First Bancorp
NYSE:FBP
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First Bancorp
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Good day and welcome to the First BanCorp First Quarter 2019 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.
At this time, I'd like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead.
Thank you, Allison. 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 of 2019. Joining today from the company 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 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 the press release issued by First BanCorp, you can access them at our website at 1firstbank.com.
At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.
Thank you, John and good morning everyone, and thank you for joining us to discuss our first quarter results.
Please, let's begin with the highlights for the quarter on the slide 5 of the presentation. This was another strong quarter for us and also we have to say purely clean, driven by core results. We reported net income of $43.3 million or $0.20 per share. And I think importantly, the pretax pre-provision income reached $70.4 million, which is the highest that we have seen in almost 10 years.
Once again, every key franchise metric that we monitor continued to move in a positive direction. We basically hit all our goal for the quarter. Our loan portfolio grew $128 million to now over $9 billion this quarter. This represents our third consecutive quarter of loan growth. We have achieved growth in the loan portfolio even with the meaningful derisking of NPAs and some strategic reductions that we're executing in the residential mortgage portfolio. Net of non-performing loan results shows the performing loan book grew $180 million.
National renewal are healthy at $971 million. I think importantly, commercial and construction loans were an important segment of it in all the three regions and the consumer portfolio in Puerto Rico.
While there's some seasonality on the large deals which are sometimes difficult to predict from a closing timing, we believe the years should continue at similar pace impacted by the timing of the large deals, but the pipeline remains very strong right now across the three regions to continue supporting similar levels.
Importantly, we achieved meaningful progress in the organic reduction of non-performing assets, down $52 million this quarter or 11%. Now, down to NPA is down to 3.35% of assets and NPL down to 3.10.
On the funding side, we also hit a good goal, we grew our core deposit net of broker CDs and government by $124 million. More important to note, when you look at the overall corporation, we grew the noninterest-bearing deposits by $99 million during the quarter. Now capital reached $2.1 billion and tangible book reached 9.32 per share and CET1, 20.4%, which is a very strong capital position.
Before turning the call to Orlando, I just want to make some comments, some highlights on the franchise initiatives that we continue to do to improve results. Wanted to share with you that the recent independent third-party market perception study that was conducted during late 2018 reveal really good scores -- actually top scores, for our quality of service and overall satisfaction when we compare those two to local peers. We believe these qualitative indicators are truly supporting our growth in deposits, our increased lending activity, our services activity.
I think I also want to comment that we continue to make very important investments in technology that are there to support growth and also support efficiencies. Just as an example, we just rolled out during the first quarter our new mobile and desktop application, our new online banking application for mobile and desktop with more deposit capabilities. That is planned to be rolled out in Puerto Rico now in the second quarter, first quarter was the Virgin Islands first.
Some other investments that we have made, that we are seeing continued progress that we monitor, the investments that we made on ATMs, our DC capabilities last year are now processing about 17% of the teller transaction volumes with only 30% of the ATMs being enabled. That will grow during 2019, which we continue to add 150 machines to the RDC capability.
So, those are continue to contribute even though the technology expenses are increasing, investments that we're making though we're seeing some efficiencies offsetting this on our expense lines.
Just to touch slightly on the Puerto Rico economy. We have been very pleased with the level of economic activity and the strength of the consumer, the consumer demand for loans and the behaviors of the portfolios in terms of payments. So it's important to note also that private sector employment during March 2019 reached its highest level since 2015, growing year-over-year by 4%.
So there is a small pieces that continue -- evidence that continue to show that the economy is recovering at a pace, which is probably slow compared to other economies, but is in the positive direction, which will make us feel very optimistic about continue growing.
So now, I will turn the call over to Orlando to cover the financials, I will come back later for questions. Thank you.
Good morning, everyone. The press release details most of the components of the results Aurelio mentioned was fairly core. But I'll touch on some of the key items.
As he mentioned, net income for the quarter was $43.3 million or $0.20 a share that -- which compares to $101 million or $0.46 a share for the fourth quarter of 2018. Remember though that the fourth quarter results included a $53 million net tax benefit related to the partial reversal of the Corporation's deferred tax asset valuation allowance, which increased the result at that time.
