First Bancorp
NYSE:FBP
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First Bancorp
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Good morning, and welcome to the First BanCorp's 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, Investor Relations Officer. Please go ahead.
Thank you, Debbie. 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 2018.
Joining today from FBP are Aurelio Alemán, Chief Executive Officer and President; 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 the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call.
If anyone does not already have a copy of the webcast presentation or press release issued by First BanCorp, you can access them at our website under Firstbankpr.com.
At this time, I'd like to turn the call over to our CEO, Aurelio Alemán. Aurelio?
Thank you, John. Good morning, everyone, and thank you for joining us today. Please let's begin with the highlight for the quarter by moving to Slide 5 of the deck. We're very pleased with the core results of the quarter. They were really good for our market. Our core business and operating metrics continue to move in the right direction from a profitability standpoint. It was really a good quarter. Net income of $31 million or 14% per share and pre-provisioned earning tax, pre-provision income reached a new level for the second consecutive quarter at $51.4 million. Definitely the recovery in Puerto Rico continues at a steady pace and our franchise continues to benefit and deliver solid quarter results.
Net interest income on margin improved driven by high loan yields on a more favorable funding mix. Credit quality continues to move in the right direction as delinquency trends and APM [ph] levels show slight improvement during the quarter. Core deposit growth was definitely strong again this quarter. The most significant growth was non-interest income non-interest bearing demand deposit which increased 50% or $287 million. We continue tracking the various economic activity indicators. Unemployment numbers are definitely showing improving trends. There's definitely positive evidence of economy recovery demonstrated this time by several indicators such as unemployment, even sales, retail sales, auto sales, imports, exports and more importantly, the overall strengthening of the consumer confidence demonstrated by incremental loan demand on the consumer segment.
On the asset quality front, NPAs declined slightly $60 million and NPLs are down $3 million. We continue to see increased investor interest in asset we have for sale, which actually contributed to some of the reductions during the quarter and as I was mentioning, improving us a quality metrics remains a top priority at the bank. We grew our capital base and our tangible book value per common share grew to $8.40 this quarter.
Let's talk about the loan portfolio on Slide 6. Long ratio volumes show decent growth versus prior quarter, but increasing $126 million approximately. It is approaching pre-hurricane levels in some of the areas. Definitely economic activity is contributing to stronger pipeline for the remainder of 2018. If we look at the graph on the right side of the slide, it shows considerate increase in all the main categories in residential, commercial and consumers over the last two quarters.
Consumer originations were already above pre-hurricane levels mainly driven by auto lending which increased 40% versus prior quarter. Florida operation results are contributing to the increasing origination activity, which for Florida was up 22% this quarter. Final for the second half of the year has remained stronger I have to say, and should reflect improvement during the second half of 2018.
On the other hand, the overall portfolio decreased this quarter. There was a lot of activity and Orlando will go in detail. We could pay off note sales and repayments. As everybody is aware, we're also actively selling NPA notes or NPL notes. While this resulted in reductions in commercial, the consumer portfolio showed positive growth during the quarter. It is important to know that even though we increased by $20 million residential origination, the portfolio went down. Obviously, this was driven by our continuous and focused originating conforming mortgages which we sell in the secondary markets. Ultimately, I have to say the recent economic trends that we are more optimistic about loan growth opportunity for the remainder of 2018.
On the deposit front, it was a really great quarter. The highlight is really the $297 million growth of the non-interest-bearing deposit, which definitely contributes to our main improvements. Most of the growth actually in our sector is from the retail and commercial deposit this quarter. It was around 75% of the growth came from those, a portion came from the government and if we had to attribute to some of the cash flow generated by insurance company, we estimate around 20% is coming from insurance sources.
Moving to Slide 8 to quickly touch on the capital ratios; as we see capital levels continue to build up, we added in the quarter -- we have $14.8 million common income on equity, Tier-1 of $22 million and total capital of $23.5 million, definitely very strong. We did continue to make payments in interest in props and dividends on our preferred securities and importantly while we no longer have the final requirements for Dodd Frank, from BFAS, we're planning to complete the process in the coming weeks and here is a result for ongoing capital funding purpose and we're planning to also share those results in the upcoming investor presentations.
