First BanCorp. (FBP) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the First Bancorp report on its First Quarter Results Conference Call and Webcast. 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 Mr. John Pelling, Investor Relations Officer. Please go ahead.

Thank you, Daniele. Good morning everyone and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the first quarter 2015. 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 structures, 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 by First Bancorp, you can access it at the company's website 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 morning, everyone, and thank you for joining today to discuss our first quarter. As usual on the call are with me our CFO, Orlando Berges who will cover most of the details of the financial results of the quarter. Let's walk you through some of the highlights, please move to Slide 5 of the deck. This was a really exciting quarter for our company, and we achieved several significant strategic milestones over the past few months. And I would like to focus on some of these milestones before we head into some of the details first. Since our last call we announced the partial recapture of the deferred stock asset which last month was recognized as part of the fourth quarter financials, it happened after we had our last call. This actually significantly prove our tangible book value which is now at $7.55 per share. Second, our participation in the alliance for the acquisition of Doral in February which – it really contribute to the original franchise by increasing our branch's footprint by ten branches. It also increased our core deposit base and the residential mortgage portfolio, and now in combining the branches, the new clients will definitely get more further access to new sales channels, we definitely expect a regional contribution to the bottom line as we continue moving different action forward and the market continues rationalizing pricing. Third is very important one, our management team has been diligently working on the stress testing for the past 18 months as we file our diverse results that were submitted on time, and as the regulation provides, this will be publicly disclosed by the end of this quarter, closer to June 30. And last but not least, I'm sure many of you saw last week FBAC announced on April 29 the lifting of the concerned alternate which had been in place for the last five years and definitely we view this as a very positive step in our strategic plan. We realize there is still work to do to continue to putting our risk profile and definitely reducing our NPA levels. Combined, we believe these events represent new times for our company. Please turn to Slide 6, as we reported last night, we posted net income of $25.6 and this included some extraordinary items from the acquisition of Doral. The quarter also reflected improvement in several franchise metrics; pre-provision pretax went up to 55.4, significant contribution of expense reductions there, that is up from 50.7 last quarter. We achieved results for the non-interest expense, I mean in net interest income also core deposit increase with the transaction were also core deposit increase organically. Our loan portfolio grew primarily to the acquisition and I thought I'd mentioned before, we continue to lose [ph] on opportunity of growing the Florida portfolio as we see more opportunities there than in our main market at this stages. Innovation products and enterprise, now we make a decision to move our $75 million PREPA facility exploit to know the real status and this will broadly increase within the quarter of approximately $38 million. If we exclude PREPA, we will have seen a reduction in the NPAs, and actually we saw a decline in inflow by 32%. We continue to manage and the priority manage our classified book towards resolution of disposition we achieved sales on the quarter of very old and smaller the note and this remains to be the priority in 2015. Our capital levels are very strong and we continue to explore options to further review our NPA levels during 2015. Moving to Slide 7, the loan portfolio, as I said before in residential – the residential portfolio acquired some of the increase in the portfolio and relations what was overdone in the first quarter of 2014, and what we've done in the last quarter of 2014, we believe continue to be healthy with relation of renewal volume of $777 million. I hope everybody is aware of the political and economic rise in Puerto Rico which has made the growth in our portfolios difficult. That said, with the crazy division channels, with the newly acquired branches and new clients we issue helpless in creating our consumer and residential origination volume for the remainder of 2015. I have to say that on the good side if I like for the commercial, it looks better than the way we start to the quarter in both Puerto Rico and Florida. And again, we will continue to look for opportunities of keeping the portfolio above the $9.5 billion than it is today. On the deposit front, moving to Slide 8, as I said, deposit grew – now the government had brokered by 621, excluding the nodal we increased the quarter by 158 organically which is, it was an excellent metric for our internal efforts on cross selling, and more importantly, we were able to reduce our brokers in independency by an additional 315 which right now is a 36% of what our deposit mean and we continue with the focus on reducing brokers independency below the 20% value. Liquidity continued to be very strong and deposit costs also declined now to 66 basis points what we historically had on the core side at Puerto Rico. Moving to Slide 9, our government exposure – outstanding is basically in the same place, some movement because of using of available lines, the deposits actually grew driven by the portion of Doral acquisition that include some municipalities, and now we have about 283 of core deposits that belong to government relationship. On the portfolio side, we continue to state that the portfolios will diversify and the majority will – in municipalities we feel comfortable with the social prepayment by margin tax revenue assignments. And while we move the $75 million of PREPA to new accrual, we're still hopeful for a positive outcome on the submit of the restructuring plant by June 1. They continue to pay interest even though the facility is in normal growth status. With economic inflation continues to fade early [ph] when we believe that when we are leaders you will make their best effort to avoid a shutdown on all cost, there also not the more expensive auctions in the areas, and we believe they are also that which is a potential for a temporary increase in the self-tax now that the tax reform was not approved, that could be a lever that they can use. We don't know how this is going to play out but we will know before June 30, definitely. That said, we are very confident on this trend of the franchise in capital position and the capabilities to continue securing on the challenging environment and we continue to get the franchise stronger with better – and now a more self-channels to continue expanding our products. So I will come back to the group for the Q&A but now I'm going to hand the call over to Orlando to discuss our results in more detail.

