First BanCorp.
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

Good morning and welcome to the First BanCorp Q1 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 note this event is being recorded. I would now like to turn the conference over to John Pelling. Please go ahead.

[John B. Pelling:]

Thank you, Chad. 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 2013. 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's 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 today's press release, or the webcast presentation, you can access it under the Investor Relations section of the Company's website at www.firstbankpr.com. At this time, I would like to turn the call over to our CEO, Aurelio Aleman. Aurelio?

[Aurelio Aleman-Bermudez:]

Thank you, John. Good morning everyone. Welcome and thank you for joining us to discuss the first quarter results. On the call with me today will be Orlando Berges, our CFO. Orlando will provide details on the financial results. Initially, I will walk you through some of the highlights of the quarter, then Orlando will go into more details, then we'll go into the Q&A. Moving to the first page, Slide 5, this was a real significant quarter for us as we continued the task of executing on our strategic planning. We have in prior calls talked about the focus and we continue to look forward with our focus on dual track. Track number one is improving asset quality, derisking the balance sheet, and in parallel with the same level of urgency and resources, we continue to strengthen and invest in our core franchise. On the first track, this quarter was important and we completed a large bulk sale transaction and we also moved several large loans, large relationships to held-for-sale status. We did announce some of that prior, on March 28, so it was not all news. We continue to increase, which is a positive thing, we talked about this the last time, we continue to see increase in investor interest on liquidity in the local market which definitely will support our efforts in introducing these assets. That sale is also important, in addition to future efficiencies, the NPL sale provide for directional space to continue rebuilding the commercial book. We view this sale as a significant step towards achieving our ambition of having a stronger balance sheet for the Corporation. On the second track, the core franchise, we continue to make excellent progress in all strategies, core deposit accounts and customer, the leadership in the auto and consumer business among the bank players, we are building the commercial book with a better price line in both Puerto Rico and Florida, optimizing the recently acquired credit card portfolio, gaining origination market share among your franchise, and I will expand in more detail in the presentation, but those are really important highlights that we would like to touch. I will touch on some of these highlights and Orlando will cover in detail. It was not a surprise we reverted (indiscernible) loss, driven primarily by this sale, and again while we're still getting some earnings, our core capital, as you can see in the slide, remained really strong. Margin increased 5 basis points in the quarter, but if we look at most of last year, it is really significant 76 basis points. Pre-provision pre-tax was down, but again when we look at it versus what we have done through the last year, it is significantly up from the $35 million in the same quarter last year. Excluding government deposit, our non-broker core deposits grew $146 million, in line with what we had done in prior quarters. Originations were strong at $802 million and the quarter represented, the total (indiscernible) of the quarter reductions in NPAs, you're going to see the trend in more detail, but again to the bulk sale, it is also a material reduction of these NPAs. From a franchise perspective, we also announced this quarter we have formalized a strategic alliance with FIS, the largest global provider dedicated to banking and payment technologies. Definitely this will give us enhanced technology ability to launch new products and continue to service our clients. So, we are very pleased with that progress. On the other hand, we also have to say that we have some disappointment in the quarter with two large TDR, total debt restructure, relationships that may (indiscernible) but we continue to be focused on working those out and moving that out of the balance sheet. Moving to our next slide, some highlights on the loan portfolio. As I said, also very good quarter in originations with $802 million. It's really in line with prior three quarters. Our goal continues to be optimizing along those replacing (indiscernible) and nonperforming legacy loans with high-quality more profitable loans and we have been able to achieve this consistently over the past quarters. The graph on the comparisons on the right covers five quarters. As you can see, there is always some seasonality in volumes, primarily in the commercial closing, but again when we compare, we'll see the trend if we compare this quarter to the same quarter last year, you also see a 30% increase in originations, consistent to the last three quarters. The resi side, with $229 million, up from the last quarter from $214 million, and up from $162 million last year. As we continue to gain origination market share in this space, we also continue to sell more of that production into secondary market. Auto, definitely our leadership position on the Bank (indiscernible) with the goal of having neutral client relationships, origination was strong at $146 million, slightly down from prior quarter but there is also some seasonality, again up $29 million from the first quarter last year. Credit card, it's really the new portfolio that we acquired last year. We continue to optimize. It shows $87 million in utilization activity, just lower than prior quarter but again there is some seasonality in this as well as you know in the quarter. Commercial, we saw a decline in volume as we've been moving out, assets have been write-offs in the sale, it also reflects lower origination activity, but I have to say that we are building a stronger pipeline, we have invested in resources, the goal is to rebuild this book, we have invested in resources in Puerto Rico and Florida which are already positioned in results. Moving to Slide 7, again the deposit, this is a core strategy as we have mentioned in several calls, and really the trend is consistent with what we have been able to achieve over the past two years, grow that quarter by quarter, lower the cost of the core, and reduce our dependency on brokered CDs. Even this quarter, we were able to achieve the three objectives, $146 million growth, reducing cost from 284 basis points and reducing the brokered CDs again. The focus continues to be cross-selling to our existing clients and launching new products primarily in the electronic blanking, construction banking arena. So I'm going to hand over the call now to Orlando so he will discuss with a lot of detail that he'll be sharing with you regarding all the noise in the quarter. So, Orlando will go through that.