At this point, we don't really have news on the capital deployment, it remains a priority. We're definitely pleased to see regulatory post-capital [ph] from our competitors. For now, we'd love to deploy that capital in looking for opportunity for growth and focus on this whether they be organic or non-organic.
So with that, I will just turn the call to Orlando to cover the highlights in more detail.
Good morning, everyone. The earnings release we put out provides you a really good color on results on the quarter. It was straightforward in many sense, but I'll touch up on some of the key items that Aurelio mentioned. We posted a net income of $31 million or $0.14 a share, compared to a $33 million or $0.15 a share we had last quarter. We looked at results, there is improvement in net interest income, we have higher levels of mortgage banking revenues, we had higher merchant and credit card fees for the quarter and we also had some increases in REO expenses.
The provision for the quarter was $19.5 million, which includes a net release of about $2.1 million in hurricane-related resource for the commercial portfolio based on the revised assessment of the portfolios, which compares with our $20 million of probation and some $6 million relief last quarter. As of June, the hurricane-related qualitative allowance we have left its $42.2 million to cover losses.
Taxes for the quarter were higher. Basically last quarter, we had $1.8 million excess tax benefit on some shares that were granted in prior periods invested last quarter and also last quarter we had sort of one-time gains on the sale of the crops and some fees on incontinent commissions. We have it on entities at some other lost components that offset some of these revenues.
Revised calculations of effective tax rate, it's about 25% excluding those entities with pretax losses, which is slightly lower than what we discussed last quarter basically change a mix of exempting some of the inter-relationship of the partial DTA with the amount of charge-offs and provision that we see for the next few quarters. Just to point out, we still have about $145 million of net evaluation on the deferred tax asset on our banking operation, which is the one that has been subject to change.
Net interest income for the quarter was strong. We had $130 million, which is $5.8 million higher than last quarter. The increase reflects improvement of $3.3 million on the commercial portfolios primarily repricing of variable rate loans and we did collect out $1.2 million interest on a non-performing loan in the quarter. As Aurelio pointed out, the one thing, we did see some large repayments of loans and some loans paid off in the quarter. We had $63 million on loans paid off, commercial loans I refer to and $32 million in large repayments which obviously reduced the average balance outstanding and affect the numbers. We did sell our $10 million of mortgage loans in the Florida market. It's part of the overall strategy, it puts us in our residential mortgage portfolio.
The quarter in terms of interest income also, we had a pick-up of $1.8 million on basically investment securities, higher level of portfolio and interest-bearing cash balances with the improvement on the interest on the on the [indiscernible] target rate and the increasing balance, those amounts came out by the $1.8 million. The consumer portfolio interest income increased our $1.6 million. It's lower impact from non-performing. The effect of one extra day and we had some increases in some of the portfolios as Aurelio mentioned. These increases were sort of offsite partially around $500,000 and on the residential mortgage side because of the smaller portfolio size.
Margin increased 9 basis points for 49, which includes the impact of the repricing of the by all rate [ph] commercial loans. The interest collected on the non-performing commercial that I mentioned, that improved the margin by about 4 basis points and clearly an improved funding mix with a large increase in the non-interest bearing deposits.
Non-interest income for the quarter was basically in-line with last quarter. We exclude the $2.3 million gain we had last quarter from the repurchase of $24 million in cross-referred. The mix changed a bit in terms of we had higher level of mortgage originations and obviously sales that increase mortgage banking income. We had a higher merchant transactions, higher credit and debit card fees which both show increases and we've seen levels similar to those pre-hurricane and we had higher service charges on the passage [ph] with increased volume of transaction accounts. That all said, the fact that we had the $1.6 million, $1.7 million of contingent insurance commission last quarter that happens once a year.
On the expense side, expenses amounted to $90.2 million for the quarter. That has been an increase of $4.2 million from last quarter and including the expenses in the first quarter that were $1.6 million of hurricane-related and the second quarter, we had $700,000. We exclude these items. Expenses for the quarter were $89.6 million and that compares with $84.4 million. The increase was basically all associated with REO properties. We had $5.4 million on fair value adjustments on several commercial REO properties, mostly concentrated on four properties. Excluding REO, expenses were very much in-lined quarter-to-quarter, at approximately $84 million, which has been consistent with our guidance on targets.