Good morning, everyone. So Aurelio mentioned the first quarter results reflected net income of $25.6 million or $0.12 a shares which compares to $333 million last quarter – you remember, last quarter results include the partial reversal of the deferred tax asset evaluation allowance which is shown as a credit, so we recover that context expense line, and that obviously affects the comparability, moreover to mention that since the evaluation allowance has been reverse fortified, we are now require to be at good income tax expense calculation on current earnings, that must not mean that the actual payments are going to be the same amount but for GAAP purposes now we're going to be showing income tax expense going forward. So for this quarter I think it's better to compare pretax income which amounted to $33.7 million in the quarter versus $31.9 million last quarter. In this quarter results, the bucketed side showed a $13.4 million margin scheme from the development section which I will explain a little bit in more detail. We also saw increases of $1.4 million in non-interest income and reduction of $1.9 million in expenses. That net of $2.1 million exactly in expenses related to conversion and contract cost on the Doral volumes. On the other hand, net interest income for the quarter is down $3.5 million, I am also going to detail, and the probation for the quarter which is $9 million higher than last quarter. The increase in the provision, it's a number of factors; on the commercial side we had $10.6 million more provision which reflects migration of certain commercial loans to worse loan classification and some increases on some of the specific returns on in parallels. But also we had much higher recoveries on the fourth quarter of last year, we had $4.7 million in commercial recoveries as compared to $1 million this quarter. The residential and mortgage slide also shows $1.5 million increase in probation, that's main two components in the provisional with a higher portfolio. And we also had some impact in the general research related to operate volume reductions that we saw over the year. On the other hand, the consumer portfolios are behaving much better and we had $4 million decrease in the portfolio primarily on loss rating from the order portfolio than that went down [ph]. On the chart, if you look at the results, for the quarter we had the acquisition as our development of the [indiscernible] for Doral. Therefore $221 million in residential mortgage loans, 9% during that – we also acquired some $3.8 million in other consumer loans and ordered rough lines also at a discount. This will also – this loan preferred value at $311 million, spot of the accounting, we also acquired $522 million in deposits, we paid out 1.6% premium, you remember from the filing data earlier in the quarter, we booked 40% intangible $5.8 million related to those deposits. The net impact of this transaction in terms of per value of the assets is offered in a $13.4 million bargain purchasing – pretax bargain purchasing gain. Also the result include $2.1 million as I mentioned in non-recurring transaction and conversion cost. Important to mention, however that there will some more insurance conversion cost that will be incurred in the second quarter that not just reflected additional base. And also the expense categories include our $1.1 million of income services cost which basically departs through over singular expenses. Once we complete conversions that should happen in this second quarter, this cost will all be replaced by parallel internal processing costs which will be much lower than this interim servicing. Excluding Doral, you have seen this charge of pretax earnings for the quarter were $22.7 million or $0.09 a share which seasonal at $6.7 million lower than last quarter, that was again driven by the higher provisions, $8.5 million higher provision. Also, last quarter you might remember we had $2.5 million late quarter cancellation penalty on our loan that was paid off at the end of December, that went into interest income, so that increased the net interest income component in the fourth quarter of 2014. On the other hand, expenses were $5.8 million excluding Doral, lower than last quarter and we'll touch upon those components later on on expense chart. Net interest income, important where declines $3.5 million on the hold entity including Doral, just $3.5 million, we not showing that interest income does reflect the $2.5 million impact that we had on the prepayment on the last quarter. If we exclude that net interest income decrease by $700,000 as compared to last quarter. Net interest margin on a GAAP basis was flat but we had just – the margin last quarter for the $2.5 million component I just mentioned and some other derivatives, reality [ph] margin going on from 409 to 418 for the quarter, not related with the acquired assets. What we had in the quarter, we had $1.4 million decrease related to these, there were two less rate in the quarter as compared to last quarter, and we had $2.9 million decrease related to volumes, we had real options in the average volume as both of the commercial and the consumer portfolio. On the other hand, we had $1.6 million in interest income associated with residential mortgage loans acquired on the Doral transaction, and we had increases of $400,000 on mortgage backed securities that we have in the investment portfolio. On the funding side, interest expense associated with the deposit accounts went down $1 million, that is with reassessment of interest rates that we had on savings and check in accounts and option in size of the broker city portfolio. We also had some reductions in $81,000 in interest expense related to restructuring of $400 million related over the quarter. Overall, the cause of our interest average core deposits went down 4 basis points as well as the cost of all deposits, they went down 4 basis points and that's a function of continued deposit cost structure based on own market. Again, as Aurelio mentioned before, our focus remains on growing non-broker deposits and improving the overall funding mix. This quarter we used some of the excess cash from the brokerage section