Looking at the provision for the quarter was $4.2 million higher it stood at $11.8 million which compares with the $7.6 million for the fourth quarter. This quarter's provision includes $6.4 million of hurricane-related reserve releases. That looks fairly much in line with the $5.7 million that was released in the fourth quarter.
However, the fourth quarter did have a $7.4 million recovery from the prepayment in full of commercial mortgage CDR that was obviously reduced provisioning needs in the quarter. While when we look at the -- this quarter, we recorded a provision of $3.2 million to increase our specific reserves on a commercial mortgage loan in the Florida region, which is part of our resolution -- nonperforming resolution strategies. And we also took a $2.1 million charge under restructuring for commercial mortgage loan in Puerto Rico.
Net interest income for the quarter grew $2.5 million, which is driven by $2.7 million increase in interest income in commercial and construction loans. That reflects higher balances based on the originations -- higher level of originations we've had over the last few quarters, including these quarters. Obviously, some benefits from the upward repricing of variable rate loans, which clearly it's changing a bit as LIBOR has come down. And we also achieved higher collections of interest payments on nonaccrual loans.
On the consumer side, net interest -- interest income, sorry, increased $1.4 million, primarily driven by the $86 million increase in the average balance. These increases were offset by $1.6 million increase in interest expense, out of which $1.1 million represent increases in the cost of retail CDs and savings deposits.
The total cost of deposits, excluding broker deposits, increased five basis points to 71 basis points. As we had mentioned in prior quarters that we're expecting some increases still increases are a very manageable pace. The quarter also showed some increases of our $800,000 in interest expense on FHLB Federal Home Loan Banks advances and repo balances.
This quarter net interest income, it's important to mention that was impacted by two less days in the quarter as compared to last quarter. And obviously, the -- some of the items are affected by number of days outstanding.
Margin increased 15 basis points to 4.92%, pretty strong margin, primarily resulting from the repricing of the variable rate loans and the higher balances as well as the funding mix as Aurelio mentioned with noninterest-bearing deposits. They grow about $99 million this quarter.
If we think about margin, its benefit from the higher loan levels, obviously we've had in the last few quarters, especially on the consumer side which carried higher yields. Clearly, the lower level of NPAs and disposition strategies have significantly helped the mix of assets and obviously the funding mix. We do feel some margin pressures will come from recent reductions in LIBOR and obviously the deposit pricing adjustments that we will continue to see some of it clearly with lower pressures as LIBOR comes down.
The other income items. Basically, there is one large item this quarter. We had a $2.7 million seasonal contingent insurance commissions, which is recorded in the first quarter of this year. We've had that over the last few quarters as a function of insurance production over the year, which was from -- slightly offset by decrease of $500,000 in fee-based income on ATM, POS and credit cards and so related to the lower -- seasonally lower level of transactions.
Expenses for the quarter were $90 million, slightly down, $700,000 down from last quarter. Compensation was down $700,000, but we have to look at components there. We did have -- we received a $2.3 million recovery of -- out of an employee retention benefit that was available to employers affected by Hurricanes Irma and Maria by virtue of the Disaster Tax Relief and Airport Extension Act there of 2017. And we also had a $900,000 reduction on number of payroll days.
On the other hand, as you know, payroll taxes are -- start higher in the year and they decrease throughout the year, as employees reach established limit and they were $2.4 million higher this quarter as compared to last quarter.
On professional fees, we had a reduction of $1.4 million, basically consulting fees on all the projects supporting implementation of accounting standards, such as CCEL and so -- as well as all the technology implementation projects that Aurelio made reference to.
These reductions were offset by $1.6 million increase in occupancy and equipment costs, due basically the full quarter amortization of cost of certain of the projects that were placed in production late in the fourth quarter or early this quarter, relating to the technology infrastructure that includes the ones that Aurelio mentioned on online banking, data security, ERP and so. Also, we had a $500,000 expense in this quarter, which is considered non-recurring in nature, which is related to the adoption of new lease accounting standards.