On the asset quality side, non-performing's are down almost $16 million to $621 million on performing assets, compared to $637 million last quarter. Non-performing loans were down over $3 million. Inflows to non-performing for the quarter were $105 million driven by two large commercial mortgage loans totaling almost $70 million, which are related to one legacy commercial loan relationship with have with operations in both Florida and Puerto Rico -- the two, the $70 million split, $47 million in the Florida market and $23 million in Puerto Rico. However, we saw inflows of residential mortgage loans come down by $10 million and those of consumer loans come down like $1.5 million compared with last quarter.
But even though inflows were higher than last quarter, we also had significant outflow activity during the quarter, of which amounting to $108 million on the non-performing loan side and also had our $11.2 million reduction in REOs. Included in the outflows are $51 million in loans that restore to accrual status, including one split loan restructuring of $34 million where charge-offs have been taken in prior periods. We've sold $10 million of the loans that were held for sale -- non-performing loans held for sale. We also had $14 million in collections and repayments this quarter of non-performing, which is very good and we achieved our $13 million in sales in REO which included one large commercial property for $3.9 million. So it will be significant outflow activity that we saw in the quarter, in line with what Aurelio was mentioning with investor activity.
Net charge-offs for the quarter were $23.4 million or 107% on loans compared to $26 million, 121% of loans last quarter. Last quarter charge-off did include our $9.7 million on loans that were transferred to held for sale. The ratio of the allowance to non-performing are on 53% and as compared to 54% last quarter and commercial NPLs have been carried out at 53% of paid principal balance.
That is like a summary of all the key things, so we'd like to open the call for questions now and clarify some of the things you might like to discuss.
We will now start the question-and-answer session. [Operator Instructions] The first question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
One or two. I guess first, make sure I understood the two loans -- the $47 million and the $23 million. Are they related and can you maybe give us a little more color on what happened with those loans? I guess is the first part.
Yes. Those loans, I think we cover well those loans with the flurry outside [ph] the last call. These are relationships that dated 2006, 2007 and one is a real estate facility that we know at the time of the loan, the cash flows are not supportive of the overall debt and even though we have cash flow. So we're currently working out the relationship to bring it back to a performing portion. That's the Florida segment. The smaller one in Puerto Rico is also in maturity on the restructuring terms. They've been classified for some time, adversely classified, so it really -- long legacy work has been done in this, too. I think it's important to highlight, Brett, that for years we have a very large list of large loans in their barely classified category. There's actually only two remaining about 10 million which I say is quite a different profile of what we had before in terms of the potential pipeline for migration. So it's been a big three that we've been chopping for so many years now, it's finally getting to conclusion from our point of view.
It's same order, but to independent properties that operate with independent cash flows.
Independent companies.
Okay. That's good to hear. Then on the pipeline, maybe you can talk about the classified loans and I know you got word of the $10.4 million credit in the quarter; any thoughts around being more aggressive? You mentioned note sales. Any thoughts on being more aggressive with lowering the level of classified assets, maybe say an STV or some vehicle to try and reduce the classified assets at a faster pace?
I think the market is providing the conditions for that to happen. There is a lot of investor interest, I have to say and we have more analyzed and agreements from some of the properties. We do have held for sale loans and arrears that add to $200 million. That is a primary focus of those classified assets that are non-performing, so the resolution was due to that. On the other hand, we're also seeing some potential upgrades based on the conditions of the borrowers and some of them improving conditions and we couldn't allow that to happen. I have to say that we're optimistic on that front for the remainder of the year as we continue to see investor interest increasing which is really the driver of capital to bring those asset to resolution.
Okay. And then on the margin. It would look like your margin could continue to improve, given the low deposit beta-s that you're experiencing, a strong inflows of core deposits. Is there anything that would mitigate that over the back half of this year?
Well, as long as the deposit trend continues and this is a market as you say -- it's a market characteristic that we're living through after the hurricane or the cash that is coming in between the different sources of funding. It is expected that when you look at the physical plan and based on the estimate, the majority of the funds have not yet been seen in the market. So we expect that that continues, but it's very difficult to predict at what levels it will continue and what is the timing of it. From that perspective, I have to say that as long as we continue to see money flowing, oh balance on accounts increasing, opening more accounts, that's our goal. It will support that improvement. On the other hand, we also see the consumer business bringing more demand from the consumer which it's our higher yielding loan.
