First BanCorp.
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2014

[Operator:]

Good morning and welcome to First BanCorp Second Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please also note this event is being recorded. I would now like to turn the conference over to John Pelling, IR Officer of First BanCorp. Please go ahead, sir.

[John Pelling:]

Thank you, Rocko. 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 2014. 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 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 the important factors described in the company’s latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release issued by First BanCorp, you can access it at our company’s website at firstbankpr.com. At this time, I would like to turn the call over to our CEO, Aurelio Aleman. Aurelio?

[Aurelio Alemán-Bermudez:]

Thank you, John. Good morning, everyone, and thank you for joining us to discuss our second quarter results. I will walk through some key highlight from the quarter and then Orlando will discuss the results in more detail and then we will open the call for Q&A as usual. Please turn to Slide 5. As we have stated in prior calls, we remain focused on our dual track of improving the core franchise profitability, while remediating our legacy credit issues and the risk in the balance sheet. We have to say that we're really very pleased with the $21.2 million of net income for the quarter. This was our best net income quarter since we turned into profitability. In spite of Puerto Rico market challenges, we continue to sustain good relation volumes across our three main line of businesses

[Orlando Berges-González:]

Good morning, everyone. So, Aurelio mentioned net income for the second quarter was $21.2 million or $0.11 a share which compares to $17.1 million last quarter or $0.08 a share and adjusted net income of $16.8 million in the second quarter of 2013. And remember, second quarter we had a both sale of mortgage – residential mortgage loans so there was a loss of $56 million in the quarter but adjusted to exclude that effect it was a $16.8 million. If we look at results for this quarter, it reflects lower provision, it reflects higher net interest income, and both were partially offset by lower net interest income and higher expenses and I will touch all of them. Provision for this quarter was down $5.2 million compared to last quarter, included there are $6.6 million in recovery. We had $4.1 million recovery in the Florida market and some reserved leases on internal loans that we were paid for during the quarter. We also had reductions related to a bigger appraisals part of them also in the Florida market and we had a decrease in the size of the portfolio. On the other hand, this was offset by the migration numbers. And the fact that, we took $1.4 million additional loss, which was booked for the provision for loan losses, which was related to the fair value adjustments on the mortgage loans acquired from Doral in full satisfaction of our commercial relationship that Aurelio mentioned. With the overall loss from fair value adjustment of the loans with $6.96 million went through charge-offs, we had a $5.5 million reserve from the commercial loan. So the net additional impact on result was $1.4 million. On the non-interest income side, we had $5 million higher, that’s mainly $5.9 million lower loss on the equity on the unconsolidated entities that we have been discussing in all the quarters. The accounting for that was assumed [ph] on liquidation this quarter. The $700,000 we had in the quarter was basically the remaining carrying amount of investment, which is now down to zero. So we shouldn’t see any more negative variance effecting results coming out of the venture. Other components I'll mention them in detail that went down $1.4 million. On the tax side, we see a smaller tax benefit in there, which was related to a reduction on a tax accrual that we had for some uncertain tax positions that we reverse as part of the settlement on tax examination that was going on. Net interest income for the quarter was $129.9 million, which is $1.4 million lower than the $131.3 million we had last quarter. Our margin was 4.21% compared to 42.7% last quarter, 6 basis points down but it is 17 basis points higher than second quarter of 2013. What you have on the net income – net interest income impact in there, we had $1.4 million reduction in interest income on mortgage-backed securities, which mostly was related to faster prepayments experienced in the quarter with a low interest rate environment we have seen prepayment speed accelerate a bit. And the options for the additional investments are not there because of the (inaudible) (12

[Aurelio Alemán-Bermudez:]

Thank you, Orlando. We are moving to Slide 17. As we all know economic (inaudible) in Puerto Rico continues to extend and we do remain cautiously optimistic about all the steps taken to improve the fiscal situation of the island. When we look at our exposure, it was reduced during the quarter by $77 million on repayments, now stands at around $400 million direct. Most of it's in the municipalities and these are facilities with the cash flow of the property taxes primarily. The – we are closely monitoring the overall exposure and actually for the remainder of the year, we expect to remain at these levels. We are also monitoring very closely the progress on the new act as communicated by the government the objective of the recently enacted act is to provide a framework to enforce an orderly process to face the financial and operating deficiencies of the Public Corporations, which we believe for the long-term is a critical matter and (inaudible) impact in the short-term. As I say, we have no surprises on the anticipated reduction on the government deposits and we still have a chunk that we can see there, core and operating for the municipalities and the relationship that we have. Before turning the call to the Q&A, I obviously I would like to recap. Definitely our priority continues to be and has to be managing our legacy book, classified loans. We are still working with some large loans as we say from that pool of classified that has a risk of a migrating. On the other hand, definitely that book continues to provide releases of reserve and recoveries that are contributing to mitigating this risk. We boasted [ph] what we consider a strong franchise earnings, a strong pre-provision, pre-tax, healthier (inaudible) for the quarter. And definitely Florida provides an environment which is definitely an improved economic environment in an accelerated manner with some additional opportunity for loan originations. Closely monitoring our cost structure and again we may focus on the dual track of franchise profitability and credit quality. And once again this quarter, we prove our capital position with dual risk profile and continue to position the franchise for future growth. Now, we will open the call for the Q&A. John, please?

