First Bancorp
NYSE:FBP
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First Bancorp
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Good morning. Welcome to the First BanCorp Fourth Quarter and Fiscal Year 2019 Results Conference Call [Operator Instructions]. After today's presentation, there'll be an opportunity to ask question. Please note that this event is being recorded.
I'll now turn the conference over to John Pelling, IR Officer. Please go ahead.
Thank you, Kate. Good morning, everyone. And thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the fourth quarter and year end 2019. Joining in today from First BanCorp are Aurelio Alemán, 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 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, you may access them at our Web site, 1firstbank.com.
At this time, I'd like to turn the call over to our CEO, Aleman Aurelio. Aurelio?
Thank you, John. Good morning, everyone. And thank you for joining us to discuss the quarter and the year end results. Please let's move to Slide 5 of the presentation. I'm going to touch on some of the highlights of the quarter and then we will go over the annual performance of the corporation. But before I do that, I just want to say that our hearts go out to those impacted by the recent earthquakes in the southern region of Portico. While it is really business as usual here in the metropolitan area and we have seen minimal disruptions, the earthquakes did impacted those in the more remote regions south of the island and we've been supporting with humanitarian efforts to those impacted, we have visited the area.
From a business standpoint, very few of our clients have been affected and we are supporting them with payment moratoriums and supporting in orientation and processing the insurance claims. I think this event, we have to compare its quite different to -- in terms of magnitude to the 2017 hurricane where if we'll remember, most of the island was impacted and electricity and telecommunications were a big problem. Fortunately, this time that is not a problem. Electricity was recovered very quickly and telecommunications were not disrupted and obviously, as a result our operations were back to normal one day after the earthquake.
So far, we have been supported clients I would say in the hundreds, not really in thousands. Our exposure to the region, somehow 4% in the mortgage portfolio and about 10% on the other consumer portfolios, and we are receiving calls and we support the clients. But so far, I have to say it's been limited number the ones that have been impacted by this, we will continue monitoring and we will continue supporting them.
So now moving into our quarterly results on the profitability front, excluding the Meridian and restructuring charges, we are actively working. Our adjusted net income was slightly lower than the third quarter at $42.8 million or $0.19 per diluted share. Pretax preparation was again strong this quarter at $72 million and I have to say that we have been consistently delivering over $70 million pretax pre-provision on a quarterly basis over the past year.
On the loan portfolio, originations, our renewal was strong exceeding the $1 billion we reach $1.1 billion this quarter. The loan portfolio grew $31 million and much of the growth this quarter came from the consumer portfolio. We also continued to achieve organic improvement in asset quality. NPAs now are at 2.5%, which is the decade low that we had in the portfolio.
Core deposits grew nicely up $261 million, growth in both Puerto Rico and a segment in the Florida market. And we continue to reduce reliance on the broker CDs, which decreased $48 million this quarter. Regarding capital, earnings continue to upgrade to our capital base, which is now over $2.2 billion. We are pleased to announce the 67% increase in the dividend last quarter. And we also look forward to use this capital as we get approval, and we can close the pending acquisitions.
Let's move to Slide 6, so we can review the full-year performance. We are definitely very pleased when we look at the numbers of the year and we look at the graph on Slide 6, it was really a monumental year for First BanCorp, adding to that the acquisition announced during the last quarter. On a year-over-year basis we really, you look at the graph, we improved all our key franchise metrics. On an annual basis, adjusted net income increased 21% compared to 2018 pretax provision increased 14%. Loan originations and renewal increased by 24% in this portfolio, the consumer portfolio grew 17%, which really helps supporting our margin and really minimizing the impact of the interest rate environment.
NPAs are down 32% during the year. During the year, we also grew our deposits by 6% or $313 million and reduced brokerage fees by 22% or $122 million. We have materially transformed to make of our deposit mix now noninterest bearing represents over 25% of our deposit base and brokerage below 5%.
Before I hand the call to Orlando, I really want to recognize my executive team, my officers and employees, the support of the Board for all the hard work and achievement of the year that have really positioned the franchise well for 2020 and the future. The earning powers of the combined franchise will drive you know future capital generation at a faster pace. We are working hard on integration plans of the pending acquisition, preparing to better serve our customers and be a larger competitor in the island. We look forward to 2020 as a transformational year for our company.
With that, I will turn the call to Orlando to cover the quarter in more details. Thank you.
Good morning, everyone. As you saw in the earnings release, we generated $36.4 million of earnings in the quarter, which compares to $46 million we had last quarter. But as Aurelio mentioned, the fourth quarter included $10.9 million in merger and restructuring costs of our recently announced transaction with Santander, including voluntary separation program we offer at FirstBank in December, and I will touch up on those a bit later.
