The First Bancorp, Inc.FNLCNASDAQ
LOADING
|||
Operator: Good morning and welcome to The First BanCorp Second Quarter Earnings 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, IR Officer. Please go ahead.
John Pelling: Thank you, Nicole. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss our second quarter results. Joining me today 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 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 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 them at our website at firstbankpr.com. At this time, I’d like to turn the call over to Aurelio Aleman, our CEO. Aurelio.
Aurelio Aleman: Thank you, John. Good morning, everyone, and thank you for joining us to discuss our second quarter results. On the call with me today is our CFO, Orlando Berges, who will provide the details on our financials. I will walk through some highlights first. So let’s turn to Slide 5, so we went through the highlights. As we can see in this page, it was a fairly clean and a straight forward quarter, but before going into the numbers, I would like to comment on the macro. The most important event across the quarter was the passing of PROMESA. We view the passing of PROMESA by the U.S. Congress as a positive step towards reducing the level of uncertainty in our main market. Definitely the expected impact on economic growth long-term should have a positive impact on credit quality and growth in the future. Our direct exposure to the targeted debt that will be impaired is basically relatively low where we look at the overall exposure that we have to bond inPuerto Rico. Going through the numbers, we generated net income of $22 million, $0.10 per share, very close to consensus, and it compares to $23 million in the first quarter, pre-tax pre-provision level of $50.5 million impacted by net interest income. Again, tangible book value increased $0.17 to $7.83. The franchise continue to perform strong despite of the market challenges, loan origination and renewal volume improved across all categories and actually across all regions and the reported franchise continue to grow stronger. We’re going to go in detail into the loans. On the asset quality side, we saw a slight increase in NPA. I think it’s important to highlight that we did not perform any large area of REO sales during the quarter, no one completed. I have to say that we do expect to increase sales activity for that commercial inventory that we have in REO during the second half of 2016. Next chart shows where stable resi increased slightly, but consumer side continue to decrease. And I am very pleased to say that our delinquencies are now at the lowest level in many, many years, obviously driven by a conservative credit on the right policies over the last couple of years. Now, let’s move to next Slide to cover some detail on the loan portfolio. Obviously as we said, given the uncertainty in the Maine market, over the last quarter we have made a conscious decision to maintain tight credit standards. I have to say that the business is there. We have chosen to be selective, especially on the consumer side. The originations volumes were healthy, but on the other hand we have larger prepayments. We have prepayments in the second quarter for $51 million and year-to-date those prepayments are $145 million. On the other hand, when you look at the origination in the second quarter, I think to positive Puerto Rico increased, Florida increased and VI increased, but on the other hand when we look at the pipeline, it actually looks stronger. The loan portfolio of numbers went for the first time below $9 billion were also contributed to this in some reclassification of municipal loans that Orlando will cover later. Moving to the next Slide; highlights on deposit, very stable – very stable core deposit in the quarter. Puerto Rico continues to grow, Florida and VI primarily by cost optimization strategies. We see a slight decrease. Our goal is continue reduced reliance on brokered CDs. We continue to achieve significant progress. We reduced this quarter by $197 million and it’s now reduced to 20% of the deposit book for the first time. In the next slide, we would like to cover the Puerto Rico Government Exposure. The exposure went down $4 million this quarter. [Indiscernible] restructuring I am not going to cover. It continues in its path and I think bill progress is being reported to the markets constantly. Very, very important events are achieved on this during the quarter. On the municipality side, we continue to feel very comfortable with their exposures. Actually 59% of our direct government exposure is to municipalities, which has definitely been to be a lower risk due to the support from assigned tax revenues. While experienced lack of growing Puerto Rico by choosing to be cautious on the underwriting, at the end the second half pipeline looks stronger. As we saw in the expense side, we continue to implement efficiencies. And Florida and Caribbean region franchise continue to provide opportunities to improve the balance sheet mix and the loan portfolio. And again, we remain focused on driving the bottom line here. Before closing, again, I want to reiterate the passing of PROMESA is a positive step to lifting the bail of uncertainty that has clouded our primary market and we are optimistic that we see a very economic environment in the month and years to come. Now, I am going to hand the call over to Orlando to discuss the details of the financials.