[Orlando Berges-Gonzalez:]

Thanks, Aurelio. Before we go into the details of the quarter, I think it is important to talk about the bulk sale that was completed this quarter. In essence March 28 was the closing. So Aurelio mentioned it was a significant transaction. We sold a pool of nonperforming and adversely classified assets with an unpaid principal balance of $378 million and a book value of almost $218 million, which included about $185 million of nonperforming loans. The mix of the pool included a total of 454 loans sold, of which 64% were loans under $1 million, which was a significant thing we wanted to achieve. The sales price of the transaction was $120.2 million in an all cash transaction which is a very important thing for a 31.8% price as a percentage of unpaid principal balance. This transaction resulted in charge-offs of $98.5 million and we had an incremental loss of $58.9 million which was reflected in the provision for loan losses for this first quarter. The transaction also had about $3.9 million of expenses, basically professional fees, which were booked on the expense category. We combined both, the loss on the transaction was approximately $63 million, included in this quarter's results. Now let's go into the quarter per se, and as Aurelio mentioned, in the quarter, we had a lot of $72.6 million on assets of $13 billion which is pretty equal to last quarter. But the quarter shows a significant level of variability mostly associated with this bulk sale, so we should for the discussion like to break down some of the components. Let's start with the provision. The provision for loan losses for the quarter was $111.1 million which compares to $30.5 million last quarter and $36.2 million in the same quarter of 2012. The $81 million increase shown in the provision consists of basically, if you just net it down, $59 million were related to the bulk sale of the loans, we had a $5.2 million loss on some loans that were transferred to held-for-sale for which we have signed agreements as we had previously announced when we announced that in bulk sales we also included those on their release. It also includes a $7 million provision for the impact of the bulk sale on the termination of general reserves of the institution and a net increase in the provision of approximately $10 million for the migration of NPLs, which I will talk a little bit later as part of the asset quality discussion. Looking at the expenses, which shows a $7 million increase, our total expense for the quarter were $98 million compared to $91 million last quarter, but also if we split the components, included there are the $3.9 million in the expenses related with the bulk sale, basically all of them in the professional service category, professional fees category. We also had in the quarter $1.2 million in expenses which were related to the preferred shares exchange offer which we launched in February and was recently terminated. Our goal was to obtain a two-thirds approval and we did not reach that goal so we terminated the exchange offer. Also the expenses include a variation on personnel costs of $1.7 million, which is a large part with seasonality in the first quarter, you go back to having payroll taxes increase (indiscernible) of Social Security limits, unemployment limits, appraisals and bonus and so – and we also had some increases in incentive compensation. The other income total had a variance of $1.9 million, an improvement of $1.9 million, which results from a $2.8 million reduction on the losses on the equity of the unconsolidated entity that we have discussed in the past we account for under the liquidation model. So it's created some variability on results. Partially offset by a reduction on mortgage banking income, we have made a few lower sales this quarter and the price margin on the market was slightly down from where it was last quarter. Net interest income for the quarter was $124.5 million, slightly down from the $125.6 million last quarter, but significantly higher than the $101.9 million we achieved in 2012. Net interest margin on a GAAP basis expanded to 3.96% for the quarter which compares to 3.91% last quarter, largely a funding cost that we will see on the cost reduction. This margin is 76 basis points higher than what we had at the same time last year on the first quarter of 2012. The main impact on net interest income are, number one, a $1.6 million is related to variance in quarter days, there were two less days in this quarter compared to last quarter, and we also had a reduction of about $1.3 million due to the volume