If we exclude of these items and some of other things that happened that are not necessarily core from our perspective, our non-GAAP adjusted net income for the quarter was $42.8 million or $0.19 a share, which compares to non-GAAP adjusted net income of $45 million in the third quarter. Pretax pre-provision, as Aurelio also mentioned, continues to be strong at $72 million and it's been consistent over the last few quarters.
The quarter -- provision for loan losses in the quarter was $8.5 million, which is $1.1 million higher than last quarter, mostly on residential mortgage loans that are driven by some of the charge-off taken on loans that migrated to non-performing and they're evaluated for impairments. Also, I'd like to point out as you saw on the release that during this first quarter, corporation is adoption the new standard for credit losses, or famous CECL. And based on -- we expect so far based on all that what we have done an increase of approximately $93 million on the allowance for credit losses that includes loans, debt securities held for maturity on balance sheet and other credit related items.
Our net interest income for the quarter came under pressure as we had mentioned before as a result of the decline in interest rates. Net interest income was down $4.5 million compared to the third quarter. However, if you remember last quarter we had one-time item of $3 million related to an accelerated discount accretion on the payoff of the large commercial. But in addition to that, we did have about $1.1 million reduction associated with the repricing of the variable rate commercial loans.
We do have mentioned in prior calls, we do have about 44% of the commercial portfolio, all commercials function and CRE and all them. It's floating with LIBOR and another 20% is floating with prime. Margin for the quarter was 4.70, which compared to 4.89 last quarter. But the discount accretion I mentioned improved that margin by 10 basis points. So if we adjust last quarter margin to normalized levels, we would have seen a decline of 9 basis points this quarter as compared to last quarter.
Going forward, margin impact at the end depends on rate movement and the asset mix. The new forward rate indications are slightly higher than prior forecast. And the expectation is that we might not see the additional rate cut that was expected for 2020. Under these assumptions additional reductions in margins would not be high, it could be a little bit but not a lot going forward, but depends on this expected movement on the rates.
Noninterest income for the quarter was good at $24 million and increased $3 million. $2.1 million of that was related to a gain on a sale of a non-performing commercial mortgage loan we had held for sale for some time but was the last non-performing held for sale loan we had on the portfolio at this point. And we also had some impact, positive impact from charges taken last quarter on a private label MBS that we didn't have to take in this quarter.
On the expenses, total expenses were $100.23 million, which is $9.5 million higher than last quarter. But out of that $9.6 million of the increase was related to -- $10.3 million of the increase was related to the merger and restructuring cost that I mentioned before. Included there are the typical -- all the legal fees, financial consulting fees, other consultants we use for the transaction, as well as we initiated during the quarter a voluntary separation program with FirstBank employees to accelerate our positioning and try to capitalize as quickly as possible, and expected efficiencies from the upcoming transaction. So we started moving in that front and that's going to reduce some of the expenses during the year.
Overall expenses, I would say that if we look at what's happened toward the end of 2020 and -- I mean 2019 and during 2020, we have completed or are about to complete a number of technology projects that tend to increase our expense [rate], or will increase our expense base. These projects are all driven towards the improvements of services and products that we have. So if we look at the expense levels going forward, we expect that excluding OREO, those expenses are going to be more closer to the $89 million to $90 million range that the $87 million to $88 million that we have seen before. And obviously, that excludes any expenses associated with continuing to complete the transaction, the ongoing transaction that we have on the table.
Nonperforming assets decreased $14.5 million, $14.7 million for the quarter to 317 total nonperforming assets. Nonperforming loans decreased by $12.4 million. We saw reductions of $7.9 million in commercial and construction and $5.6 million in nonaccrual residential mortgage loans. As I mentioned, we completed the sale of $6.7 million of nonaccrual commercial mortgage loan held-for-sale, and we also collected or brought an addition $6.2 million in the commercial nonperforming portfolios. However, we see a migration of $6 million construction relationship in the Virgin Island that offset some of the reductions.
OREO portfolios continue to decrease as slower migration. However, if you look at inflows, overall inflows were bit higher $33.5 million, which is $1.7 million higher than last quarter, but that was highly driven by the one case, a $6 million case construction portfolio. The quarter, we also saw reductions of adversely classified assets $34 million in the quarter.
Net charge-off in the quarter were almost $19 million, $18.9 million covered 84 basis points of covered loans compared to about $14 million last quarter or 61 basis points of loan, which mostly $2.7 million of that was consumer portfolio, which a lot has to do with the fact that the portfolio has been growing, so we have much higher portfolio and that would yield from increases dollar wise on charge off not necessarily percentage wise. The ratio of the allowance to nonaccrual loans stayed high at 72.6% that was slightly down from the 76.5% we had last quarter. And our commercial nonperforming carried at $0.42 on the dollar as you can see on the presentation.
