First BanCorp. (FBP) Q3 2015 Earnings Report, Transcript and Summary

Good day everyone and welcome to the First BanCorp Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note, today’s event is being recorded. And I’d like to turn the conference call over to Mr. John Pelling, Investor Relations Officer. Sir, please go ahead.

Thank you, Jamie. Good morning everyone and thank you for joining First Bancorp's conference call and broadcast to the company’s financial results for the third quarter 2015. Joining me today as always are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today’s call, it is my responsibility to inform you 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. 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. Company assumes no obligation to update any of these 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 at the our website www.firstbankpr.com. At this time I would like to turn the call over to our CEO, Aurelio Aleman. Aurelio.

Thank you, John good morning, everyone. And thank you for joining us to discuss our third quarter results. On the call with me today is Orlando Berges, our CFO, who will provide the details of the financial results. Please let’s start with slide five of the presentation to discuss the highlights of the quarter. As we can see and report that it was a fairly clean and stable quarter, with no special transactions this time. Our franchise performance continue to show progress in key metrics. Economic activity in our primary market was received within normal levels. Slight decrease in our sales and mortgage originations in Puerto Rico, while we continue to see increased lending activity in both Florida and the Virgin Island market. We generated $14.8 million of net income for the quarter. It was negatively impacted by increased provisioning related to government exposure in Puerto Rico. On the positive side, we achieved slight increase in the loan portfolio organically and our expense reduction initiative can be seen as we reduce our third quarter non-interest expense to $93.3 million approximately. We also drove improvement in our pre-provision pre-tax results. Pre-tax pre-provision earnings now are $50.5 million for the quarter, which continues to support our growing capital base; tangible book value is now $7.50 per share. NPA declined 4% in the quarter largely to improved performance of the commercial book, NPA ratio now 4.8%. Despite this improvement influence to non-performing reflected a slight increase both in the commercial and residential portfolios. We obviously remained cautious as the Puerto Rico fiscal situation unfolds, but definitely we are very well prepared to manage through potential adverse scenarios if they come to play. And as I said before we continue to focus on improving our core metrics of the franchise, while operating in this challenged environment. Please let’s now move to slide six. Loan portfolio as we can see for the first time in some cycles we grew the loan portfolio organically by $39 million and actually all three markets contributed to this slight growth. Definitely the regional diversification of the franchise is an important element, which continue to produce results in both the loan side and the deposit generation side. Pipelines I have to say are stable and we continue to work to sustain loan portfolios in Puerto Rico and achieve growth in Florida and the Eastern Caribbean regions. With the current pipelines we feel confident, actually we can sustain the loan portfolios above the levels that we are today. Please let’s move now to slide seven. Deposit and broker increased $275 million, net of government and broker increased $25 million during the quarter. Government deposit actually increased to $48 million, around half of this increase we view it as temporary, but we continue to increase our relationship with municipalities and all entities, which First Bank supports in the long side and we continue to receive deposit from those. Our excess liquidity continues to be very strong and our government deposits remain at 61 basis points for the quarter. Further reducing our reliance in broker CDs is one of the objectives, this quarter by $65 million and year to date I want to highlight we have reduced brokers by over $600 million as of the third quarter. Now let's move to slide eight to cover our Puerto Rico government exposure. Government outstanding remained basically flat during the quarter. We continue to feel comfortable with our exposure to municipalities, which is more than half of the overall exposures. These municipalities are very well managed entities and have a strong source of repayment assigned to our facilities. The situation in Puerto Rico we all know continue to face the uncertainty and slow progress on the submission of the plan. Next in important milestones with the market has been informing everyone both the government and the entities our PREPA, GDB bond payment in December and GO bond payments in January, we are very closely monitoring those. Progress has been made on PREPA negotiations and I will say significant public information was released over the past few weeks. Banks continue to be patient and we just extended the full balance agreement once again. I have to say we are optimistic about the current path for the solution of PREPA. On the indirect exposure side we’re closely monitoring our exposure to hotels supported by the Tourism Development Fund. It’s important to highlight the revenues received by the government from those hotels continue to exceed by large margin, the support provided by TDF. We are definitely confident that the capital strength the diversification of the franchise will support the situation of our plan. So we continue with the focus on our metrics improving the franchise and definitely the pipeline that we see give us comfort for the quarter to come. Now I am going to hand the call over to Orlando to discuss the financial results in more detail. Thank you.