of commercial loans as Aurelio mentioned. And as we have outpaced, we had a reduction of about $1 million in the mortgage backed securities on the investment portfolio due to faster prepayment rates and the fact that there are not too many reinvestment options in the market. So, we have kept most of that money on our liquid instruments, short-term liquid instruments. Offsetting the reductions on the interest income side was a reduction of $2.9 million on interest expense which we look at the component, you'd see that we had an overall 11 basis points reduction on the average cost of funds. The average rate on interest-bearing deposits, excluding brokers, declined 3 basis points to 98 basis points, and you can see in the chart on the top right-hand in there, and you compare that to last year, we are down 27 basis points on interest-bearing deposit, excluding brokers. Brokered deposit for the quarter were down 21 basis points. This quarter we repaid approximately $565 million of maturing brokered CDs with an all-in cost of about 191, and the new issuances of $550 million were at a cost of 84 basis points. In addition, this quarter we also repaid about $130 million of maturing payments to Federal Home Loan Bank advances with an average cost of 3.39%. We still see some opportunities in the funding cost of this interest rate level, we still have opportunities on the time deposits, the Rico time deposits, and on the brokered CD side, we also have some opportunities, we have $2 billion of brokered CDs that mature within the next 12 months and they have an average right now of 1.39%, which depending on the term, we can renew at a range of 50 to 130 basis points, and as I mentioned, like last quarter it was 84 basis points. Total cost of deposits, Aurelio mentioned it before, was down to 84 basis points while at the same time we increased deposits excluding brokered by $146 million, which is a significant strategy of the institution. Now if we move to asset quality, as you can see on the chart on the left, we achieved a reduction of $151 million or 12% in nonperforming assets driven by the bulk sale of loans. NPAs are down 18% year-over-year and they are down 39% from its peak a couple of years ago. Nonperforming loans, including those held-for-sale, decreased by $147 million or 15%. This quarter, the reduction was partially offset by inflows to nonperforming of $176 million, which is $64 million higher than last quarter. But most of this was associated with the two large commercial TDRs that Aurelio mentioned which amounted to $85 million and you can say this was the largest disappointment in the quarter since these two cases have been in compliance with the terms of the restructuring but their fundamentals of the business are not showing significant improvement. Excluding these two cases, the inflows were about $20 million lower than last quarter. And as you can see on the chart on the low right-hand side of the slide, the commercial nonperforming continue to be carried at $0.59 on the dollar. On the charge-offs, charge-offs were $204 million for the quarter and also we need to break it down, so you can see on the chart on the right, the main component was $98 million associated with the bulk sale of loans, we got $35 million related to the loans that were transferred to held-for-sale that include both the ones that have signed agreements and the ones that are in process. We had a $25 million charge-off related to split TDR that we did in the quarter. And remaining charge-offs for the portfolio was $47 million. This charge-offs compare with the $41 million last quarter and $47 million same quarter of 2012. The allowance at the end of the quarter was 3.6% of the total loans and the allowance as a percentage of loans held for investment is 50.2% at the end of this quarter. Allowance coverage went down obviously because of the amount of nonperforming and classified that were sold as part of the bulk sale. Going into capital, even with the bulk sale, the capital levels remained strong as you can see there. The total capital ended up at 17.4%, basically 40 basis point impact, and Q1 capital was 16.2%, same thing for Tie 1 Common, 13.2%. So, we still keep strong capital ratios. Many of you have asked in the past and I would like to remind everyone that we still have the valuation allowance on the DTA of $366 million. That is not included as part of the capital numbers yet. We are only taking the benefit of what we made from the earnings. With that, I would like to turn the call back to Aurelio and we'll answer the questions a little bit later.