Just briefly on the year, Aurelio already mentioned that we believe 2019 was an excellent year for our institution. We saw improvements in all key metrics. We saw some of the components that were listed in there. Earnings wise the full year net income was 167 million or $0.76 a share compared to 201 million last year. However, remember that last year we had $63 million benefit from the partial reversal of BCA valuation allowance. If we adjust the items again that are non-core on both years, the non-GAAP adjusted net income for 2019 was $165.6 million, which is $0.75 a share, which compares to adjusted net income of $137 million or $0.62 a share in 2018.
Overall, 22% improvement year-over-year on an adjusted non-GAAP basis. ROA, adjusted ROA also was pretty healthy this year, with up to 133 from 112 last year, so significant improvement in the earnings components of the institution.
With that, I think that, we will open the call for questions and attend some of your pending items.
We will now begin the question-and-answer session. [Operator Instruction] Our first question is from Ebrahim Poonawala from Bank of America Securities. Go ahead.
So I guess just first question, it would be helpful to get a little bit of an update, Aurelio, in terms of the activity on the Island. Just what it means for your loan and deposit growth as we think about, on a core basis, going forward? And if -- because of the recent events you see some of the Federal Fund aids inflows and just private sector activity slowing down over the coming quarters?
You know so far, it's actually probably too early to really tell but we haven't seen the real impact outside from the impacted area, which is the South region of Puerto Rico. When you look at the overall Island, the size of the Island, the size of the population in the areas nearby that Southwest region compared to where most of the economic activity takes place.
So that's why when we look at the numbers of total exposure in our portfolios, they are what we consider low. Obviously there would be some impact in that region. I think the other effect that it could have overall is tourism, which is also too early to tell. But I have to say that we have to think about the compensating factors also, which are the additional reconstruction effort and funds that will be in the Island to continue supporting the reconstruction of the area. Obviously the timing, how much additional time if we continue to have reoccurrence or not earthquakes of the similar magnitude, that's another factor which -- since basically January 7, have been limited to lower severity.
So far on the other regions we have not seen a change in what we do every day for the month of January in terms of business volumes and activity. Considering the seasonality of January, which is always a slower month than December as an example so -- but so far in general, we don't expect any significant impact to the economy. And this quite a different magnitude to what we experienced in 2017.
We have to be conscious of that and I think the fact that electricity and telecommunications were back to normal in a very short period has also to do with the disruption that was created before, which was the majority of the -- or the roots of the issues were the lack of electricity and telecommunications.
And just on a separate note period end non-interest bearing deposits were very, very strong. Just wondering if we should expect some seasonality in outflows of what we saw in the fourth quarter coming into the bank. And just Orlando, in terms of, when you think about the margin outlook, do you expect things to stabilize with the Fed on the sidelines or do you expect additional compression?
On the deposit, we divided a bit here. It's -- we have good growth in both Puerto Rico and Florida. Florida tends to be a little bit more volatile in terms of those accounts as we have lot of money comes in and out. So we could see a bit of that Puerto Rico. So there is always some additional inflows during the latter part of the year that are used at the beginning of the year.
But so far we've seen pretty consistent penetration on the deposit front in Puerto Rico. Regarding margins, the answer is yes. At the end we, again, the 60%-plus portfolio of floating has been affected by the commercial portfolio by the decline in rates. Assuming most recent expectations, the LIBOR component that we use, it's typically three-month LIBOR. So the expectation of LIBOR it's not going down, it's staying flat or slightly up and if there are no additional Fed fund rate cuts, clearly Prime would stay at least our current levels, that would limit the exposures a bit that we have on the margin.
Remember at the end, there was a little bit of a mix also, because if we continue to achieve deposit growth which we want to achieve and then it goes tied with the volume growth and portfolio -- investment portfolio. But clearly from the net interest income perspective, if rates would say flat, the impact of the margins would be small.
[Operator Instruction] Our next question is from Alex Twerdahl from Piper Sandler. Go ahead.
First off, I'm just wondering if you can give us any sort of help on how we should be thinking about provisioning in 2020. I guess pre Santander and post CECL just kind of taking to account what's happened to your reserve and expectations for loan growth, etc.?
That's a $64,000 question. So I mean at the end, remember that once you adopt CECL, in essence we are taking lifetime losses. Lifetime losses are a function of expected economic scenarios going forward, and as expected, historical loss and correlation of factors. In our market there are factors such as unemployment, home price index that are critical factors in those losses. Assuming those components would stay consistent from quarter-to-quarter, your implications would be then on volume either growth or reduction, not so much in terms of your loss component.
