Q2 2019 Earnings Call
Good morning, and welcome to the first.
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The quarter 2019 results conference call and webcast, all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over Investor Relations Officer, John Pelling. Please go ahead.
Thank you and good morning, and thank you for joining first Bancorp's conference call and webcast to discuss the company's financial results for the second quarter 2019.
Joining today from SPP are really Waldman, 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 Companys 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 or the press release issued by first Bancorp you can access at our website first bank PR dotcom at this time I'd like to turn the call over to our CEO early on.
Thank you John Good morning, everyone and thank you for joining us today.
Lease led led begin with the highlights lets move to slide five four of the presentation.
As we reported this morning.
With those who we reported another really strong quarter over quarter core earnings.
Financial resold it we're at 41.3 million or 19 cents per share I think most importantly core franchise made today continue to move in a positive trend.
Across the different areas.
Re taxable income reached 71 million for the first time.
Net interest income increased by 2.3 million quarter over quarter by $12 million year over year, when we compared to the same quarter.
Back in 2018.
The loan portfolio grew 180 million to 9.1 billion this quarter and this is this represents our fourth quarter.
A of consecutive growth in the loan portfolio.
Year over year, the loan portfolio has grown almost 5%.
Reflecting a 19% increase in consumer over 8% increase in commercial and construction.
Achieving these while strategically reducing the residential portfolio by around 5%.
Originations, our real world, where healthy in the quarter at 988 million $988 million. Obviously, we know there is some seasonality on larger deals on pay downs that are difficult to predict from a timing standpoint, but the initial trajectory for the year should continue at similar base I have to say that our pipeline remains strong for the remainder of the year.
We achieved another quarter of meaningful progress on our organic reduction of nonperforming assets were down 31 million were 7% this quarter.
Mph now represent only 3.06 of assets and MP, the NPL ratio is down to 85% to 185%.
Capital continues to grow is now at $2.2 billion.
Tangible book value also continues to grow now at nine point $52 million or 52 cents exceed the one at 20.6%.
Some additional highlights on the franchise for the quarter, we continued to to place a lot of priority on technology investments I think during the quarter. It's important to communicate that we rollout our new state of the art with expanded functionality digital banking platform in Puerto Rico.
We also continue expanding the rollout of ATM with remote deposit capture capabilities.
Obviously this new functionalities continued to contribute to this strain of the core deposit franchise.
And the brand.
With regard to the Puerto Rico economy, and some recent events of government disruption.
I have to say that it is unfortunate and disappointing that we have to deal with this negative headlines.
Definitely we are somewhat concerned we political headlines on the potential impact.
That could have on on economic activity in the short term.
On the other hand, we do remain hopeful that this will resolve.
In the short term and ultimately lead to greater level of transparency from the government.
From from the long term you know we continue to remain optimistic.
With the recovery of the local economy and the progress that we that we should have ahead of us.
With regard to capital deployment as we previously mentioned.
We remain on track for for a capital agile announcement during the second half of the year, we don't have any other information regarding capital in this call today.
Now I will like to turn the call over to Orlando to go over the financials in more detail thanks to all.
Good morning, everyone.
So I would tell you mentioned, we had a very good.
What I called straight forward quarter, we posted a net income of 41.3 million, which is 19 cents, a chair, which compared with 43.3 million or 20 cents a share in the first quarter.
Adjusted however than the non-GAAP .
Net income, which eliminates some of those items, we believe those known as early recur every quarter such as up.
Last quarter, we had a recovery.
A reversal of uric in reserves and this quarter we had.
An insurance recovery that had a net after tax impact of about $500000.
Net income for the quarter was 40.8 compared to 37 million.
Last quarter.
Pre tax pre provision remained strong at 71 million compared to 70.4 million, we achieved last quarter.
The provision for the quarter was 12.5 million, which is slightly higher 700000 higher than than last quarter, but that was mostly the result of the 6.4 million Hugh Regan Reserve release, we had in the first quarter of 2019.
Net net interest income remained.
Really strong grew 2.3 million this quarter was mostly driven by 79 million in the average balance of consumer loans and 91 million growth in commercial loans.
We did have one extra day in the quarter.
But.
But we also had some some impact from from rate changes margin remained relatively flat at four nicely.
Compared to 492.
Mark margin reflects a number of things including.
The repricing of our floating rate commercial loans, which.
There was an impact based on their reduction in LIBOR.
The impact was approximately $400000 in interest income.
On the other hand, we had a reduction of approximately 50 basis points in the cost of our floating repos and on the trust preferred securities, which it's also a result of the of the reduction in July were.
Average cost of deposits went up by five basis points.