to pay up brokerage and that portfolio was reduced by $250 million as we get to December balances. Looking at the net interest income components, excluding the bargain purchase scheme, net interest income component was $17.9 million, and that include – that reflects an increase of $1.4 million from last quarter – I'm sorry, the $17.9 million was last quarter, this quarter was $19.3 million. $1.5 million of the average insurance commissions, these are seasonal components that are on the commissions we think by net insurance agency. And we also had $700,000 pick up on fee income associated with all the deposit accounts acquired from Doral. On the other hand, we had longer gains on sales of mortgage portfolios on the secondary market sales as well as reputations [ph] which offset some of those income. Expenses are worth really good in the quarter, non-interest expenses in the quarter amounted to $91.7 million, a decrease of $2 million from last quarter. That includes the $2.1 million related to acquisition and from section cost rate to allow. It means that non-interest expenses decreased $4 million, main drivers; credit related expenses are down $1.8 million; that is a function above additional implementation of the industry alike from the disposition of arrears this quarter, as well as reduction in professional fees related to the legal services collection fees and troubled by longer solutions as compared to the last quarter. Occupancy expenses are down, about $500,000 and that is after including our $200,000 of ongoing expenses associated with Doral. Of these item, although taxes are down $1.5 million, and that's the elimination of the Puerto Rico national gross receipt tax which was the factory buses generate first, that was – on average was $1.5 million per quarter. Also we've seen the continuing decrease on BAC insurance cost, it's down $900,000 this quarter and that's a function of improvements in the many categories, this quarter obviously higher liquidity, with auction of broker CDs and continuation of the earnings. Business promotion is down $1.8 billion, there is a lot of seasonality there in terms of campaign, so that's a not necessarily ongoing on quarters but we did see that on this first quarter. On the other hand, if you look at employee compensation, it's up $1.8 million, that excludes the $300,000 associated with employees on the Doral branches, and also additional payroll factors on month's accrual as we started the mid-year. Important to mention that included in other expenses, the other expense line items here are – it's $1.1 million that I mentioned related to the past few loan service and interim loan servicing cost associated with the Doral manufacturing. This cost definitely will borrow in the future based on once we complete conversion. Moving towards the quality, Aurelio mentioned the key component, again, non-performing went up $37 million with reality mostly related to basically – all related to PREPA loan that was put in on accrual. If we exclude the PREPA loan, non-performing assets decrease by $37.4 million. Same thing the non-performing loans, they went up $39 million but excluding PREPA basically declined $35 million this quarter. One important components that we did see during auctions in inflows of non-performing – PREPA obviously, with PREPA inflows were $118 million, but total inflows went down to $43.7 million if we exclude the PREPA loan. We saw it treated in basically all categories, we have seen it down $8.5 million, CDR [ph] is down $4 million, consumer is down $5.7 million, so we saw reductions in plausible different loan categories except for that one facility. OREO balances are down $1.4 million, net impact of foreclosures and sales we have achieved in the quarter, and adversely classified commercial loans supporting naturally [ph] are down by $53 million which is a 10% reduction in that category. CDRs were $705 million at the end of March which is slightly up from – it's $10 million up from December, and now approximately $434 million of those were in accrual status. Net charge-offs behave very much in line with last quarter they were $29 million as compared to $27 million. The variance is mainly related to the recovery component, as I mentioned on the commercial side we had $4 million lower recoveries this month – I'm sorry, this quarter as compared to last quarter. The allowance at the end of March was 238 of loans compared to 240 at the end of December, even though all the allowances are bid by $3.6 million but this increase is obviously a function of the addition of 300 and plus 1 million portfolio that we acquired from Doral. The ratio of the allowance to non-performing loans was 40%, 40.1% as compared to 42.4% at the end of December. Net carry forward of non-performing commercial loans still are only 58%, $0.58 on the dollar, and as we have seen in the Basel III, it's been consistent. On the capital front, I would elaborate some comments already but just to mention that obviously Basel III rules began effective January 1, and they are subject to multi-year concession provisions primarily related to some of the items that are applied for retract inductions and adjustments. The Tier 1 total and average ratios on the Basel III as of March were 16.15%, 19.19% and 12.17% respectively. Those numbers on the Basel I rules were 18.44%, 19.70% and 13.27%. Important thing here to mention on the Basel III rules, the two significant changes we saw is one that was, the corporation has some cross preferred securities, 75% of those are no longer included in the Tier 1 calculation, they are included in total. And also there were some changes on definitions of risk weighted assets that affected the numbers. Keep in mind that there was some impact from the additional assets acquired on the development section. Also important, the Common Equity Tier 1 capital, the Basel III 2015-16 which is a strong ratio, and as Aurelio mentioned, we completed our dephas process in the first quarter and submitted out results a bit later prior to the March 31 deadline, and we expect those to close severally under a supermation by the end of June. With that I'll open the call for questions. Thanks.