We had provided you some guidance of expenses between $87 million and $88 million, and this quarter was slightly higher, just over $88 million if we take out the benefit and the OREO expenses. But including the -- we consider the payroll tax variability, in reality we are going to be on that same range of $87 million to $88 million.
As you can see on this slide, the NPA reductions begin to reflect the process we've taken to address the areas where we feel we can achieve asset quality improvements. NPAs declined $52 million for the quarter to $415 million. And we have been extremely successful in completing sales of some of the loans that were held for sale, collecting some of the non-performing loans and achieving some restructuring of others.
If we look over the last 12 months, NPAs have been reduced by $222 million. And a positive thing to that, we continue to see inflow reduction for the quarter. Inflows were down $4 million from $28 million in non-performing loan inflows to $24 million this quarter. And adversely classified assets also came down by almost $34 million. So there have been pretty good results on this front.
Charge-offs for the quarter were $24 million, or 1.1% annualized, that's compared to $12 million or 54 basis points annualized last quarter. This increase is driven by basically two components. One is the $7.4 million recovery, I've mentioned before, that we achieved in the fourth quarter on the full repayment of the commercial mortgage loan. And the other component was a $5.7 million charge off we took on commercial and industrial loan in Puerto Rico in this quarter that had -- that was fully reserved in prior quarters.
The ratio of the allowance continues to be high. We stand at 2.04% of loans as of March, compared to 2.22% at December. However, if you look at the ratio to non-performing loans, it's now at 67%. The allowance is 67% as compared to 62% in December. And we have always showed you commercial NPLs continue to be carried at low amounts. They're now at 51% of unpaid principal balance, net of charge-offs and reserves.
With this, I'd like to open the call for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.
Good morning guys.
Good morning Ebby.
Good morning.
Sorry, if I missed this in your comments, I was just hopping on your other call. But can you talk about just outlook in terms of deposit growth as we think about the rest of the year both in terms of the mix of deposit non-interest-bearing versus interest-bearing? And your expectation just around increases in deposit cost? I know you mentioned margin pressures a little bit of pressure. So if you could quantify that in terms of what all of that leads to the margin outlook for the rest of the year.
Well, I'm going to give you, there's a lot of moving parts here. And obviously, we execute toward maximizing the core deposit growth. It will depend on money flow in the market. So far, so good. Not necessarily means that funds that are assigned to the island are coming on an accelerated manner. They're taking longer than we all expected.
But we continue to see enough and plenty activity, and it's also showing in some of the growth. So our goal to continue growing it's -- at the level that we are achieving now. If -- in the deposit side, if more funds come in an accelerated manner, then we might improve them.
So -- but really, I have to say, Ebrahim that is sometimes a little bit unpredictable, because there are so many factors and moving parts. I think the important part, it's -- we're really focused on it. And the more we can do on a core basis, the better mitigation we have to any impact on the NIM.
You do mention the NIM, and the NIM also have a lot of moving parts. Obviously, we -- the contribution of reducing NPA is helping us every quarter, if we look at how much we have reduced over the last years, it's over $200 million. If you -- then you add to that how we will position in the loan portfolio and the balance sheet that we started also about a year ago, we're reducing the mortgage portfolio, having more conforming originations, but we're also growing the consumer book, which is higher yielding. And we have been able to grow the commercial book over the last three quarters.
So that -- how that mix of loan continue to move ahead, that is the goal. The goal is to continue to achieve the trend. The offset of that is how the markets it's moving on the repricing side. I think that the Fed positioning on the rate, it's important to continue to monitor obviously. And we see kind of a break over the last couple of months on that trend of increase. But we cannot really predict, renewals are still coming higher than the baseline.
So, so, so far, I have to say, we're working towards again maximizing NIM also. And as long as we continue reducing NPAs, increasing the commercial and consumer book and the betas of the deposit continues in level, we should be able to either sustain or stay close to where we are on the NIM, yes.