Orlando Berges: Good morning, everyone. As Aurelio mentioned, we posted a net income of $22 million, or $0.10 a share, which compares with $23.3 million last quarter, or $0.11 a share. Total assets at the end of the quarter were $12.5 billion, slightly down from $12.7 billion at the end of March. Key highlight refers; basically, it’s a $4.4 million decline in the net interest income, which was mostly offset by $3.5 million decrease in operating expenses. Non-interest income was up $1.3 million. Remember, last quarter, we had two unusual or infrequent components. Number one, we had a gain of $4.2 million on the sale of – on the repurchase and cancelation of $10 million in trust preferred and we also had a negative impact of $6.7 million on other-than-temporary impairment adjustments on Puerto Rico government securities. We didn’t have any this quarter. The provision was basically flat on the quarter. Net impact of $5 million increase in mortgage. On the mortgage side, there was a revision of HPI by the Federal Housing Finance Agency that is used for the purpose of our future projections of expected losses on the portfolio and that affected provision and we also had $1.7 million increase in the amounts allocated for possible losses on purchase impaired loans, which was basically one portfolio of the ones we acquired early in 2014 from Doral Bank to cancel some of the commercial relationships we had with them at the time. On the other hand, provisions on the commercial side was down over $4 million offsetting that includes, so net effect was basically flat. On the net interest income, which had a large impact of $4 million, total net interest income was $120.2 million and margin went down to 4.1 so basically 17 basis points. There were a number of components in there. First of all the lower portfolio affected net-interest income by $1.7 million it's about six basis points on the margin. The big impact in there was the 40 million we auctioned we had in consumer portfolio which as you know are higher yield. And we reflect on the prepayment Aurelio mentioned that we had over the two quarters which also had some impact on the numbers. The loans that were moved in the first quarter to non-accrual status and the one that was moved in the second quarter affected margin by about three basis points. We also had a large volume of prepayments on the investment portfolio side. As you know the 10-year note was pretty lower in the quarter, it went down as much as 144 that affected prepayment and the impact was about $1 million and that impact or three basis points in the margin. Our expectation is with some stability on the rates if prepayments will go back to normal levels clearly we will have some pick up on the second quarter because of the not leaving us much of amortization on premiums. In the quarter we also had $200 million reverse repurchase agreement we had outstanding it was trade call prior to maturity, at the end of April basically. We did not put it back in place until end of the May because of the – again the interest rate environment and it was replaced later at lower rates than the original one and that affected margin slightly over one basis points for the quarter. In addition, the higher level of average cash outstanding cash on money market related to some of its components also affected margins. We’re trying to compensate a bit that and we have been doing that already by reducing the level of broker CDs that Aurelio mentioned a bit on the volume side. Overall, we didn’t have a change on the average cost of interest-bearing deposits stayed at 76 basis points. Broker CDs did go down the average balance was $99 million lower. Overall, we had $280 million of broker CDs maturing in the quarter at 97 basis points and we only replaced $82 million of those at 101. So that had net impact of 2 basis points in improving costs, but a much lower volume. Overall, the interest costs of our interest-bearing liabilities went up 2 basis points, partially related to the broker CDs and to the recoups. One of the things over the second half of the year, we have about $400 million of higher costs throughputs that mature within the six months and should help us reduce the funding cost in the second half of the year. Again, the strategy hasn’t changed, we continue to pursue growth in our non-broker deposits, and core deposits in our markets and improve the funded mix that at the end is what’s going to affect the funding cost. Non-interest income for the quarter again was $19.8 million, that compares to $18.4 million over last quarter had the OTPI charge and the $4.2 million gain. If we exclude those items, first quarter non-interest income was $20.9 compared to $19.8 million now. The $1.2 million decrease is basically related to annual contingent commissions will repeat on the insurance business