We've been lagging in deposit increase so some some of it it's showing on the numbers, but we did benefit us I mentioned from the mix change on.
Increasing the higher yielding consumer loans, while we decrease our mortgage loans as part of our strategy of reducing some of those long term assets.
With LIBOR are projected to decrease further we believe margin, we'll see some pressure, which is going to be compensated by by the growth in higher yielding consumer portfolios and the employee reductions.
In the near term, we expect NIM will remain at levels slightly under current levels.
Assuming no changes in deposit composition.
Which has been more of a stable kind of source over the last few quarters.
Non interest income for the quarter was.
Very similar however, it showed improvements of $800000 in mortgage banking revenues.
And increases.
Mobile deposit service fees on credit card fees in the quarter, our 600 combined.
Well when we look at it versus last quarter last quarter. We had 2.7 million increase on continued insurance commissions that were collecting that data. It's done once a quarter, which is partially offset by.
600000 in insurance claims we collected this this month as I mentioned before.
<unk> expenses for the quarter.
Were 92.9 million, which is 2.9 million increase from last quarter.
When we look at the components.
First of all.
Oreo expenses increased by or what about 1.3 million, which is.
Basically mostly revise property valuations on some of the efforts that are being encouraged to reduce non performing.
Our employee compensation seemed to show a growth of 1.5 million. However, remember that last quarter, we received $2.3 million in recoveries that.
Were part of an employee retention benefit that was available to employers affected by heroic any remind maria.
By beer beer Chauveau, although this house or tax relief Act of 2017.
But this quarter on the other hand, we had lower payroll taxes as people have rich.
Our limits.
Professional fees were high this quarter.
1.4 million higher 700000 of that it's mostly consulting fees, we continue or volume I made reference to some of their projects. We continue to to work through through all that cease all implementation, which has required a number of third party consultants in the process.
As well as completing some of our ERP rollouts.
That have resulted in some additional.
Consultant expenses on the other hand, we have seen lower FDIC costs on lower.
Supervisory fee cost in general.
If we look at the expanse as and we exclude the Oreo expenses were.
$87.9 million.
Which compares well with 86.2.
As you remember our guidance have been that our expect expenses, including our iOS will be between that $87 million to $88 million range.
We still feel that that is that is the range.
We were on the higher end of the range this quarter.
But as I mentioned there are some components of these professional fees.
Which as we complete the seasonal implementation world. Some of it will will go away or reduce significantly. So some of it will be compensated by those components.
Otherwise some of the other components of expenses were in line with expectations.
I would tell you made reference to asset quality non performing came down by by almost 31 million.
We're down to 384 million as of June .
We just.
Just slightly above the threep, the 3% of assets have been our target for for a while.
Weve number of airports are underway to continue to reduce that organically and we believe there they will be completed throughout the year.
Non accrual loans.
<unk> decreased 20 million in the quarter.
And now there are 260 million, which is under the 2% of loans.
Two of the 3% I'm sorry of loans.
We've been talking about also.
Our nonperforming decrease includes a charge of 11 million on a large commercial loan and deploy that region that we've been working through for quite a while and had previously established reserves.
We also achieved 4 million in collections OBO nonaccrual commercial loan construction loans.
And we saw decreases of 2.5 million in residential consumer non accrual.
Which is a combination of loans that were a broad karyn collections charge offs.
And Tom foreclosure, so were completed in the quarter.
Other real estate owned Oreos came down by 11.6 million, mostly driven by by $14 million in sales that were compelled completed in the quarter.
Inflows, which is important oil nonperforming.
Were 23.2 million now, but almost a million decrease from last quarter. So they have remained at the lower end of the of the spectrum as compared with prior quarters, and we continue to to work through that process.
Commercial adversely classified assets also decreased by $24 million in the quarter.
Our net charge offs for the quarter were 24 million, which is our oneto Simon of loans.
And it's fairly fairly in line with last quarter.
We saw.
Reductions in consumer and residential charge offs.
But on the other hand, we saw an increase in commercial up 3.8 million, which was driven by the 11 million.
Our charge off I mentioned.
But but we continue to see improvements on on those.
Metrics.
The ratio of allowance to nonperforming has increased to 68%.
And overall the allowance is our.
One point, 89% of loans.
Commercial nonperforming at at our carried at 50 cents on the order, which is very similar to what we had in the prior quarters.
With that I will I will open the call for questions that I mentioned it was up.
But I still believe it's fairly straightforward in terms of results that have to be better address all of your questions. Thanks.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Alex Twerdahl Sandler O'neill Alex. Please proceed.
Hey, good morning, guys.
Alan I like.
It first off obviously, a lot of progress made on a and P.A. and NPL reductions over the last year and years.
