple of quarters but the market is strong enough for $21 million property to trade hands at some point in time.

I think it’s not that valuable the size of the property or the loan. In some other property itself and the cash flows are behind and the type of investors that are specialty in the different type of property. So some of them sell very quickly some of them take years.

And then just one final question on a previous, when you were answering previous question you talked about use of capital, you said something about dividend or a buyback being something that could potentially happen after DFAST. Is that something that you plan on implementing DFAST this year?

I'd say that that is not in the short-term plan. When we go after DFAST then we will have all the information to put together our capital plans and decide how the capital will be used or returned or put to produce or return to shareholders. But nothing will happen in the short-term and nothing will happen before DFAST regarding usage of capital on that sense.

[Operator Instructions]. As we have no further questions 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. We would like to thank you all for your time and continued interest in First Bancorp. We have several conferences in February; we'll be meeting with investors at the Credit Suisse Conference in Miami next week February 11. The Stern Agee conference in Boca Raton February 12th and the KBW Conference in Boston on February 25. Again thank you for time and interest in First Bankcorp and this will conclude the call. A - Aurelio Alemán: Thank you all.

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