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead.

[Alexander Twerdahl:]

Good morning.

[Aurelio Alemán-Bermudez:]

Good morning, Alex. How are you?

[Alexander Twerdahl:]

I'm well, thanks. First off, could you give me a little bit more color on these two commercial loans the $60.5 million that migrated into non-performing during the quarter. You said that they were shared national credits, are they located in Puerto Rico?

[Aurelio Alemán-Bermudez:]

Yes, they're both located in Puerto Rico.

[Alexander Twerdahl:]

Okay. And were they on some sort of a watch list or was it kind of just a huge surprise that they went bad during the quarter?

[Aurelio Alemán-Bermudez:]

No, they were no surprise. They've been in the radar screen for some time.

[Alexander Twerdahl:]

Okay, great, thanks. Can you talk about the appraisal trends for commercial properties down there? I know that after the bond issuance in Puerto Rico in March, there were some more increased investor interests for some of the larger commercial properties. Can you talk about how that changed over the past quarter, especially with the recovery act being passed and the balance budget et cetera, just sort of what you are seeing for – some of these big properties for the interest down there?

[Aurelio Alemán-Bermudez:]

I'll make some comments, but obviously we have not seen – with the recovery act was enacted less than a month ago. So I doubt we'll see any impact (inaudible). It's too close for any actions. During the quarter, we saw some improvement, remember, some of the properties are also – appraisals are depending on NOI. But primarily the – most of the improvement came from the Florida market, which obviously benefits the overall corporation. And we see values in Florida recovering over the last year and every quarter we see some improvement. Orlando, I don't know, if – in the Puerto Rico market you want to comment, anything else there?

[Orlando Berges-González:]

Yes, it was on the value adjustments where that we saw some positive movements were like three quarters were in the Florida market and the other ones were in Puerto Rico. Going back to the investor (inaudible) it's been more or less the same, but we mentioned before again, I don’t think we are seeing a (inaudible) effect on that process resulting from the new loans. We just have to wait and see what's the final position the government is taking there.

[Alexander Twerdahl:]

Okay, that’s helpful. And then final question, just how do you think about your capital levels today, especially given, what the balance sheet looks like, the complexion of the balance sheet and also as they relate to the stress test that you guys submitted at the end of March?

[Aurelio Alemán-Bermudez:]

Once you know, again, it’s all related to the risk profile of the market, obviously no capital actions are in the plans. We continue to sustain healthy capital levels that will support, anything that happens in the market. On the other hand, the formal stress test comes now in the last quarter of the year remember that for banks $10 million to $50 million, it was a practice exercise. So, the final test, it starts with the September data and you have to run and deliver by the first quarter. So this is the final test, and obviously that as we say before that’s an important step towards that. (inaudible) option of Basel 3 will take place in the first quarter, so all that is taken into consideration, but you should not expect any changes in the capital structure in the near-term, until those steps takes place.

[Alexander Twerdahl:]

Okay, great. Thank you very much.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from Brian Klock of Keefe Bruyette & Woods. Please go ahead.

[Brian Klock:]

Good morning, gentlemen.

[Aurelio Alemán-Bermudez:]

Good morning, Brian.

[Orlando Berges-González:]

Good morning, Brian.

[Brian Klock:]

So actually I just – I had a question on Slide 14, you guys talked about the increase in adversely classified during the second quarter related to a public corporation. I guess, is there any sort of color you can give us on any sort of provisioning that would have been built along with that adversely classified loan?

[Orlando Berges-González:]

Yes, we (inaudible) adversely classified loans that are not considering fair – general (inaudible) and we assign general (inaudible) allowance, that are (inaudible) in accordance with our allowance calculation methodology. As you know, we develop general valuation allowances that are for each category of loan meaning differently from the classified assets. And along with (inaudible) will be treated (inaudible) so for this case we assign the same level of reserves that we would assign to any other substandard classified loan that we would have on the books on the general (inaudible) process.

[Brian Klock:]

Okay. Thank you. That’s helpful. And maybe I guess a follow-up to Alex's question on the two large commercial NPAs in the quarter, I know I had – I think you said, that they are performing, so I guess what was the sort of characteristics of those loans, what was it that, I guess, got you concerned and hedge it (inaudible) to non-performing?

[Orlando Berges-González:]

The two loans as Aurelio mentioned are (inaudible) credit, so we move according to what the banks (inaudible) sees on the cases. They're obviously to be classified, there are some levels of concerns on some of the loans that are been worked, the banks are been working on with the borrowers. Again the borrowers have continued to make payments, but there are some risks (inaudible) the portfolios on the two cases, so they will move to non-performing. Different sections are been worked closely, so Aurelio mentioned we (inaudible) two cases of possibilities of during the year to go back to not being a non-performing, but obviously there are some things that needs to be cured during the process. And that’s why we move them.