So that also contributes to the margin. So there is some evidence and trends that should support that.
Okay. Thanks for the color. I'll hop back in the queue.
The next question comes from Joe Gladue of Merion Capital Group. Please go ahead.
Good morning. Let me follow-up a little bit on first question on March and just first off on the deposit side. It looks like there was a really strong growth in the non-interest bearing accounts. I imagine some of that was affected by the rise and government deposits, but it looks like even without that, there's strong growth. Just wondering if you can have a sense of where that's coming from, if some of that was insurance proceeds from customer? I'd like to get an idea of how sustainable that is.
Yes. We estimate around 20% to 22% is identified as sources of insurance proceed. The remainder is really average balance activity that we see in our accounts in actually both the retail and the commercial. There are some increase in retail accounts in terms of number of accounts and customers also that add contribute to that. Obviously, there is a lot of economic activity going on that is related to ending of the island and as we all know, that building is just in early stages.
Joe, let me clarify, the $290 million on non-interest were in the buffering growth we had in the quarter that Aurelio mentioned, it's all retail and commercial customers. On top of that, we had about 100 million growth on the government side. Those were two independent components on the growth. On the other hand, we did eliminate our 100 million of broker CDs in the quarter, that excess is helping to change the mix of the profile of the institution.
And I guess while we're on the funding side interest cost, any further opportunities to I guess reduce the TruPS referred?
TruPS referred is one of those chances that happen once in a while. It's difficult to say that. It's something we can't control based on the way we distribute it. Once in a while we do get the opportunity like we did last quarter and some last year. There are some, we'll pursue them, but I cannot tell you that that's going to happen.
And just one other, I guess loan yield on -- it looks like average loan yields are up about 20 basis points or so compared to first quarter and just wondering if some of that is just related to loan prepayment kind of lease or some related to some of the loan sales where they're lower yielding loans, just trying to figure out the source of that jump.
The job is number one, repricing. We have a fairly large commercial variable portfolio that reprices with LIBOR. So with the LIBOR increases, mostly if want LIBOR, increases has helped. We did collect some non-performing interest that you saw in the release in the quarter that helped the margin and the other component was what Aurelio mentioned, that we've seen growth on the personal, on auto loan side of the business which both carry higher yields. Those combined puts the yield on the loans a little bit higher. Again as we mentioned, also the mortgage lending side, even though the yields have increased a little bit on your originations, in reality, most of what we're doing, it's conforming paid but it's being sold so that portfolio has come down a bit and we did sell some amounts in the Plaudit [ph] market based on the way we want to position our mortgage portfolios as the percentage of all our lending portfolios.
Okay. All right. Thank you.
The next question comes from Arren Cyganovich with Citi. Please go ahead.
Thanks. I apologize I had to hop off the call for a bit. So if these have already been addressed, I apologize for that. Would the REO cost that were up for the quarter, is that a catch up from more time -- what was that related to and how should that progress as we go through the rest of the year?
This quarter, REOs, we appraise it once a year. That's a general policy we follow. We had four properties that were due for re-appraisal this quarter -- commercial properties. Those four properties -- we had a bunch of properties that were due for re-appraisal, but these four properties are the main driver for the increase. One of them, it's a land loan that took a blunt of the head of this change on -- it's on the western side of the island which market is moving a little bit different and that affected more than typically you would see because of the composition of the properties that were subject to re-appraisal. There are still volatility on values in the market and that could happen once in a while with properties.
On the other hand as we mentioned, we did sell one commercial property for $3.9 million, which was sold as just about carrying amount. We did sell the other non-performing loan that was a note that was also sold at just about carrying amount. It all depends on the kind of property and there could be some volatility, but I would say that this one is a little bit higher. There may be one or two properties that still can experience that, but most of it probably leads a more of a normal kind of variation in values.
Okay. And then on the capital return a potential -- you continue to run with a high amount of excess capital. I'm just curious as to why you haven't been a little bit more aggressive with respect to getting that capital return. I think you addressed this at the beginning of the call. What's the timing expectation there when you might address this?