The last quarter, I had mentioned that the margin was sustainable in the near term and I still feel that way. We had a pretty good pick up this quarter. I think that obviously with LIBOR coming down again a bit, three-month LIBOR and having a portfolio which is on a commercial side, which has significant ties to LIBOR. LIBOR will definitely put out a little bit of pressure there. I -- honestly, I did not expect margin to go up that much this quarter.
So we'll take it. But as Aurelio mentioned, we're going to be in a range, but it's -- we have to recognize that there are some components. Still it’s going to be very healthy margin, I don't think margin is going to come down dramatically.
Yes.
Got it. And just part of what you mentioned around relief funds. Like I get that they've been slower to come than expected. Do you see there are some -- do you have any visibility on whether that picks up by the middle of the back half of the year? Or just hard to say even from your standpoint?
We monitor that very closely, and there's $1.5 billion that are moving around. As projects are being designed and approved towards those $1.5 billion, so that's kind of the first trench. But that’s really the CDBG components, there’s FEMA still investing out there. And also there's also some private capital coming in from some of the -- that should come in over the next quarters in some of the private -- public-private partnership. So it's difficult to predict the exact timing on this, Ebrahim, yes.
Understood. And just separately on capital. One, I think if you can just talk to your expectation around non-performing assets at 3.35% two assets at the end of the quarter. How quickly can that number move lower? And just if you can comment in terms of capital deployment, either buybacks or either from inorganic growth standpoint kind of where do you stand?
Yes. I think we shared last I think in a few calls ago on the NPA side, we wanted to be below 3% by the half of 2019. We're still working towards that. I think the good thing; we've been able to execute the strategy organically, with less capital impact. It's been a long road on the NPA and we're pleased with the results. I -- we -- the goal is to be below 3% by next -- by the end of next quarter. But it's a deal-by-deal execution. Pipeline looks good on the deals that we have on the table. So hopefully, we're there.
Regarding capital, I think first priority is continue to use the capital to leverage the balance sheet and try to grow as much as we can, either on a sound manner with a risk appetite that we have, either organically or non-organically.
I think we have -- we don't have any capital announcements to make today, but we have -- we're working towards being able to make some announcements, of capital action announcements during the year. So that is a goal of 2019. I cannot give you any more information on that. But it continues to be in our priority list. But you, obviously, -- the focus continues to be how we can grow the balance sheet and continue to improve our numbers, yes.
Got it. And just one last to confirm, we still expect tax rate to be 28% to 29% for the rest of the year?
Yes. Taxes? Yeah, that is correct. Yeah.
Thanks for taking my questions.
Thank you.
And the next question will come from Brett Rabatin of Piper Jaffray. Please go ahead.
Hi, guys good morning.
Good morning, Brett.
Good morning, Brett. How are you?
Good. Thanks. I wanted to ask about credit first. I mean, you continue to have a decrease in classify CreditSights and commercial but seeing some of your peer’s early-stage delinquencies are just a little bit higher. Can you talk about what you're seeing in terms of -- I know you're working through some nonperformers and have some charge-offs this quarter. But what the outlook is relative to maybe a quarter ago in terms of just can criticized classify go down? Or is the pipeline filling back up with new delinquencies?
What we have on hand to date, we don't see the pipeline filling with new delinquencies that concern us. I think we have to consider also that when you close a quarter of 29, and which was a Friday instead of a 31st, that do have an impact -- small impact on delinquencies of payment that are received over the weekend that are not reflected.
So in -- we have some noise in the commercial specifically. But when you look at resi and the others, the impact is really related to the timing. So we don't have -- right now we don't have -- we don't see signs of deterioration on an early stage or new path.
I think -- we’re -- not like $7 million, Brett, and 30, 29 meaning. And part of it was, as Aurelio mentioned, related to collections that typically come in at the end of the month.
Okay. And then just want to ask about loan growth and your originations or lower linked quarter, but they're quite a bit higher year-over-year. I mean, can you guys give us some thoughts on growth for the year. I mean, can mid single-digit possibly be achievable? And how are you guys thinking about the portfolio this year?
Our goal is continue to repeat what we achieved this quarter or better. I think the timing of some of the deals sometimes could make some noise. If you have a transaction that don't close this quarter, close the other. Remember that we report also, it's a mix of renewal of deals that we retain and we renew and deals that are new. So that timing is mostly on the renewals.