[Operator Instructions] The first question comes from Alex Twerdahl from Sandler O'Neill. Please go ahead.

Good morning. Aurelio Alemán: Good morning.

First, I just wanted to ask a little bit more about the broker deposits, obviously they came down a lot sequentially and you were able to replace some during the first quarter with the deposits in cash from Doral. Can you talk a little bit about how many of those broker deposits will mature in the second quarter and then the remainder of 2015, and if there is more ability to replace those with either cash on hand or other ways in order to bring down cost of deposits further and reduce that FDIC insurance expense?

Sure, really the objective as we have mentioned is to continue to lower the level of broker CDs that we have in the books. We're planning to get below 20% of assets on that line carry forward. And the first quarter obviously, we have two big phase; number one, we grew a lot organically on deposits, as Aurelio mentioned, we more than $160 million growth in deposits organically plus the one's we acquired from Doral. So we had some good amount of excess cash. And we will continue to write – we have basically spread out, we have typically from quarter to quarter, about $600 million to $700 million of broker CDs that matured each quarter and will replace us as needed and remember that one of the benefits been able to use it for car [ph] purchases. So we will continue to reduce the size of the portfolio as a function of the overall liquidity component and lending component what gives you an idea of the level of maturities we do have in quarter.

Okay, thanks. And then I just wanted to ask about the tax rate going forward, is the 20 – almost 24% that we saw this quarter, is that a reasonable tax rate used for 2015 for GAAP purposes?

Yes, for GAAP purposes we're going to be around that level for the year. Keep in mind that still – because of the evaluation allowance being only partially reverse, some events could always happen that changes have been of what still on their evaluation allowance but the 24/7 assuming the current levels evolved over the same income we have as a relationship of the other income, it will be a good number for this year. Obviously we – I mean if, for example, we can rate the portfolios a bit more and those percentage could change a bit from quarter to quarter but except very good at indication.

Okay, thanks. That's all the questions I have right at this second.

Thank you.

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

So, I don't want to say you had a pretty busy quarter with the Doral transaction closing, the consent order lifted. Can you let us I guess on the Doral side of things you know with a little bit of noise with from some of the non-recurring cost and the initial provision booked. But it seems like if you take those provision out and those expenses they are not going to recur, it seems like it's a quarter, it's the first month of the Doral transaction seems to be in-line with your guidance at the close, I think you said it was about 10 million to 12 million annual pre-tax income benefit from Doral? Aurelio Alemán: The way we see it from preliminary numbers are consistent with our estimates, keep in mind obviously that we do expect to capture some more volumes in the market on the residential side, having one less layer that helps the number but we still have noise in the expense side because of the interim cost and interim servicing cost and the conversion related cost. We want to see it normalize onto the third quarter, because second quarter is still has conversion related matters, by the third quarter we should have affirmed a more normalized component on that sites.