that basically based on prior year results paid on the first quarter of the year. And that was somewhat offset by $600,000 gain we had under this [indiscernible] regional and operations. On the expenses, we have continued to do a lot of work on reducing the date on identifying opportunities, where we can further reduce our expenses. The obvious outliers are always credit related and the OREO expenses, given the size of the NPA book and the OREO book. But all are continuing to reduce as you saw non-interest expenses came down by $3.5 million in the second quarter. We have reductions of $1.2 million in occupancy that included reductions in repaired costs, electricity, rental expenses, depreciation and things which depreciation life and we have continued to renegotiate agreements and pursue ways to reduce those expenses. Compensation and benefits came down by $1 million reflecting decreases mostly in payroll taxes and bonus accruals. As you all know, some of the payroll taxes are based on up to some limit, as employees reach the salary limits. There is a decline in unemployment, social security, in [indiscernible] and some of those. That was partially offset by the merit increases we did in April of this year, which affected the numbers by about 600, 100 of those was one-timer on some payments the other are recurring expenses. Finally, the other large component is that we had $1.6 million reduction in other expenses which is due in large part to limited amount of additional provision needed from funded commitments. Our goal as we have mentioned to you is to keep expenses under 90 excluding OREO and we’re pursuing to do more to compensate for any reductions we see on the other parts of the business. On the non-performing side, we had an increase of $19 million, total non-performing upward $756 million for the quarter. That included the non-performing held for sale had included one facility of $35 million, which resulted which basically had two components, $14 million in C&I and $21 million in commercial mortgage but it was one relationship that moved to non-performing. This was a classified asset but with up-to-date as of March but the Company filed for bankruptcy in the second quarter, so this will move to non-performing. That impact was partially offset by $8.5 million decrease in non-performing residential mortgage loans. Inflows for the quarter were $78 million, which included that $35 million relationship I just mentioned, it’s a decrease of $99 million from prior quarter. However, remember that in first quarter included the $128.6 million exposure to the commercial loans guaranteed by TDF, if we exclude that component total inflows were up $29 million. We did see a reduction of $5 million in inflows of residential mortgage that it went down to $20 million, which is a low level as compared to prior quarters. OREO decreased by $3.7 million basically net impact of adjustments of sales and transfers. But as Aurelio mentioned we did not complete any large OREO sales in the quarter. We do expect to complete a couple in the second half of the year. Also Aurelio did mention that early delinquencies 30 to 89 days delinquency was down 13% in the quarter compared to last quarter, which by itself was down about 9% compared to the December quarter. So, we have seen some reductions on those early delinquency trends. Net charge offs remained fairly stable over the last four quarters. Net charge off for the second quarter was $24.7 million, annualized 1.11% of loans compared to $23.6 million last year, or $1.05%. Basically the increase was in the residential mortgage loans resulting from updated appraisals on those loans that I’ve already pointed to. On the other hand we had decreases of $1.6 million in charge off on the consumer portfolio but it continues to come down and $1.1 million decrease in the commercial portfolio net charge off. The allowance to non-performing remain basically flat up to 64 compared to 65 as of March and the ratio of allowance to non-performing went down a bit to 39.2% as compared to 41% basically reflecting the impact of that migration of the $35 million loan to non-performing. As of March, the reserve ratio of the core exposures on government side was about the same about 19.5% basically close to 20%, it's a function of those revolving lines that are going up or down a bit each quarter. Capital remained strong, continue to grow. Capital the corporation’s tangible common equity ratio was 13.55% at the end of the quarter the Tier 1 17.12% and the total is 20.72%. We should be filing DFAS at the end of this month as required and the results will be published as required the second half of the month of October so you should be able to see results that once they have been filed and reviewed with the regulatory world. Now I'd like to open the call for questions.
Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Alex Twerdahl of Sandler O'Neill. Please go ahead.
Alex Twerdahl: A couple of questions for me, first off, you said as the early stage delinquencies is being down 13% can you give us the actual dollar amount for the early six delinquencies?
Aurelio Aleman: The number is about the – the total dollar amount you mean or the amount they went down.
Alex Twerdahl: The total dollar amount that they were at the end of June?
Aurelio Aleman: Yes, that's going to be shown on the Q but it's about $212 million that the number we had at the end of June.
Alex Twerdahl: Okay, and then as the 30 day 90 days delinquency?
Aurelio Aleman: It was over 245 or so at the end of March.
Alex Twerdahl: Okay.
Orlando Berges: 30 to 89.
Aurelio Aleman: 30 to 89, yes, 30 to 89 days on all portfolios the combination of all portfolios.
Alex Twerdahl: Okay, great. And then secondly just as I look out at NII which declined a little bit and sort of had to replace some of that income and I guess loan growth will be the most ideal way to do it and the only real loan growth you've had has been in Florida. Are the pipelines in Florida – are they sufficient or you think loan growth in Florida could get close to covering continued runoff in Puerto Rico?
Aurelio Aleman: Yes, I think Alex if you really if you are back the prepayments and repayments that we had that were unexpected for the first half. If you add back the 145 what you see is that we actually when you go back to the beginning of the year, the origination level that we had for the first half were actually going to replace the loan portfolio between Florida and Puerto Rico. Last quarter the Florida was the only component that grew I think like 11 million or so and the other two components reduced. To be honest, as I mentioned the pipeline for Puerto Rico and VI looks stronger in the second half, and for Florida it's been strong through the year and it looks at similar level for the second half. So, I will say our ability to sustain the long run loans above the levels they are today it also has to do with the repayment, but we feel good about the origination volumes for the second half obviously what we're going to anticipate is very difficult is really some of the prepayments
Alexander Twerdahl: Okay. And…
Orlando Berges: No, I was just going to add Alex. Obviously we expected some reductions in the quarter, because of the reductions we have seen on the commercial side repayments in the first quarter and the fact we have seen some reductions on the consumer portfolio. The consumer portfolio reduction was probably a bit higher than we expected in the quarter. And obviously I was not expecting that the note will stay down that much that affected the investment portfolio and the reinvestment capacity as well as that reverse repo. So there were some components that are trying to compensation. The other component that I mentioned obviously we’re going to get some benefit in the second half by maturities of those reverse – I mean those repos that the 400 million debt mature, it’s about 100 million in the third quarter and 300 million in the fourth quarter.
Alexander Twerdahl: Okay. And then when you said the pipeline being stronger in Puerto Rico for the second half. Is any of that, do you think related to in any way, just what’s happening on a macro level with PROMESA and with some of the things that have kind of passed towards the end of the second quarter or is it, it’s just too early to see any real impact from that?
Aurelio Aleman: I think in general people it’s less uncertainty surrounding it. So some of the investors that are the silent we’ll already seeing them coming back to look at the same deals that they were considering more or is there an investment in their business. So when you look at the environment and the volumes and the business activity, it’s being, we have to say stable. But obviously they will reduce on third that they should bring some of these potential investors back to the payroll.
Alexander Twerdahl: Okay. And then I just have one final question here. And that just as over the last six months, we’ve seen kind of two “capital actions” I think with the repurchase of the trust preferreds in the first quarter and then becoming current on the whole trust preferred portfolio in the second quarter. Can you just talk a little bit about how the process has worked with those actions and interactions you’ve had with the regulators specifically around in written agreement that’s outstanding with the Fed?
Aurelio Aleman: Well Alex, unfortunately compensation with our regulators are, is really confidential. And obviously as we see, on the other hand as we see like to be build capital backed year. And those steps are always leads towards, but getting to be able to achieve return to the shareholders during the day. So as we can continue to make progress in line with the limitation of the Fed agreement and work together with the regulators on it we should see some progress that’s what we’re trying to where we are hanging.
