First BanCorp. (FBP) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the First Bancorp Second Quarter Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I'd now like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead, sir.

Thank you, Keith. Good morning, everyone and thank you for joining First Bancorp's conference call and Webcast to discuss the company's financial results for the second quarter of 2017. Joining from First Bancorp are Aurelio Alemán, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. Company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the Webcast presentation or press release issued by First Bancorp, you can access them on our website at www.firstbankpr.com. At this time, I'd like to turn the call over to our CEO, Aurelio Alemán. Aurelio? Aurelio Alemán-Bermudez: Thank you, John. Good morning, everyone. Thank you for joining us to discuss the second quarter results. Orlando and I will walk you through the details of the financial results. Please let me start with the highlights of the quarter. Please turn to Slide 5 of the deck. We're very pleased that we posted another quarter of positive results. Especially in light of the fact that our main market continues to face both political and fiscal headwinds. I really want to recognize the great work of my management team. Challenges in our main market in Puerto Rico and at the same time, executing on the growth opportunities that we have in the closure market. We generated $28 million of income this quarter or $0.30 per share. And most importantly, our operating metrics continue to show positive trend during the quarter. Pretax preprovision for the second consecutive quarter came in at $55 million level. And we did continue to expand our mining, up 2 basis points as we all know interest rates are moving in a different direction and this is a very positive for us. Continued to show a good trend of managing our expense base which was below $90 million for the quarter and just over $85 million be the other expenses. Performing assets decreased nicely by $72 million this quarter and we did reduce again our government exposure in the Puerto Rico government by about $53 million. The decline of the NPAs that we reported - we took some charges from previously taken on the exposure is government related. We saw $23 million on securities. We resolved a large nonperforming commercial relationship which we collected - we're definitely pleased with the progress on the asset quality improving during the quarter, but obviously, we remain cautious of the economic environment and the potential effects of the fiscal plan in our portfolio. We definitely still have work to do in continuing managing our NPA book down. Core deposits were flat, excluding government, they decreased $74 million, government continued to increase deposits across most of the banks in Puerto Rico. When we look at Florida, there was a slight increase in deposit and was quite stable. Most importantly, we continue to build capital as we and now book value, it's at $8.24 per share. Also important to note that in May, we actually formally in our common stock. This to simplify our capital structure. We truly appreciate the support of the U.S. Treasury contribution to our turnaround story over the past 8 years. Please let's move to Slide 6 on the loan portfolio. It was a strong quarter in originations. The loan portfolio increased $30 million. Obviously, in spite of the large charge-offs that we had the quarter on the government loans. Most importantly, I want to highlight that the performing book increase $97 million. Obviously, this will contribute to our margin. And Florida - the Florida region continues to be an important contributor to growth. Coordination and activity increased about $47 million if we compare that to the prior quarter. Cover the distributions, Florida growth was mostly concentrated in commercial and residential portfolio. In Puerto Rico, we're recovering some of the market share that we have lost in the consumer book in both the auto, personal loans and credit cards which definitely should help our margin going forward. Again, I think it is important to highlight the regional diversification of the franchise. Now when we look at the portfolio, it's 24% as the loan book is outside Puerto Rico, Florida and in Puerto Rico. Again, the origination pipeline, we continue to have double-digit for the remainder of the year, 3 regions and the focus on the 3 main assets commercial, residential and consumer. Please turn to Slide 7. Again deposits, relatively flat. I think I want to highlight that we continue to reduce our reliance on broker CDs and this quarter, it was reduced by the $105 million. Now are 20% of our total deposits and it is our goal to continue to reducing that exposure in terms of concentration on broker CDs. Now please let's turn to Slide 8. I think this is a big highlight of the quarter. For many, many quarters, we did report our intent to government exposure of the first on that regard. We've been working out the TDF currently on an agreement and we've been writing down on taking reserve that guarantee Orlando. The remaining exposure that we have was primarily municipalities. And I have to say, we continue to feel comfortable in municipalities. If we look at our book, 70% of the municipal exposure, the municipal that depends in a very small portion on the subsidies, less than 4%. And when we look at the municipal portfolio, their reliance is actually below 6%. So we think that's very manageable. So the reduction on the general assignment is not a concern at this stage. I think on the commercial front, the approval of the fiscal plan and the approval of the budget, we