So in reality, Alex, first quarter will, I would say that other than -- or any significant change in economic assumptions, which are not something that you typically see dramatically from quarter-to-quarter, a lot would have to do with how the portfolio moves. I think that I had mentioned that assuming a normalizing of growth I wouldn't expect CECL to be a huge difference in terms of provisioning for the years as compared to prior year.
The one-time hit obviously would be the large component, but it depends a lot. If we achieve a lot more in growth, then we'll see some of that impact, but that would be compensated by revenues on the loan side. So it's a -- it's hard to really give you a very, very concrete one, but again, assuming stabilized assumptions, economic assumptions and unemployment components in Puerto Rico, I would say that it's a volume related movement.
And then, as we think about loan growth in 2020 and I know you guys have shown some -- probably some pretty decent trends, especially since you've been jogging against the run-off in the residential portfolio and NPA reductions etc. One, do you foresee the residential loan reductions coming to an end anytime soon or at least slowing? And then two, kind of as you look at your pipelines right now and kind of what you know on the Island in sort of go heading into 2020, how do you feel about loan growth outlook over the next couple of quarters?
If you look at the plan itself, how we view it and how our loan strategy, the mortgage portfolio should continue to accrete a bit. Probably the rate of reduction is going to slow down at some point in time later in the year. Origination could get closer to repayments. We're doing strong originations, but we're focused on the conforming side of the equation, which is reflected in the gain on sale on the non-interest income. On the consumer, we still see additional opportunities for continue growing the portfolio as we did over the last couple of years.
And on the commercial side, we have significantly less non-performing loans to move out. So if the pipelines translate into closings, we should see an increase in the commercial book at better rate than prior years, because some of the growth that we achieved in prior years was offset by the reduction in NPLs that we also achieved. So we don't have that large NPLs reduction targeted for this year because we're really approaching -- we still have some work to do there, but we are approaching a normalized portfolio. So from that perspective, yeah, the answer is, we should see better growth on the commercial, if the pipelines materialize. We haven't seen indications yet that that's not going to happen, but the environment can change.
Yes.
And then just a final question, as you continue to move closer to closing the Santander transaction, do you foresee any meaningful balance sheet clean up as being necessary before that deal closes?
No, if you look at the math of the deal that we shared back in October, those numbers stands. Obviously there is some balance sheet optimization that any deal will require at that point and I will say more have to do probably with government deposits or you know securities portfolio. But remember we're not buying NPAs in this deal. So there is not a lot more than those other matters that will be done for IRR or liquidity just to make sure -- and optimizing the balance sheet and income statement. But it looks like the picture that we presented back in October.
And in terms of the timing of the deal closing, do we have a better sense for when that might actually -- the exact date?
No, there is no exact dates here. It's just a sequence of event. We continue to work on the approval and I think we stand by our best estimate is what we project, what we propose in the October Presentation, somewhere near the last part of the second quarter.
Our next question is from Glen Manna from KBW. Go ahead.
I had to jump on the call late, so Orlando I missed most of your commentary on the NIM. I guess if you look at the moving parts and you know 10 basis points was from the interesting cost recoveries in last quarter, maybe 6 basis points or 7 basis points from the actual interest rate environment. What do you expect for the trajectory of that NIM here, could we see stabilization into 1Q '19 or would you expect some kind of modest further deterioration?
What I was mentioning was that, if we assume the -- we expect that -- the most recent scenario, it's probably an expectation that there is not going to be another rate cut and that there will be some stability with some improvement in the LIBOR. If that were to happen, my opinion is the margin impact, it's small from what we are now since we do have a large chunk of the commercial portfolio.
As you probably saw in the release, 44% is LIBOR based and 20% is prime based. So those two components move quickly if rates go down. So, at the end, it's a bit of mix also on the assets. But with those assumptions, the impact of margin shouldn't be much. It could be a little bit, but not a lot, based on where things have been repriced recently.
This concludes our question-and-answer session. I would now like to turn the conference back to John Pelling for closing remarks.
Thank you, Kate. On the investor front, we have the KBW Conference in Boca coming up on February 13th. We are also attending the Credit Suisse Conference in Key Biscayne on February 27th, as well as the KBW Investor Tour to Puerto Rico on March 16th.
In addition, we're hosting a number of individual investor meetings here on the Island. It's -- weather is beautiful here, so if you're tired of the cold up north, come down and visit us. We appreciate your continued support and look forward to seeing many of you in the coming months. Thank you. At this point, we'll conclude the call.
Thank you, all.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.