Operator: Our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Brett Rabatin: I missed a little bit of the compensation on the one large credit on the commercial side. Can you go back and just give me a little color on that situation. And then obviously, I think everybody is kind of hoping that PROMESA helps the overall environment in Puerto Rico. I guess I’m just looking for any color as well around how you feel about the potential for charge-offs to decline. Given what you’ve done in terms of actions the past few quarters and the early stage and current NPA funnels?
Aurelio Aleman: Well there is multiple pieces. Let me try to get one of them your question it has multiple components. First of all, as Orlando covered it was a large relationship that was already adversely classified and filed bankruptcy during the quarter, so it went into non-performing. That obviously – it's reflected in whatever adjustment needed in terms of provision and was covered during the prior quarters, I think it was moving from classifications and obviously reporting quarter by going to non-performing. Remember we still have some large credits in our portfolio and so we still have a classified book that we report in our Q that we continue to manage proactively. On the other hand, that book it's actually the migration of that book is showing as well as the delinquency. The classified book is also showing some improvement. So, it's a mature book primarily it's being worked out for a long time and obviously we feel and obviously the net EBITDA we feel is properly we save on margin. The NPAs as shown is the commercial NPAs which is a large portion it's around $0.61 on the dollar and the OREOs are actually lower. So, the OREOs is really one of the focus that we said, as I said, that we would like to move, see moving out of the balance sheet in the short-term. And those OREOs are a significant portion of our commercial OREOs. In terms of the PROMESA, it was – many people were very concerned about the macro and the potential implications and the potential scenarios, shelf scenarios of Puerto Rico could experience and obviously PROMESA reduces, it doesn’t eliminate, but reduces the potential which are scenarios that we could have out in Puerto Rico. On the other hand, you’ve seen the market is already reacting on the bump side and back stocks are basically moving the bonds in this environment. So, at the end of the day we see this as a more orderly process and better framework that make people feel more comfortable how we’re going to bring to as a solution. We still have to wait on kicking off the economy and which is the most important part, but obviously we have the attention of Congress and we have the attention of everyone in the Island, and in government and the private industry in trying to achieve that. So it's just a more positive framework, we had a control and discipline to move the island forward.
Orlando Berges: And I think just to clarify that facility with adversely classified as of March, so if you look at the balance of adversely classified for March through June. On the commercial side, it's down about $2.5 million, so we didn’t have anything large coming into adversely classified and it was not affected by this just because it was already classified we did see reductions that as you saw in the numbers on the non-performing, on the consumer and the residential side, which are also part of the overall adversely classified portfolio.
Brett Rabatin: Okay. And then I guess the other thing I was curious to hear more about is the expansion in Florida. And maybe if you could just talk what's your plans from here might be to further propel that franchise?
Aurelio Aleman: Well, it continues to be primarily wholesale play. We have rebuilt our branches in better places and better facilities, now we have locations in all the Miami-Dade Broward County areas that we would like to be. The teams are in place and we continue to hire quality officers to continue to improve our participation in the market in the different segments. Now we have a complete sales global in the resi, on the commercial, and on the corporate banking side. And what you see is really the work of a lot of internal marketing getting integrated into a business community and looking for this to participate – trying to build a core or waiting to build where we consider a core business within the Miami-Dade Broward County area. The part of the deposit franchise is changing as we've been reporting and obviously growing BBA, growing fees and growing cash management services. And obviously trying to not to compete on the high-end of the purchase manual or not grow that segment of the deposit book.
Brett Rabatin: Okay, thanks for all the color.
Aurelio Aleman: Thank you.
Orlando Berges: Thanks, Brett.
Operator: Our next question comes from Joe Gladue with Merion Capital Group. Please go ahead.
Joe Gladue: Good morning.
Orlando Berges: Hey, Joe. Good morning.