Good morning, everyone. So Aurelio showed the beginning of the third quarter shows the net income of $14.8 million, or $0.07 a share compared to a loss of $34.1 million or $0.16 per share for the second quarter. As we discussed during our last earnings call our second quarter results included several significant unusual items that do affect comparability, specifically the $48.7 million loss we had on a bulk sale of classified and non-performing assets. The $12.9 million other-than-temporary impairment we took on the Puerto Rico government securities and pre-tax cost of $2.6 million related to the conversion of loan and deposit accounts that we acquired from Doral. If we look at pre-tax result excluding these items, pre-tax income for the third quarter was $19.2 million, compared to an adjusted pretax income of $20.2 million for the second quarter. Also as Aurelio mentioned pre-tax pre-provision earnings for the quarter were $50.5 million in comparison to our $47 million last quarter. If we breakdown components start with provisioning, the provision for the quarter was $31.2 million, compares to $74 million for the second quarter. Second quarter however included $the 46.9 million charge associated with the bulk sale of non-performing loans and assets. If we exclude this impact the provision for the quarter increased by $3.9 million. Main differences, last quarter we had $3.8 million in recoveries, $2.7 million of those were on the sale of several auto and personal loans and were fully charged-off in prior periods. And we also had some consumer loans we start releases in the second quarter related to lower loss severities in the prior periods that are included on the allowance calculations. Also you remember in the second quarter we did have $15.5 million charge, which was related to incorporation of the charge-offs from the bulk sale in the calculation of the historical loss rates used to estimate the general reserves. The largest insight on provisioning in the quarter was we as Aurelio mentioned that we moved to an adverse classification, the $130 million in commercial mortgage loans we have extended to the hotel industry in Puerto Rico, which are guaranteed by TDF, that added an amount to the provision, significant amount to the provision because of the size of the relationship. These loans continue to be current and continue to be in accrual status, but we feel it was prudent based on the uncertainty in the market to move those relationships to an adverse classification impacting the reserves. Looking at net interest income for the quarter, net interest income amounted to almost $125 million, a decrease of about $1.6 million which compared to the second quarter while NIM increased 1 basis point to 419. $800,000 of the decrease is related to the reduced volumes of both consumer loans and investment securities. On the investment portfolio side, in reality we have not been able to reinvest large chunk of the prepayments we have been receiving on the portfolio due to the low interest rate scenario and the expectation of possible rate increases in the foreseeable future. As we have mentioned before we concern on interest rate risk and expansion. If interest rate stabilize we could have some improvement in interest income once we are able to invest the excess cash we’re holding now. On the consumer lending side, specifically auto loans originations under current credit policies are still not at the levels to compensate for normal repayments and we could still see a bit of that for the remainder of the year. On the commercial side, reduction reflects a couple of things we had a $500,000 collection in the last quarter related -- income in the last quarter related to a commercial loans paid off and also we did record $400,000 in interest income on PREPA, this was before we started applying all interest received to the principle balance back in May at that time we moved the loan to interest to principle rather than recognition on a cash basis. Reductions on the interest income side were offset by decrease in interest expense and it’s been primarily driven by reductions on the average balance of brokered CDs, we continue to reduce brokered CDs and average balance went down by $158 million compared to the last quarter and also we had the full quarter impact of reverse repurchase agreement we enter into in last quarter. Cost of deposits remain on 61 basis points, however we have seen some pressures on broker deposit pricing as well as time deposit pricing specially in the longer-terms both in Puerto Rico and in the Florida markets. But we continue with our strategy focusing on the mix of the deposits and growing number of deposits and demand deposits and that could continue to improve our margins down the line. On the non-interest income side, non-interest income for the third quarter was $18.8 million as compared to $6.7 million in the second quarter again those second quarter results were affected by the $12.9 million other-than-temporary charge on the Puerto Rico government securities and about $600,000 of losses that were loans held for sale that were included in the bulk sale. Excluding those non-interest income is down $1.3 million and decrease mainly mortgage banking business is down $500,000 large part of it has to do with realized and unrealized losses on the forward contracts that are taken to hedge the future mortgage loan sale, this obviously it’s offset by higher margins on mortgage loans, but as you know the contracts our