If you look at first quarter, usually on the consumer and mortgage, seasonality is lower. So we continue to see good pipelines to move into the second quarter. So the goal is we'd like to continue to achieve what we did this quarter, and grow the share for some of the products. We are growing share in auto and we're growing share in the consumer loans.
In terms of origination, we have continued to grow share in mortgage, even though they don't show -- they don't grow the portfolio because it's primarily conforming. But numbers similar to this quarter is what we are looking to achieve.
Yeah, keep in mind that we did come down $47 million or so in residential mortgages. So, obviously, that's going to affect when you compare percentage wise total portfolio period-to-period.
But I think that -- the important number is also the portfolio -- the performing book because we still have a goal of reducing NPAs, so really the performing book grew $180 million during the quarter, and which also that contributes to the margin, yeah.
Is there a level you want to get the mortgage portfolio to? Or is there a point where atrophy and -- I know that it doesn't look great from a seasonal perspective, so I understand the desire to deemphasize that portfolio. But is there a point where that becomes less of a headwind?
I think – we can share with you, probably we don't have it right here. I don't want to say a number from the top of my head. But if you keep the originations, the market originations that we're achieving and around 20% being conforming, so that would level down the portfolio probably -- it's going to continue decreasing for the next couple of years and then will level. Yeah.
Okay. And then one last quick one. Just I joined a little bit late. But the margin from here, the margin was obviously up, but you had increases in both loans or both loan yields and the cost of funds just the margin atrophy a little bit from here relative to 1Q?
Well, the – I was mentioning that obviously we did have a larger pickup that I expected in the quarter, driven by the fact that we did grow the non-interest bearing deposits in the quarter and yields went up as the consumer portfolio continues to come up. We benefit from the average LIBOR being higher than it was last quarter and having a portfolio mortgage – a commercial portfolio which is around two-thirds that are floating. The – we do expect margin to hold at the levels we had seen in the prior quarter. The reality is that LIBOR did come down a bit towards the end of this quarter, so we'll have some impact going forward. And as we had mentioned, the rate increase on the deposit side hasn't shown as, as you will know, as aggressively as in the states. But we have seen some increases. So we feel some of those will compensate. Margins will stay up. Can it be at 4.92? I don't know. But it's going to be at level in between these two quarters. For the next two or three quarters, I think it's sustainable.
Okay. Appreciate all the color.
Thank you, Brett.
Thanks, Brett.
The next question will come from Arren Cyganovich of Citi. Please go ahead.
Thanks. I was wondering if you could just give us an update on what the M&A environment's like in Puerto Rico, if there's anything that you can comment on that side?
There's really no news on that front that we can – that we have to share, really, nothing.
Okay. And then you addressed capital return a little bit. Is the reduction of NPAs down below 3%, is that something you have to achieve before you can start to return a higher level of capital being above 20% CET1? It definitely seems like an outlier relative to most banks you see out there.
Yeah. It's more unreliable not necessarily it's a limitation.
Yeah. We've had that guidance, internal guidance below those levels. You have a really manageable portfolio, which non-performing portfolio which up to now it was a bit high. So it's clearly one component of the whole formula. But it's not a – the defined driver.
Okay. All right. Thank you.
Thanks, Arren.
The next question will come from Alex Twerdahl of Sandler O'Neill. Please go ahead.
Hey. Good morning.
Good morning, Alex.
So I'm just wondering if we can put the puzzle pieces together and the margin sustainable and we get a little bit of loan growth from here and the expense guidance is really unchanged, does that all imply that the $70-plus million of pre-tax provision should be sustainable over the next several quarters?
Yeah. That's the goal. That's the goal. We really – we still have levers to make that number better, and that's the goal, yeah.
Great. And then just in the near term as we think about all this FEMA money and CDBG money that is expected to flow down to the Island and some of it which has already been allocated and much of it is not, does that create more or fewer lending opportunities in the near-term?