We know what the point kind of hovering around 3% NP aides, where those can continue to get meaningfully better or is there kind of a natural point of.
Or level of Npis are a tale, where it's going to kind of tail off for a longer period of may we saved between kind of two and 3% for for some time.
Well you know we were working towards continued to improve in that number.
The you know there is activity in the market good they're good due to be you know investor interest and in some of these assets and we do have some deals on the pipeline and we expect to continue showing rather than us.
No quarter after quarter inducement.
Okay.
Great and then.
It seems to me like a lot of the the commercial loan growth. This quarter was was a little bit larger ticket stuff as you kind of look at the pipeline for the remainder of the year and I know you commented that the commercial pipeline was still pretty full is still a lot of larger ticket stuff that can kind of close or go one way or the other or is it a little bit more granular relative to what we saw in the in the second quarter.
I think I think it's you know it's all the above I think what we have these segments. This mall in the middle might get on the large corporates.
In the mix depends on what clothes, which quarter.
The.
We continue to target the three segments. So obviously when you do a large deals in the quarter that caused the attention more than than the one show smaller ones.
But but you know it's going to be a mix, which you know very difficult to predict the timing of some of them, which close which quarter b well. Obviously our goal is not to have more concentration on the portfolio.
Is to have less concentration in the portfolio. So so we were looking to for diversification will all borrowers size also yes.
Okay Thats helpful. And then final question I appreciate your comments Orlando on the margin and kind of where you expect it to go in the near term.
I guess modestly down a little bit pressured by LIBOR et cetera, but as you kind of.
Look out I mean is that.
Is that assuming a rate cut in July or is it assuming rate cut I mean, I guess the forward curve is not suggesting a couple of more by the end of the year is that kind of incorporated in that guidance or if it's not and we do get a couple of rate cuts by the end of the year kind of how do you see the margin.
Traject trajectory looking out over the next couple of quarters.
But basically at this point we're.
Using the forward curve us us.
It comes out on Bloomberg.
As the guidance on freights on where we see them.
With the consumer portfolio is not affected that much by this amount of changes in rates.
We do have an impact on the on the commercial portfolio, especially the one that is floating based on LIBOR.
Although we do get some benefits on on some of the components of the of the floating liability side, which which and specifically you saw it on on the repos on the on the drops.
And some renewals that are made are come down in terms of rates on the other hand, so that that incorporates that forward looking curve that were seen through the end of the year or at this point.
Under make so what are we expecting on on the asset generation.
On the side of the other balance sheet.
Okay, great. Thanks for taking my questions.
Our next question comes from Brett Robertson Piper Jaffray.
Please proceed.
Hi, guys good morning.
Morning, Brian Brian .
Wanted to first start off on expenses and just thinking about the path I mean 2017, you lowered expenses and they were up just a little bit last year, they've been flat the first half of this year.
Should we assume a similar path.
Two last year, where they move up a little bit from the second quarter levels or maybe I know there's some.
Some obvious things in there that that can change things already expense et cetera, but just can you give us some thoughts on how you see the expense space playing out in the back half the year.
Well the team the reason of the 87 to 88 million without Oreo, It's where we expected them part of part of what you mentioned it's related to some of the large investments that have led Aurelio made reference to an anomaly there projects we have been undergoing.
So you have different things come in and I know that's a as I mentioned, we're spending a lot of money on on completing the seasonal work and completing some of the RFP rollout.
You know us, we complete those which which is going to happen to a large extent during the year. Some of those expenses will will come down. A then we continue with some projects that are under going on on the technology front, specifically related to things like New branch automation systems and things like that.
So thats why on the average I. I still feel that we should be in that 87 to 88 million range.
The Oreo side, so it's a little bit more challenging because we still are.
Like this quarter, we saw some some.
Revise property valuations on the appraisal the updated appraisals, which probably by now we expect some of those who have stabilized, but we've still seen some a bit in the market.
So it affected the number it doesn't happen every quarter. It all depends on the properties that are up for re appraisal, we do appraisals once a year.
So that one I am more reluctant to give you very clear indication obviously as we come down on on on the size of the Oreo portfolio those expenses should come down.
But are there is more volatility on on that kind of expense.
But but other than that the others, we expect to stay in that in that range of 87 to 88.
Okay. That's helpful. And then just want to talk about sort of the big question and its capital and you have to over 24% total risk based.
Okay, and I know, there's no decision obviously are nothing spend and now just can you give us maybe a timeline of how things should play out in the back half of this year, if you haven't been able to.
Do something non organic with the capital do you make a decision on a buyback just that go into 2020, how do you think about the capital actions and what kind of timeline, we should be on.