have to continue to watch closely the implementation process, but I have to say that we definitely would like to see more transparency from both the government and the Fiscal Board. In terms of the timing of the action, including the that are directed to support economic development in the island because economic development is key to replacing and improving employment. So we do expect some alternative measures, but we're ready. I think the - this is discipline that we're seeing now it is needed and Puerto Rico will end up with a more manageable at the end of this process. Again, we have to remain attentive and cautious to this economic environment and the potential effects including our portfolios but we're ready to manage that challenge. So I'm going to hand the call over to Orlando, so he can discuss the results in more detail. A - Orlando Berges-González: Good morning, everyone. As Aurelio mentioned, second quarter was $28 million with earnings above $28 million or $0.13 per diluted share which compares with $25 million, $0.11 last quarter. Total assets for the quarter were $11.9 billion, up $23 million from last quarter mostly in the loan portfolio where we grew $30 million. And as Aurelio mentioned, the performing portfolio grew $96 million for the quarter. We go over the main variances. Let's start with the provision. For the second quarter, the provision to loan losses was $18 million which is down $7.3 million from the first quarter. This decrease was driven first by $7.8 million in charges to specific reserve for the commercial mortgage loans guaranteed by the TDF. Last quarter, we provided a $10.8 million on this loan as compared to $3 million this quarter. During the quarter, we reached a preliminary agreement with GDB on the value of the guarantee and we adjusted the allowance for loan losses accordingly and as I'll discuss a little later, took some charge-offs on the loans. During this quarter, we also had a $4.2 million on a previously charged off loan that final resolution was achieved. Offset in this was an increase of $4.2 million in specific loans which includes a $2.2 million of additional charge-off and additional for the provision on the resolution of a $27.6 million nonperforming commercial relation in Puerto Rico and I'll touch a little bit more. During the quarter, we recorded an income tax expense of $9.3 million which compares with a tax benefit of $8.1 million in the first quarter. You might recall from last quarter discussion that we had a $13.2 million tax benefit recorded last quarter related to a changing tax status of certain subsidiaries. So that offset expense of the quarter and also, we did have some higher pretax income this quarter resulting in the increase in taxes. If we move to net interest income, net interest income was $125.9 million, up $1.4 million from last quarter, margin was 4.44%. So as Aurelio mentioned, up 2 basis points from last quarter and a number of components on the increase, mainly $900,000 impact related to both higher performing commercial portfolio primarily in the region and the upward repricing of the variable rate commercial loans, the increase of the LIBOR rates. Also, we had an $800,000 increase in interest income on securities associated with lower amortization and we had an $800,000 increase related to the one extra day in the quarter compared to last quarter. On the other hand, mortgage interest income was down $600,000, primarily associated with a lower amount of nonperforming loans that we're as compared to last quarter and some additional inflows to nonperforming in the quarter. Interest expense for the quarter was up $800,000. The average costs of our interest bearing liabilities increased 4 basis points in the quarter. This increase includes 2 basis points in the cost of interest including broker CDs for this purpose which basically result from a change in deposit mix in the quarter where we saw increases in retail CDs and decreases in savings accounts. Obviously, retail CDs carry a higher interest cost than the saving deposits. Also, the effect of the higher market interest rates resulted in repricing of - repurchase agreements that we have on the books on the subordinated debentures as well as a higher cost on new broker CDs. This quarter, we redeemed approximately $164 million of maturing broker CDs with an cost of 108% and we issued a $59 million with a cost of $164 million. This CD had a longer maturity issuance an average of a 27-month maturity, taking advantage of the lower - long term rate. The quarter, also we increased the proportion of long term from the home loan bank advances, taking advantage, again, of the curve. While we did issue some money at an average cost of 2% which is good for our earnings risk management. Noninterest interest for the quarter amounted to $20.5 million. Last quarter we had $8.2 million. So the quarter had - the first quarter had a $12.3 million in charge on OTTI and Puerto Rico government securities. This quarter, we - as Aurelio mentioned, we sold those securities and we had a $400,000 recovery on previously taken charges. On a non-GAAP basis, we adjust for these items. Noninterest income was $20.2 million in the quarter, up - I, mean down $300,000 compared to last quarter which is a net impact of 2 main components. Last quarter, we had a $1.7 million in insurance commissions which were related to seasonal continuing commissions that insurance agency repeats once a year based on the prior year sales. And on the other hand, we had an increase in $1.2 million in revenues from our mortgage banking activity which was driven by higher sales volumes and better margins. This quarter, we sold $99.5 million of U.S. government securities - of U.S. government-related mortgage loans and - at a gain of $3.6 million compared to $85.5 million sold with a gain of $2.3 million in the first quarter, also related to better originations in the quarter. On the expense side, we continue our management of the expense components. Expenses in second quarter were $89 million, an increase of $1.2 million from the first quarter. This increase includes some one-time items. In the first quarter, we had a $700,000 - this quarter we had $700,000 increase in credit card expense which mainly reflects seasonal credit cards incentives we receive in the first quarter which were based on the prior year's sales volume quarterly assessment fee. We had a $500,000 increase in professional fees in the quarter which was associated with the implementation of new information technology system we've been working on, some consulting work and certain legal matters. Also last quarter, we had a reversal of $1 million reserves needed on unfunded commitments based on outstanding traffic items on the commitment. We didn't have any this quarter. This was offset by lower OREO-related expenses in the second quarter and we also have some reductions in occupancy expenses and compensation in the quarter. All-in, basically, it's been a fairly consistent on the expense base except for some of these one-time items. In the asset quality component, as Aurelio mentioned, nonperforming decreased $72 million to $575 million in the quarter. The nonperforming assets are now 4.8% on assets. Nonperforming loans decreased by $66 million, 4.7% of loans. The decrease in nonperforming first the charge-off of $29.7 million we took on the commercial mortgage loans guaranteed by TDF. As we - as I mentioned before, we reached an agreement with TDF on the value of the guarantees, so we ended up taking charge-offs on basically on previously reserves on this specific loan. We also - some of the related to the sale of nonperforming GDB and Puerto Rico bonds. This bond had a book value of $23 million, but we also had to pick up on OCI related to this sale. And we - in the quarter, had a resolution of a $27.6 million nonperforming commercial relationship, where we received cash payment of $12.8 million recorded charge-off of $2.5 million and acquired some collateral amounting to $10.6 million that were transferred to OREO and now we have available for final dispositions. The inflow to nonperforming was slightly higher, $4.3 million higher than last quarter. This includes mostly the mortgage portfolio million. We've seen inflows over the last few quarters be consistently lower. If we look at our inflows over the last 2 years as compared to the trend we have this year, it's a significantly lower number of inflows which has helped in the reduction of the nonperforming portfolio. The adversely classified commercial and construction loans decreased by $51 million in the quarter. They're now at $367 million. And as I mentioned, the OREO balance did increase because $24 million in additions which includes the $10.6 million for acquired in the resolution of the large nonperforming because offset by sales of $7 million and OREO - value adjustments of $4.7 million. We continue our pace of getting rid of the OREO portfolio. Net charge-offs in the quarter were higher, amounted to $47.8 million, 2.16% of average loans compared to 1.6% last quarter. This increase includes the $29.7 million recorded on the mortgage loans guaranteed by the TDF. Charge-off of $3.5 million we took on the resolution of the nonperforming, the $27 million of performing commercial relationship. And the $900,000 increase in consumer loan net charge-off which is primarily related to a recovery of $1.2 million we had in the first quarter on the sale of credit card loans that had been previously charged-off. These increases were partially offset by the $10.7 million charge-off we took in the first quarter associated with the sale of the credit line and we also - this quarter we had $4.2 million recovery on our previously charge-off loans and we had $1.4 million decrease in residential mortgage loan charge-offs in the quarter. The ratio of the allowance came down as a result of this large charge-off of June, compared to 230 but largely due to those previously taken reserves that were charged off in the quarter. However, we look at the allowance, percentage of nonperforming loans, it's 42. - 17% as of June which is basically at the same level as last quarter where the allowance was 42.56% of loans. Important to mention that as you see on the chart, commercial nonperforming loans are now at 46.6% of the principal balance net of charge-offs on reserves. On the capital front, ratios continue to be really strong. Stockholders' equity came up based on earnings and based on the pickup on OCI we had of the nonperforming Puerto Rico bonds that had about $5.7 million of OCI adjustments last quarter. Our capital ratios are really strong at a - with tangible 18.6% and total capital is 22.2%. We have continued to make the payments on the stocks and the dividends and the deferred securities. And also, as Aurelio mentioned, during the quarter, we - the - the impact of the sale was at $2.4 million - one of the impacts of the sale was a $2.4 million of outstanding restricted shares held by employees work which, obviously reduced the number of shares outstanding and part of the pick up on the book value per share. This helped $0.09 on the book value per share which book value now stands at $8.24. Regarding, it's important to mention that we will be filing our 2017 stress test next Monday, the 31st and by October, the results will be made public. So now I would like to open the call for questions.