mark-to-market every month while the loans are held for sale at typically lower cost of market, creating some timing difference as in the recognition of their values. Also we had a couple of other smaller items, decrease of $300,000 in insurance commissions commercial policies tend to have some variability and some $300,000 in income we had last quarter on exchange of some first preferred securities. On the expense side, non-interest expenses for the quarter were $93.3 million, came down $9.5 million from the $102.8 million recorded in the second quarter. Again second quarter results included $2.6 million on non-recurring acquisition and conversion cost related to the Doral accounts that were converted to our system in the second quarter and $1.2 million in expenses and losses related to the bulk sales. If we exclude these items non-interest expenses decreased by $5.8 million in the quarter. Main drivers last quarter had $1.6 million in access interim servicing cost related again to the loan deposit accounts from Doral over our internal processing cost. We converted these accounts in May as you remember we had a couple of months of interim servicing cost. We also had $1.3 million in consulting legal fees during the second quarter for special projects as well as strategic stress testing capital planning matters we didn’t have this quarter. Legal fees are down this quarter by $1.1 million related to troubled loan resolution efforts that we have completed a number of cases over the quarter and there was a decrease in employee compensation as we have reached -- some employees have reached maximum payroll limits and intensive accruals have been adjusted based on current volumes. Important to mention, you remember there was change in legislation back in the middle of year where sales tax were increased, this legislation included a new business to business tax that was effective on October 1st. So a 4% tax just became effective. We expect an impact somewhere in the $800,000 to $1 million range depending on the level of professional services and obviously we continue to take measures to mitigate this impact as part of our expense management process that are we continue to have. Our goal is as we have mentioned before it’s to keep those expenses at the $95 million range or below. And we expect to continue to do that. On the non-performing, if you look at asset quality now, non-performing assets decreased $27 million to $617 million, non-performing loans came down by $30 million or 6%. This decrease in non-performing was mainly related to one loan that was historical accrual status based on the borrower’s sustained repayment performance and the credit evaluation on the facility. We did have slight increase in inflows our -- as you saw in the numbers all inflows were $50.8 million compared to $44.9 million. It was a bit divided the increase in the commercial side inflows for the quarter were $10.3 million compared to $6.4 million last quarter. And on the residential side inflows were $27 million compared to $25 million last quarter. No significant large items came in this quarter but there were some variability. OREO did increase a bit by $2 million driven by additions in the quarter primarily residential. We had about completed our $10 million in foreclosures in the quarter, compared to slightly over $5 million last quarter, that’s part of the increase. One thing I like to point out is if you look at the numbers, it appears as if construction non-performing went up by $40 million, but in reality, the corporation we has the corporation change the intend on a $40 million construction loan the Virgin Island that was held for sale. Upon signing of a new loan agreement with the borrower, therefore the $40 million loan was transferred back to held for investment from held for sale. So you can see the $40 million increase in construction and $40 million we auction in held for sale. Net charge-offs for the quarter were almost $24 million 1.02% of loans, which compares to the $79 million we have last quarter. Last quarter obviously was affected by the loan sale, which added $61.4 million in charge-off. Excluding this impact, charge-offs were $6 million higher this quarter. $2.9 million of the increase was related to the consumer portfolio large expand the $2.7 million I mentioned before on loss recoveries we had on the sale of federal loans that have been fully charge-off in prior period. We had an increase of $1.8 million in commercial and construction again, primarily related to a $1.1 million recovery we had in the Florida market last quarter. And residential was increased by $1.6 million and it’s related to the increased volume of foreclosures we did have in the quarter. We haven’t seen any increased patterns of charge-offs it’s been consistent with other quarters. We had each of the allowance to loans held for investment was 2.46% compared to 2.40%. We did provide the provision was higher than charge-off for the quarter mainly related to the classification of $130 million facility. The allowance ratio to non-performing was 48.4% compared to 47.8% similar to slightly increase from last quarter. Capital position to mention it remain strong as you have seen on the ratios the corporation’s total capital ratio was 19.7% and the Tier 1 capital ratio is 16.6%. Tangible common equity ratio increased to 12.6% all related to earnings for the quarter and some improvements in OCI. So now I turn the call back to Aurelio and we'll open for question and answer.