And I guess a follow-up question would be you mentioned about the DFAST failing your stress test in March and again looking at your capital ratio is very strong. I guess Aurelio can you comment on your thoughts of I guess what can you do with that excess capital in the meantime and with the consent order lifted does that help you become more active on the capital management side? Aurelio Alemán: It is important Brian, that relate to the question [indiscernible] and we put certain milestones on the road before getting the -- talk about definitely capital plan. Some of those milestones, we have hit several of those. We still need to find out the final feedback from the DFAST, and we also -- we're still operating on the agreement which hopefully will be a resolution during this year also. We cannot anticipate when exactly that's going to happen and obviously you know the capital alternative that we will continue to pursue in spite of those events, any of the opportunities we see out there, we continue growing our portfolio, in Puerto Rico or Florida or the Virgin Islands which we see some stabilization too and also we continue to work on achieving better asset quality ratios so those are alternative that we continue to evaluate and when in the two fronts, one to grow the asset, the other one to continue cleaning up and having a better balance sheet which brings some future benefits as we have done before the cost and actually basically premium side of things we [indiscernible] to liquidity. As I mentioned things we evaluate continuously and obviously we're more active on the street to be honest, building pipelines and we're seeing investment activity. As obviously this market continues to consolidate and right size the banking system. We continue to see a healthy pipeline in all of the products, it's less than before, yes, but it's still healthy to be able to certain portfolio growth in U.S. revenues in our balance sheet. But the last quarter of the year we will have a more clear view hopefully of how we will reduce that excess capital.

The next question comes from Taylor Brodarick from Guggenheim Securities. Please go ahead.

I think Alex and Brian hit my main ones, but deferred tax asset allowance it might be in the deck but I didn't see what it was at March 31? Aurelio Alemán: We're having a little difficult hearing you clearly; can you repeat the question please?

I was just asking what the March 31, DTA allowance was? Aurelio Alemán: The allowance we had in March, 105 million, let me get the exact amount. You mean what's left for reversal, that's what you want?

Yes after the reversal kind of where we're -- yes what's the most recent number? Aurelio Alemán: It's 200 million.

And then Aurelio, is there I guess as far as the written agreement goes, is there any other I guess timeline, color you can provide or is that just the consent order it's just going to occur when it occurs at their discretion? Aurelio Alemán: Fortunately we have a don't have a timeline, they were trying together when we entered those due in 2010, possibly [indiscernible] and which lift the process or led the process and obviously there is a process to follow which cannot anticipate how long it's going to take.

We have a repeat question from Brian Klock from Keefe Bruyette & Woods. Please go ahead.

So just a follow-up question, so I guess looking at slide 18 where you actually show the reserves related to each of the commercial NPL buckets, I would think that the PREPA was included into that 186.5 million C&I book-value. So would it be a comfortable conclusion I come to is that reserve ratio the 24.7 reserve to that 186.5 is the PREPA reserve that you're carrying under PREPA exposure on that same ratio or is it a little bit slightly higher than that sort of ratio? Aurelio Alemán: I made a slide where you can reference to -- the PREPA is a facility which is C&I as you mentioned and we had -- we mentioned before we had classified the asset and we have started some specific reserves going back where we review the reporter, review of the reserves is a function of the projected cash flow information running the sensitivity analysis. What we have seen is overall carried amount on all the portfolio so PREPA would not necessarily flow what you see there, it's a fortunate to be specific estimates of cash flow that we get from PREPA and consulting groups that we use and that's why we have estimated those reserves.

So I guess, is there any way to kind of get us comfortable at what kind of level or reserve you have on PREPA I guess is it somewhat more or less than that reserve you're carrying on non-performing C&I loans I guess that's what I'm trying to ask. Aurelio Alemán: I mean we haven't disclosed specific reserve for loans, it's a bit slower than this overall reserve that you've here but what we typically don't disclose on specific loans Brian, and we I know other people have done that but rather if we did one more loan in our books, we hope that with the analysis we got very established possible exposures in there and we have had some reserves that are the upside of the reporter but it's based on those cash flows but it's not a highest average percent that you've shown here. So with the overall asset -- [indiscernible] in the portfolio.

This concludes our question and answer session. I would like to turn the conference back over to Mr. John Pelling for any closing remark.

Thank you, Daniele. We appreciate your interest in First Bancorp. We're around if you've any further questions. This will conclude the call. Thank you. Aurelio Alemán: Thank you all.

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