If you – I think we have to go back to – we have a recession baseline. So I think don't forget about the baseline. I think the baseline was low. So any growth is good in terms of how the economy is moving. And there's a lot happening in the reconstruction in both Puerto Rico and Virgin Islands and still some private money moving around on insurance. And there is FEMA money and there's CDBG money that is coming. So I'd say it's difficult to predict, but the flow is going to be more positive than it's been for years. So that should lead to additional lending and activities. We're already looking at projects that are related to reconstruction of housing, just an example, or other type of infrastructure. So the answer is yes, we believe that, yes, the timing is unpredictable, but lending – demand for lending should pick-up.
Great. And then just finally, we saw the dividend was turned on I think in November, the common dividend. Is there a time of year specifically that you guys would be analyzing specific capital actions like dividend increases or buyback announcements? Or is it a much more fluid process throughout the year?
Yeah. It's an ongoing process, it's an ongoing process. And as we speak, we're working on actions that we would like to execute. And hopefully, we can give news to the market this year, although it's an ongoing process. Yeah. And it's a priority.
Okay. Great. Thanks for taking my questions.
Thank you, Alex.
[Operator Instructions]
Our next question will come from Glen Manna of KBW. Please go ahead.
Hi. Good morning, guys.
Good morning, Glen.
Good morning, Glen.
When we talk about the possibility of a recovery in Puerto Rico and what's going on, I put your Puerto Rico loans into my model just on a segment basis and this is the third quarter of sequential growth in Puerto Rico loans and it's been growing at a sequentially higher rate. I look back in my model and that hasn't happened in all the data I've had in my model.
So, can you give us some color on what industries, especially on the C&I side you are seeing growth in? And maybe give us some anecdotal evidence of where it's been?
And in terms of -- because yields were up and given LIBOR and what Orlando said, can you tell us what competitive is like in the market? And what you're seeing on pricing?
I think the market, the market -- let's talk first of all, on pricing, I think the risk is fairly priced. I think bankers learned from experience. And we have to say that in Puerto Rico, the risk is fairly priced, also in the Virgin Islands. I think when you look at Florida, it's challenging. It's more competitive and more aggressive on pricing. But it's been like that for some time also. That's on the pricing side.
On the -- what industries. I think when you look at it -- first of all, when you look at commercial, we do lend in small middle market and large corporations and we have -- we are focused on the three segments. So, there's a small business activity and there's middle market activity and there is large deals. When you look at asset class, there's no -- nothing specific that highlights specifically as an asset class, just activities related to construction, warehouses, distributors, demand for materials, distribution companies. And also -- that's one segment. Also auto, even though it's shown as a commercial, we have increased our exposure in the inventory of auto on the wholesale side, because we finance that inventory.
So, I don't say we're not creating a concentration in any asset that we'll see -- for example, construction, we haven't seen yet the heavy activity in Puerto Rico starting to come, deals are starting to flow.
So, with -- what has come in? Are you happy that FBP is getting its share?
We're happy that we are getting our good share. And we're very active on the street. And you saw that PPNR up 70 and it's linked to that growth. It's linked to that portfolio growth. And we have to continue -- that's our goal to continue getting that share -- the fair share in the market. We still have some buckets of share on the consumer that we have opportunity for increase. And we have it also in the commercial and CRE side -- the C&I and CRE side.
And Orlando, maybe you could help me out. On the yields in the commercial, were there any credit driven interest rate recoveries this quarter in that number? Or were they pretty much flat quarter-over-quarter?
No, there was nothing significant. There is always a little bit of collections of non-performing that you get every quarter and it could be a little bit higher or lower. Never -- typically not a significant amount like a couple of large cases we had at the end -- second half of last year. But not -- not this quarter. It was more of the normal kind of thing.
Okay. Thank you, guys.
Thanks, Glen.
Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to John Pelling for any closing remarks.
Thank you, Allison. On the IR front, we have the center Puerto Rico Investor Tour scheduled for May 23. We also plan to attend the Morgan Stanley 10th Annual Financial Conference in New York on June 11th and 12th. We greatly appreciate your continued support. And at this point, we will end the call. Thank you.
Thank you, all.
Thanks.
The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.