[Operator Instructions]. And the first question comes from Alex Twerdahl with Sandler O'Neill.

Just a couple of questions on credit. First a little bit more color on the TDF loan and sort of exactly what still needs to be done before that agreement closed? Aurelio Alemán-Bermudez: Obviously, we have an agreement that closing and that agreement is probably of the restructuring that to be made public Fiscal Board and we need certain changes at the legislator side of creating an entity that replaces GDB that will be the entity that - which remains the and continues forward. That, I understand, next week, it's going to be. So as you have seen, we have - if you look at the numbers we have written down significantly, the value of the guarantees taking the charge-offs. So once we have closely, according to, we believe, are the values.

Okay. And do we have enough information at this point to make any assumption? Once the agreement closes, if it does according to plan, what will happen to that loan, to those set of loans following the agreement? Will they remain as nonperforming loans? Aurelio Alemán-Bermudez: Yes, the idea of the loans is to the loans, this these loans could become performing loans based on the tax loans and the value of the collateral that we have today.

Okay, that's great. And then the other big loan that you restructured during the quarter, a result during the quarter of the $27.6 million commercial resolution. Is there anything special about the timing of that resolution? Does that suggest maybe a little bit more aggressive stance from you guys to move some of these things through? Or something happened with the collateral? Or what kind of drove that? Just the timing specifically on that resolution? Aurelio Alemán-Bermudez: Well, if you look at the classified loans, we still have nonperforming loans, we still have loans that will be working for some time in the legal framework. So there is always a finish line here. And some of these finish line. So because of the time of resolution that it takes in the court, but the courts are moving and usually we - it's priority to cut down the tree of the NPA . Orlando Berges-González: It's a case we've been working for some time. It's not a new case working on for some time on the case, final line - the finish line this quarter.

Okay. Is it something that could have been even potentially several years that this resolution took to come to fruition? Aurelio Alemán-Bermudez: We have some cases that are being in court for 3, 4 years. So this - I think this was probably 2 years' timeframe approximately. We have some cases that have taken longer, yes.

And then on the OREO, I know you sold a little bit this quarter. What kind of OREO properties you're able to sell? And are there other OREOs in the portfolio that look like what was sold this quarter? Orlando Berges-González: Yes. We actually divide the portfolio in 2 components. Obviously, residential, there is a - as we go through a foreclosure process, there is a constant flow from nonperforming loans to OREO as we complete the different closure processes and we do sell every quarter a good amount of those loans. So that's a consent in and out on the portfolio. On the commercial side, it takes a little bit longer. As we have previously mentioned, there are 2 or 3 large properties, there are 3, in fact, large properties in there that we have as part of the portfolio that we've been working on some final resolution and some legal things that could help getting disposition. We have interest in a couple of the properties that once we achieve resolution, we might be able to complete those transactions. We're shooting to try to complete during the year and hopefully, that would help reducing that balance. But it's something we've been working on. The commercial is - the consumer - the residential is easy to estimate, what goes in and out, but the commercial takes a little bit longer.

[Operator Instructions]. And our next question comes from Joe Gladue with Merion Capital.

Just a couple of questions. On the professional services line, the increase in there, I think, you said that a lot of that was related to loan workouts and everything. Just curious, is that new level going to continue where it sort of some temporary spike in that, that will go away in coming quarters? Aurelio Alemán-Bermudez: It's not something that we expect to continue. We have a trend of NPA reductions. So usually it's linked to the process. We had expenses at a certain level, but we have some specific charges that impacted the quarter as well as at the on the technology front. We did - in the technology side, we did complete the implementation of the new mortgage platform under the relations side which requires additional investment on the consulting side in implementation of the final stage of implementation of the project which was budgeted and actually brings , paperless in the mortgage business.