We really can't give you timing. There are conversation, it's a priority. But really, we're not in a position to create an expectation. We like to see that capital deployed in growth, we would like to see the capital deployed in growth organically or non-organically and obviously, we'd like to see the opportunity of providing from distribution event [ph]. But at this point -- and it's a priority for both, the Board and the management team, but at this point, I cannot give you a timeframe.
Okay. I understand and it would be great to see in growth. With the size of excess capital that you have, it's hard to believe that you'd be able to get that down to a meaningful or more reasonable level of capital just through growth unless you had a fairly sizable acquisition.
Keep in mind that obviously from where we're coming as an institution, there are conversations that we've had with our regulators over the last few years, trying to move in that direction, but our formal agreements still require regulatory approvals. So that's part of the discussion process that we have and how the composition of the non-performing portfolio behaves.
The next question comes from Glen Manna with Keefe, Bruyette & Woods. Please go ahead.
Good morning, guys. I just wanted to drill down into the brokered CDs a little bit better or a little bit more. When you look at the run off in the quarter, it seems to imply that CD book has a year-and-a-half duration. Is that correct? And if you continue to see good deposit trends on the island, do you have the ability to gather deposits and enough excess liquidity to fund the future growth and continue to let that brokered CD run down?
Definitely. We have excess liquidity and we have seen our capacity to gather deposits. That has been one of the reasons why broker CDs have been coming down. Also keep in mind that broker CDs have become more expensive in the market. If you remember a few -- six or seven years ago, the broker CD market was much cheaper than the Puerto Rico market. That has changed. You are correct that the average life, it's in that 1.5 to 1.8 years and we continue to -- and that was spread out in the sense that we managed the portfolio or the broker CD portfolio to hide on system amount of maturities per quarter so that the process of reissuing was easier. So that allows us as the positive growth to continue to take the broker deposits down and that's the plan, to continue to do so.
Okay, thank you. And Orlando, I was writing quickly. Did you give tax rate guidance for the second half of 2018 or the full year 2018?
Yes. The revised guidance on taxable entities, it's like 25%. What I mean is there are some entities that have some losses or like for example, the holding company which is an operating entity and whenever you have some gains like sale of the TruPS could have affect the number. But in general, it should be in that 25% to 26% range based on the projected composition of revenues and expenses.
Okay. And on an FTE basis, what would that be?
On what are you saying? Sorry?
On a fully taxable equivalent basis. Would that be something higher?
Well, the margin already is 39% in Puerto Rico, but remember that in general, the industry has always had the benefit of tax by law of how the management portfolios are treated or operations that we run from other kinds of entities like IBEs that have special tax treatment. You'll never get to those 39%. It's mostly going to be in that 25% to 35% range, depending on the mix.
Okay, thank you.
[Operator Instructions] Next, we have a follow up question from Brett Rabatin with Piper Jaffray.
Hey, guys. I just want to follow up on the classified assets and just thinking about getting those down to 20% of capital or so. Can you maybe just give us an idea of time frame that you're hoping to accomplish that or that might entail particularly in the back half of this year?
Time frame today, not a commitment but it's a priority and we're looking at no later than the second half of next year, then the second half of this year, mid next year.
Although 20% is aggressive.
Yes. That's what we're planning to.
I'm sorry. What's the…
Then the second quarter of next year.
Second quarter next year. Okay.
It's an aggressive 20%.
Okay. And then just I guess just thinking about the back half of this year, you had a little better trends in some of the fee income. What items should we expect back to continue in 3Q in particular?
The fee income is divided. Everything related to transaction volume -- meaning credit cards, debit cards, merchant transactions, we're seeing those levels get back to normal and that is the reason for the increase in the fee components, so we expect that to continue throughout the year. The mortgage banking revenues, it's a function of originations of that increased this quarter and we feel that we can sustain originations at this level for the rest of the year. The market in general, it's down from what it was a year ago and we expect it to be down from what it looked back a couple of years. But these current levels are sustainable. Obviously you have to take out the unusual ones like the continued insurance commissions that happen once a year, basically first quarter or early second quarter at some amount. And any other kind of special things like the props or the sale of the branch we had in the first quarter or the physical location we sold in the first quarter.
So taking those out, I would say we feel it's going to be consistent with some opportunities for some growth.
Okay, great. Appreciate the additional color.
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.