Yes please let’s open the Q-and-A.

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

Hey, good morning guys.

Good morning, Alex.

First, could you share with us the actual amount of the provision that was associated with the TDF loans during the quarter?

Alex, as a practice we never disclosed specific reserves on loans. Obviously, I can tell you that an adverse classification as a standard classification does carry a double-digit reserve number. But we have not disclosed that in the past and we have not disclosed any specific reserves on our loan.

Okay. Did anything changed with respect to the payments for this quarter, is it just purely due to what’s happened in a macro level that makes you nervous about how much of those payments could potentially made in the future?

Nothing changed in the payments; it's just obviously about the macro. Revenues on those properties meaning room tax, casino revenues that the government received from the properties continues to be significantly higher to what they contribute. So nothing has changed on payment behaviors.

Okay. And then what about -- can you just talk a little bit more about... maybe I missed in your prepared comments, but the $40 million construction loan that was transferred back to held for investment, did you say that that was refinanced to a new borrower during the quarter or what exactly change that makes it something that you now going to keep versus selling?

This case has been under press for a long time, is a Scrub Island case and what happen is you know that case went through a court process. We ended up finding a new agreement with court support with the borrower and we plan to hold the loan for now. They are expecting new investors’ money to come in and we feel that with the strategies we’ve applied the properties could improve the value. So we decided to change the strategies on selling it versus holding it.

Okay. And then the $800,000 to $1 million per quarter that you mentioned for the business-to-business tax, is that per quarter or per year?

That is per quarter, it’s important to clarify though that... remember that business-to-business tax which are 4% coming in now in October and will be like that through March 31st. According to the regulation -- to the legislation it could go up to 10.50% in April 1st. The secretary does have that the discussion to postpone the time. We are hearing that there is a possibility that they could postpone at least through the end of June or beginning of June. But it could change. So their numbers could go up if it stays the way it is.

Okay. With that in mind, can you talk about some of the opportunities that you have in 2016 to increase that pre-tax pre-provision net revenue number both on the expense side and also on the revenue side?

When you look at the expense side in the Puerto Rico case in 2015 the significant what we would consider onetime event. So when you talk about legal, you talk about consulting professional services actually some of the list top in branches we acquired Doral, which actually increased expenses we just realized some of the consolidation opportunities and you actually going to see reflected in the fourth quarter. So as the improvements in the different areas those expense we are still working on it. We feel fairly confident that we will mitigate that increase from the tax side, and actually the target is to show a better number. On the revenue side, I think I mention over the pipeline, the pipeline actually looks good, looks good in Puerto Rico and it actually looks very good in Florida and the Virgin Island. So the portfolio on the revenue side there is some non-interest income opportunities. When you talk about account fees and charges, which we’ll closely monitoring and introduction of certain new services that we probably mention later on when we are ready. But we feel good about the above $200 million pre-provision pre-tax Alex.

And then just final question, can you just remind us when we could possibly see some reassessment of that DTA, the remaining DTA evaluation allowance?

Well we have to go through the analysis every year as you know, we’ll undertake that process this quarter, that doesn’t mean that we’ll see some changes on the information because obviously some of it was based on the strategies we had analyzed on revenue streams and how things change overtime. We feel comfortable that the analysis we had done to recognize the DTA last year, included situations on the market and included sensitivities on charge-offs that would reflect adequately what we have seen in 2015. To be able to say that the recognition of the remaining amount, I would have to say that it’s, I don’t think it is something that is ‘15 event.

Great. Thanks for taking my questions.

Thanks, Alex.

[Operator Instructions]. Our next question comes from Brian Klock from Keefe, Bruyette & Woods Inc. Please go ahead with your question.

Hey, good morning gentlemen.

Good morning, Brian.

I wanted to follow up a little bit on the TDF loans that you guys put in the classified. So just remind us I mean these guarantees are I guess, I would view it as a third source of payment right because you’ve got the cash flows from the hotels then you’ve got the collateral and then we have to go through that before the guarantees come into play. So I guess maybe talking about that process and again these are current. So I just make sure I understand the process and how these things are accruing in currently?

Okay. The way the guarantee work is that it’s two things, but it's obviously the primary responsibilities from the borrower, which is the hotel and TDF comes in as a secondary responsibility to cover payment and performance of the loan. If you remember when at the filing of the 10-Q we had indicated that we have received our $4.8 million of payments from TDF during 2015 through June 30, on Payment and performance in this facilities. So that tells you that the hotel facility is not fully compliant covering that payment. That’s why, the TDF guarantee it’s an important component on supporting the full payment. They have continue to make payments normally and the loans are current we haven’t had any issues on timing of payment. But in reality TDF continues to be part of the government part of GDB. And we feel there is enough uncertainty on GDB to warn the classification. Aurelio did mentioned Brian that if you look at revenue collection on the hotels that the government gets vis-à-vis the amount of payments they’re covering, is significantly higher the revenue collections. So we feel it’s in the best interest of the government to continue to support the hotels, but we cannot ignore that the uncertainty surrounding GDB.