[Aurelio Aleman-Bermudez:]

Thank you, Orlando. We're getting into Q1 thinking it is important – from Page 16, we detail progress on each of our key strategies and rather than going through it again I think it is important that I make some comments on the market and the economy. When we look at the margin on the economy, we divide it into two sections, the fiscal and the economic environment, I think it is important. In the first quarter, we saw significant activity on the fiscal side in terms of progress made on key legislations that was approved in the first quarter to support really the Puerto Rico debt ratings when we look at the 4% expansion of foreign tax, the year (indiscernible) was closed, they was increase in order rates, that was before (indiscernible) authority, the debt that will start in July, the approval of the retirement system reform. We think those were very important steps in total supporting the debt of Puerto Rico. Definitely there's a lot more to do. I think we feel the second quarter is important as elements such as the budget approval are in discussion and also there is additional measures needed to support public corporations debt that is impacting the overall development in bank. So we've seen the government very active in those fronts, we also see that private industry getting involved in making sure those plans get also approved. In general in economy, we continue to see privatization, if at a very slow pace, unemployment still surrounding the 14%, GNP projection from different economies look between 0.2% and 0.5% growth, and in the quarter, we did experience 3% growth in normal sales, basically flat retail sales, there is improved consumer delinquencies and basically flat commercial delinquencies. Obviously, we all experienced increasing better activity and better interest in the Puerto Rico market which definitely is positive for all types of industry. Again, as a closing, we will continue to focus, we recognize that we will continue improving the balance sheet and derisking it, and as I said in the beginning, this is a dual track, same level of resources, same dedication to improving the franchise and the dedication to improving our balance sheet. With that, I will open now the call for questions.

[Operator:]

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Brian Klock with Keefe Bruyette & Woods.

[Brian Klock:]

First question I guess related to on the NPA inflows, I know you guys talked about the two large commercial TDRs, so it sounds like from the details that you have given us on that, is that the rest of the portfolio seems like that continued improving trends on the island are actually improving. So these are issues that were disappointing but – and I'm not calling them one offs but I guess maybe you can talk about what you're seeing with the rest of the portfolio and maybe you can remind us what is the level of TDRs versus the fourth quarter?

[Orlando Berges-Gonzalez:]

TDRs at the end of March Brian were $844 million, that includes the $131 million which are part of the held for sale. Excluding those, there were $713 million. TDRs at December were $942 million including performing and nonperforming. At December, we had $504 million of TDRs in accrual. As of March, that number is $433 million. Keep in mind that obviously we did sell some loans that's part of the bulk sale of lower TDRs, so some of them were performing, some were not. So, non-accrual TDRs went down by – exceeded the held for sale by about $150 million.

[Brian Klock:]

Got it, okay. And overall, it does look like this bulk sale obviously was a big help to derisk the balance sheet, but ex this, your inflows seem to be slowing.

[Aurelio Aleman-Bermudez:]

Actually, Brian, if you exclude those two large TDRs, definitely the inflow was less. These are loans that we monitor very closely. I think Orlando did mention something from a big TDR, even though they are paying and they had their mis-payments, they could go to NPA because of financial limitations or conditions. So we do monitor this relationship very closely. And the ones that we believe at this stage of the game will not have a resolution we are moving out, looking for strategies to dispose, and basically some of them are obviously already signed as we announced in March 28 and some of them are (indiscernible) that really the ultimate goal is to move them out of the balance sheet.