Okay. All right. That sort of leads into my next question which was - just wanted to be sure I understand that the yields - on the residential mortgage side looks like yields were down about 15 basis points versus in the first quarter and I just want to make sure I understand what was driving that? Aurelio Alemán-Bermudez: I think some of the - obviously, we're reducing Puerto Rico which has been yield and we've been looking Florida, growing Florida in the mortgage, so some of that is . In Puerto Rico, remember it's primarily a fixed rate mortgage business. In Florida, some volume, some of which obviously shows not only so it's traditionally been Puerto Rico. Obviously, the NPA levels on the portfolio is smaller. The NPA levels remain around the same level. So that's the other . Orlando Berges-González: And we also had a - every quarter, we have on the mortgage side, we have mortgages that finally geared and get up to-date and you get payments put up today than - so you have a big cut on earnings there. The amounts that we had in this quarter was lower than last quarter. So that had some impact on the income side. And also the - that increase on the inflows of $3 million, $2.4 million of mortgage inflows into nonperforming did have some impact on the yield. But quoted rates haven't changed much. It's a mix of our portfolio by region and some of this impacts on the nonperforming.

Okay. And I guess I'll ask about the government deposits you have. Is that - I guess the level of those as they peak - should they be coming down or do expect them to be relatively stable? Aurelio Alemán-Bermudez: To be honest, we've been expecting some reductions and some use of the liquidity of this deposit, it's not been the trend. It's been . We also have been a portion of the deposits belongs to transactional account of the public agencies. Entirely - it's not an entirely central government money. So they have continuous of the core deposit strategy to bring the operating accounts and provide other services to both municipalities and agencies which - public agencies which are the largest depositors in the sector. So - but yes, the answer is yes, we were expecting some reductions . Orlando Berges-González: And we ended up with an increase of $60 million this quarter. So we - went the other way.

Okay. And I guess lastly, I'll just ask about the municipal exposure. My understanding is that the central government is likely going to be reducing some of their subsidies to the municipalities and just wondering how that makes you feel about the - those credits. Aurelio Alemán-Bermudez: Well we think the - based on the level of dependency that our portfolio has on that subsidy, we think it's manageable with the municipalities to adjust in the expenses and continue the that they've been doing. So we're not concerned about the - in our portfolio, there are some municipalities out of our portfolio that have a very high dependency on these subsidies. But remember, the largest municipalities are the ones that banks are being underwriting and they are linked to fairly strong property tax which is the primary source of our loans repayment. So this measure as an impact. Obviously, you have to be watchful, though. Changes in law or how the process continues to evolve. We don't expect - there is nothing in the budget that concerns us regarding our municipalities by managing the changes, yes. Orlando Berges-González: As Aurelio mentioned before, that almost 3 quarters of the municipalities we - the exposure to municipalities, it's 3 municipalities that their revenue, the central government allocation is only 4% of the revenues. And for the entire portfolio that we have, it's under 6%. And keep in mind, the structure of collection of the property taxes goes to the comes to us before it goes to a municipality.

And the next question comes from [indiscernible] with Keefe, Bruyette, & Woods.

I just want to make sure I have it right on that agreement with the TDF. The - that's being done as part of the GDB restructuring under the auspices of the FOMB. So any fixed income instrument that's issued as part of it would presumably be remote from any possible further debt restructuring because it would be in an already restructured entity? Is that kind of correct for my thinking or not? Aurelio Alemán-Bermudez: It's being interpreted. That's correct.

Okay. And could you refresh my memory? What are the properties that are guaranteeing? What's their current operating status? Was it 3 properties or? Aurelio Alemán-Bermudez: These are three hotels, properties. And three of them are operating, yes. Orlando Berges-González: And one of them was the one that had been making all the payments on its own. The other 2 did need support from TDF.

Okay. And on - could just remind me, on the muni loans, what is the tenure on those loans? Orlando Berges-González: Well, it changes. It could be - you have 2 structures. It could be less than 7 years which are the ones that are less than of the loan. And the ones that were listed as securities at original terms of 25 years. So they have different terms outstanding, but they are longer terms.

And as there are no more questions, this concludes both the question-and-answer session and the conference call. Thank you for attending today's presentation. You may now disconnect. Have a nice day.