[Brian Klock:]

Okay. And I guess another question on the yield side, the margin did contract a little bit this quarter, it seems like the impact of the Doral loan that you purchased the underlying collateral and with the accretable yield impact, I guess should we expect there to be some improvement in loans yields and maybe some offset to some of the other margin pressure coming through after that transaction?

[Aurelio Alemán-Bermudez:]

The pool of loans brings a higher yield than the commercial portfolio that we have. So that is a reality and the impact of that is only a month in the current quarter that we just reported. But I have to tell you that going forward we continue to see competitive pressure on pricing in this market. And that’s a reality that we did with everything. On the other hand consumer volumes versus prior year are down in the overall market which is also a contributor to yield. So at the end it’s how we plan one thing and the other. Orlando did mention the securities portfolio, we continue to see prepayments and there is not a lot of opportunities to reengage. So we may have some liquidity for some time until we see the investment portfolio go back to (inaudible) opportunity of the leverage on that side. We have healthy pipelines on the other side and we continue to work, we have the very strong teams in the three main businesses that on the other hand even though the market gets smarter, we are improving market share in some of the areas like mortgages specifically. And Florida on the other hand is also compensating. So we have (inaudible) opportunities that could drive the yield. Our expectation is that we are going to be able to sustain the NIM at the levels that we've been reporting over the last year.

[Brian Klock:]

Okay. That’s helpful and thank you for your time.

[Operator:]

Thank you. Our next question comes from Taylor Brodarick of Guggenheim Securities. Please go ahead.

[Taylor Brodarick:]

Great, thank you. I think Alex and Brian had a lot of stuff, but on the tax rate I assume that probably would revert back what we've seen in the last several quarters prior to 2Q, is that right?

[Orlando Berges-González:]

I couldn’t hear you well, Taylor, could you repeat that please?

[Taylor Brodarick:]

Yes, I said, I would assume that the lower tax rate in 2Q is an anomaly and hopefully the tax rate trend back into the – what we've seen in 1Q and 4Q, correct?

[Orlando Berges-González:]

Yes, as I mentioned, we did have some accrual reversals in the quarter. That's why we had a positive effect because of I think specifications that has been going on for quite a while and then was completed. So we did reverse on tax accruals in there. So you should see more in the levels that we had in prior quarters. Remember, the tax number is at this point it’s basically related to the results of the profitable subsidiaries that we have the banks [ph] because of the amount of NOL carryovers and the fact that we have valuation allowance and the DTA, any impact on the bank will be compensated with that.

[Taylor Brodarick:]

Great, thanks. And looking at sort of residential and the migration of residential and consumer NPL, very little this quarter. I've heard comments here from your peers that suggested that additional strength on the consumer was (inaudible) in Puerto Rico. Are you seeing that or anything change materially over the last few months?

[Orlando Berges-González:]

Well, we've been playing conservative for some time, so we monitor very closely the policies on the new volumes. And we – the inflows are not really the issue at this stage, I think the issue is – it’s more market volumes in the overall that we have seen a reduction in auto sales and mortgage originations over the last year if you compare to 2013 to 2014. But we feel – obviously, the consumer portfolio does not accumulate NPA, so we see the impact immediately. We act on the front-end of the policies, when we see early deteriorations. So the – at this stage – to this stage early delinquency is stable, but we monitor that every day basically.

[Taylor Brodarick:]

Right, okay. And then I guess lastly of the public corporation exposure, I assume the $75 million is PREPA, what is the balance PRASA?

[Aurelio Alemán-Bermudez:]

In our case it's (inaudible), yes.

[Taylor Brodarick:]

Okay, great. Thank you, both. I appreciate it.

[Aurelio Alemán-Bermudez:]

Thank you.

[Operator:]

Thank you. And it looks like we have a follow-up from Alex Twerdahl of Sandler O'Neill. Please go ahead.

[Alexander Twerdahl:]

Sorry about that. Just can't let another conference call go by without getting some updated commentary on the DTA recapture.

[Orlando Berges-González:]

You couldn't let it go, right?

[Aurelio Alemán-Bermudez:]

My (inaudible) get concerned every time you ask me about it.

[Orlando Berges-González:]

I don’t think anything has changed from what we have mentioned the last few quarters. I mean, we – this is again the fourth quarter of profitability since the (inaudible). We continue to see a possibility of laying (inaudible) continue profitability and we will continue to work on that side to eventually have those discussions. But clearly the (inaudible) important thing to support (inaudible) and that we were looking for, so nothing has changed from what we have mentioned before.

[Alexander Twerdahl:]

Okay, great. Thank you.

[Operator:]

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks they may have.

[Aurelio Alemán-Bermudez:]

We thank you all for joining the call and participating today again. And we look forward to the next call and seeing you in person.

[Operator:]

Thank you. The conference has now concluded, and we thank you all for attending today’s presentation. You may now disconnect and have a wonderful day.