[Brian Klock:]

Great, thanks Aurelio. Maybe Aurelio since I have got you on answering the questions now I guess thinking about the loan origination volumes, I know the first quarter typically is a little bit more seasonally weak, the commercial pipeline, maybe there was some pull forward, like we saw in a lot of businesses into the fourth quarter, but typically second-quarter is a little bit stronger for you guys, and now you guys are actually, you are in a stronger position now year-over-year, can you talk about the progress and what you are seeing in your commercial pipeline on the island?

[Aurelio Aleman-Bermudez:]

Sure. One thing, we did announce late in December that we have [regrouped] (ph) some resources into Florida team as part of the Florida strategy. We have expanded into the middle market and corporate areas, similar disciplines that we have in Puerto Rico in terms of product and target mix as a community bank strategy. We have some local business in Florida that we definitely are going after. We did have the resources before allocating to it, so we are as I said, we are building that commercial book as we have reduced that commercial book significantly. When you look at the side of the commercial book, even a year ago, it was about $5.5 billion and when you look in the field of construction, it was actually $6 billion. When you look at that book now, it is basically down to almost $5 billion. So definitely there is some room, there is some appetite. We are not adjusting our risk appetite, we continue to apply a conservative policy. In Puerto Rico, we also expanded the resources of the commercial teams and (indiscernible) is a competitive arena, we cannot say it's not, but there is activity, there is activity in the market, there has been some big flow created and we fully optimistic about the pipeline.

[Brian Klock:]

Okay, great. I guess essentially talking about how competitive it is in Puerto Rico from a lending perspective, I know you guys had a benefit in the margin this quarter from a decrease in funding, which again you got a lot more potential benefit going forward with what you laid out with the pricing on the brokered deposits and being able to re-price that, but seem like your earning asset yields held in there pretty well as well. So maybe you can talk about what you're seeing in being able to do as well as controlling your loan pricing as well?

[Aurelio Aleman-Bermudez:]

I think it is a mix. If you – again, the mix of the loan portfolio and the mix of assets in the balance sheet, obviously by reducing NPAs, that helps. When you look at the originations on how they are balanced between mortgage, consumer and commercial, so that helps us achieve the target deals, our leadership in the auto business which brings firm volumes every quarter, the opportunity in the consumer that we see some of the products, the credit card portfolio, last we also – when we talk about commercial, there are more aggressive pricing on the large corporate but we're also playing in the middle market. So, on a blended basis, I cannot tell you that [lending] (ph) will increase, I think we are working towards sustaining it, but obviously the fact that we are moving NPAs out of the books will support that.

[Brian Klock:]

Okay. And then I guess just one last question from me I guess is, thinking about after the bulk sale, there is still some derisking you'll be working at I guess. It seems like the margin should be a positive going forward, especially with the ability to lower a lot of expensive debt and bringing that down, I mean price debt lower. So should we think about at what point do you think that the loan growth, or at least maybe you should have the loan balances somewhat stabilize and start to turn positive, and so that mean maybe second half of the year, we should be seeing maybe some growth in net interest income?

[Aurelio Aleman-Bermudez:]

We don’t provide a lot of forward-looking information. We are just expecting that we'll see (indiscernible) a better portfolio which is a component of how prepayment behaves and how penalty from the investment market when we think about the overall interest margin. As Orlando said, there are still some opportunities different to back in the U.S., we still have some opportunities to reduce on the cost side, which also will contribute to earnings.

[Orlando Berges-Gonzalez:]

On the long side, Brian, keep in mind that the way we see it is, yes some growth on the consumer side, but on the commercial side, we hope to continue with the strategies and be successful on those strategies of reducing the number forming which will offset some of the growth we achieve on the portfolio. Thinking on the mortgage side, we have been originating well but we have been selling a large part of it, so that's creating results. Looking at the near term 2013, I don't see the portfolio growing, it's more of a balanced portfolio.

[Operator:]

(Operator Instructions) There appears to be no further questions, so I would like to turn the conference back over to management for any closing remarks.

[Aurelio Aleman-Bermudez:]

We thank you all for joining and we'll keep you all posted of our progress as we continue to moving our key strategies. Thank you all.

[Operator:]

Thank you very much. The conference is now concluded. Thank you for attending. You may now disconnect.