Okay. And maybe I guess the thing about so there the risk that the TDF guarantee those cash flows that you’re getting so far may not whatever happens with the GDB those cash flows could be at risk, but the underlying mortgage payments principle and interest you still have collateral and you still have cash flow that’s coming from those hotels as a first and primary source, right?

That is correct.

Great, okay. Just want to make sure and I think you did answer a lot of other questions, oh go ahead.

Yes, that’s why we called it indirect exposure.

Yes, exactly and when I think about the direct exposure, some pretty good trends in the underlying asset quality some of your higher severity commercial we continue to work down the NPAs there. So like that and net interest margin was pretty stable. So some good loan growth we saw as you talked about the first time we’ve seen some positive loan growth organically in a while. So maybe talk about I guess we are seeing from the stability in the margin and the good loan growth organically.

It’s really what we call it a three-by-three it’s really consumer, commercial and mortgage in the three regions Puerto Rico, Florida and the Virgin Islands. If you look at the graph that in one of the pages when we talked about the loan portfolio and you look at the trend for the last year we actually if you exclude the loan sales and all the related noise, it’s been fairly stable. Originations are above the $800 million and at the levels that we had over the last two quarters the portfolio will continue to show growth. So it’s really a three-fold strategy commercial, consumer and mortgage understanding the sensitivities of Puerto Rico, keeping the credit policies very tight in this primary market. We’re going to see as Orlando mentioned still some attrition with the consumer book because we continue to keep tighter policies. There is a lot of applications on paper obviously approval ratios remain cautious. On the other hand the Virgin Islands have shown -- we have reduced our portfolio significantly, it was about $1 billion five years ago it’s below $700 million. So, we see some opportunities on that market and Florida as I mentioned before the teams continue to improve the pipeline we have expanded the staff, the staffing in the Florida teams in all the commercial, corporate and mortgage areas. So it’s a combination really the power of the franchise as a loan originator of three main core businesses and three regions.

And one thing Brian, the loan growth that we saw in the quarter on the commercial side was basically happened at the end of the quarter. So we didn’t see the full impact of those loan growth revenues in the quarter.

Yes the most of the closings on the commercial side took place in the last month of the quarter, yes.

Yes that’s a good point, thanks for highlighting that and good work in a tough quarter and thanks for your time.

Thank you Brian thanks for your support.

[Operator Instructions] Our next question comes from Taylor Brodarick from Guggenheim Securities. Please go ahead with your question.

Hey, great thank you. Hey I think just one left from me, what could you tell us about kind of… I know you can’t give too many details about conversations with regulators but looking at the payments at the end of the year that the government entities have due, what do you think is the most important in selection point to think about possibly getting the fed kind of shifting more towards allowing for more capital deployment?

Well I think it’s two different questions to be honest, I think the -- for Puerto Rico there’s three very important milestones here now, it’s I think PREPA is a milestone, why because it’s kind of first domino here. Resolution of PREPA will give market some confidence and will be a positive step towards outside of the court system, outside of the legal system achieving a good transaction towards the future of a very important entity in the island. And then secondly, liquidity is really the most important event there’s still a lot of noise regarding what GDP is doing in the short-term versus the long-term, but in the short-term it’s really the December payment and the January payment. I think those it’s really the ripple effect of those into the economy, which will give more confident to everyone and the regulatory bodies is how the macro it’s going to bail while we all trying to define here. As we said we do have a lot of capital, we are well aware of the math on how accretive buying shares would be at this stage, but we have to be at this stage we cannot anticipate when the environment will allow us to move forward on any capital actions.

Thank you, Aurelio, appreciate it.

Thank you.

And ladies and gentlemen at this time I am showing no additional questions, I’d like to turn the conference call back over to Mr. Pelling for any closing remarks.

We thank you for your continued interest in First BanCorp. We have a busy November-December attending the Sandler Conference, in Palm Beach, November 7th, The Bank of America Conference in New York November 17th, and the KBW Investor Field Trip in December. So we look forward to seeing you there. Thank you this will conclude the call.

Thank you, all.

Thank you.

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.