Joe Gladue: I was just wondering I guess the TDF loans left were on non-accrual last quarter. Just wondering if you could give us an update on I guess the underlying loans they get seasoned we see any favorable trends on the cash flows on those loans underlying that or is it bad season to tell that?
Aurelio Aleman: Well, as you know there it's made up of three loans to hotels the – doing the up to now two of those loans have remained current as their operations are generating the cash flows to cover payments. The other one is not and obviously that's the one that was needing more support from TDF. So it's early to tell we need to see now the low season coming in what's going to happen with those cash flows of the two hotels that were covering the payment. But until we get to a final solution of how the government is going to deal with it at this time the inventorial law would have hold on the funds that TDF had that are held by GDB therefore they are not being released to cover any payments. So for now, we don’t see the loans moving out of non-performing until the whole thing with the government is settled and a clarification comes out of what's going to happen with GDB bonds and then we'll have a better picture. In the meantime we hope that those two facilities continue with interest as being applied to principal and the balance has been reduced over the second quarter and hopefully we'll continue to see that in the next quarter.
Joe Gladue: All right, I think my other question has been answered. Thank you.
Aurelio Aleman: Thank you, Joe.
Orlando Berges: Thank you, Joe.
Operator: Our next question comes from Brian Klock of Keefe, Bruyette & Woods. Please go ahead.
Brian Klock: Good morning guys. How are you?
Aurelio Aleman: We are fine.
Orlando Berges: How are you doing?
Brian Klock: So I mean just a couple of things, I think the, I mean you guys already touched on a lot of the details on the quarter. With all the changes that have happen, I think when you kind of look at pre-tax, pre-provision earnings, you guys continue to grow that and then even up pretty significantly year-over-year. So even with the challenges with the spread in this interest rate environment, you guys are still growing pre-tax, pre-provision. So I mean, I guess, with everything you talked about with some of the moving parts that are going in and out of NII and you’ve got some expense level. I think, do you think that the second half for this year, we can still see that growth in the pre-tax, pre-provision earnings number?
Aurelio Aleman: Well, I think we mentioned before that, we aim to keep it about 50 million and as you say it hasn’t been easy. Some lower moving parts not only the local market but the interest rate environment as you said, well said. We still have the goal that how we continue to work to keep it about that 50 million level. It’s been pretty consistent on that over the last whole quarter, so it hasn’t been easy.
Brian Klock: Okay. Again I guess just a follow-up on the asset quality side. I know you mentioned the OREO balances. I mean, I know you talked about some of the, with the carrying amounts are related to the other NPLs, the commercial NPLs. I guess, can you remind us, I guess what you’re carrying those, the OREO property that. And is there an opportunity maybe you think what a little bit of a maybe better feeling about post PROMESA that maybe you can it some more bids and maybe there is a way to maybe clear out some of that OREO?
Aurelio Aleman: You are right, I did mention in the call, that we feel we’re going to have a better second half. More of those OREO based on the level of activity, we see on those commercial properties yes.
Brian Klock: Yes.
Orlando Berges: Yes. And get all the, I don’t have the final, final number for the quarter. We have the OREO on the commercial side what is about $0.40 that’s I would say carrying amount. On the residential side basically within, what we have mentioned is that, we’ve been losing all-in about $0.43 on alternate disposition of those loans that go through non-performing and get through for closure. So that’s on the average what we carry them on the OREO portfolio.
Brian Klock: Great. Thanks, that’s helpful. Thanks for your time.
Orlando Berges: Thank you, Brian.
Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to John Pelling for any closing remarks.
John Pelling: Thank you, Nicole. We would be on the road next week we’re attending the KBW conference in New York, August 2nd and 3rd. And then we’re going out on the road with Joe Gladue at Merion Capital in Philadelphia on August 4th. So we look forward to seeing some of you then. Thank you for your time. And I appreciate your interest in First BanCorp this will conclude the call.
Aurelio Aleman: Thank you, all.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.