Well I think just you know I would have mentioned this before and on I I previously mentioned it today you know we do remain on track for you know, making some sort of announcement, we've got we're dumping selection decisions.
During the second half of the year that means before before the years and.
So so that that's as much as I can tell you right now.
Okay.
And then just lastly, you wanted to comment you yeah.
Really a you mentioned earlier in the call talking about just the environment. There's obviously some political.
Noise going on what do you think the outcome.
Of all this in terms of how this impacts.
The recovery finds and just the remaining.
Thanks on the island, they need to be restructured.
The G.O. dad, what like what do you think is going to be the net result of all this current turmoil.
So I I think obviously, we can think that obviously because of the.
We'll do this rupturing demonstration the risk the rollout of the recovery efforts could could could have a delay and delayed in being finally implemented.
Yeah, we're still options on Boeing doors that blood that it could be a delay.
On the other hand, I think this will lead to greater level of transparency.
He will any lieberman.
Which I think is in the low growth in the loan growth needs it's positive.
The four for any of the India for any any of the other players or the best stores. All the the whoever you know leads it's working towards that Puerto Rico the globally.
So.
So it's very difficult to predict what's going to happen and we're hopeful that these results.
You know in the near term he.
You know the island continues to move ahead and a lot of efforts will do to move ahead, we'll definitely there's a clear disrupting the administration that we cannot ignore and we we have to be you know attentive both both any development that continues to move forward.
Okay Fair enough I appreciate all the color.
Thank you Brad.
Our next question comes from Joe Gladue.
Our insecurities.
Joe. Please proceed.
So Jeremy Yeah.
Good morning.
Learning tool.
Just wanted to I guess first I will touch a little bit more on the net interest margin you and Orlando you talked a little bit in detail about the the the loan side. It just on the deposit side, though.
Puerto Rico, the deposit rates went up a lot more slowly than they did in the mainland is.
As.
Yeah.
Interest rates, where were rising now that theyre going back down do you see that as a.
Constraints in terms of Ah you know taking advantage of a declining rates that deposit rates will go down more slowly.
Oh, no. It's clearly clearly Joe when you know we didn't go up like like the U.S. market went up as fast.
So there was or the lane catching up and that we're still seeing a bit obviously it.
Its rates coming down again, it's going to lower the pressure on some of those.
Especially in your on time deposits and those kind of components.
I do believe that there was a slow adjustment that was happening in the market.
That does men.
I do believe they will going to happen a little bit pressure is going to be less board, we should expect a little bit of a in an increase on the interest bearing components of deposits in the market not a lot, but a little bit.
The question is other noninterest bearing components, how it behaves and how.
Things continue to move in that front, which obviously.
Has been part of the ore or the average cost of deposits.
Aboard but I don't think we're going to see is sharp decline on deposit rates on the market I will foresee some small increase on on the interest bearing side still four for one or two quarters.
All right. Thank you and I guess also one of the view.
Yeah with further consolidation in the islands banking industry.
Do you guys see any.
Opportunities to take advantage of the disruptions.
Well I think historically, we have achieve organic growth.
To what happens in the market. We have participated on consolidation will we don't when we don't participate we'll also benefit.
And I think that that's been demonstrated over over the past few years. The most recent 10 years with the significant consolidation in 22011 2016.
The the most recent we're benefiting from the auto lending side of the equation.
Recent consolidation, we continue to solidify our.
We're offering.
And we have continued to grow our market share in that sector.
You know its bottle of open market whenever a market consolidate than eight that the natural opportunity.
To execute.
All right. Thank you.
Yes.
Just as a reminder, if you have a question. Please press Star then one.
Our next question comes from Glenn manner of Keefe, Bruyette <unk> Woods.
Glenn Please proceed.
Hi, Good morning, guys good morning, Brian .
When when I look at the period end balance sheet the spot balances. It looks like there was a buildup in cash and money market investments can you kind of maybe your let some some of the MBS roll off is can we expect some kind of deployment of that cash.
What point does it maybe make sense to pay downs from some some of the higher cost wholesale funding.
And can certainly with rates kind of expected to head down we would expect that there might be some pressure on those yields there. So what could we kind of expect there.
Well, it's it's exactly what you said, it's it's a bit of.
We didn't reinvest immediately sold their Paydowns, then and accelerated repayments in some of the MBS.
Based on where the market was going on the expectations.
Where were monitoring obviously, how some of the wholesale funding moves.
We probably saw we did pay down our repo that I'm not sure in the end of the first quarter part of it was that same reason.
So it's a function of of rates reinvestment rates burriss borrowing rates are that it's a constant daily money during kind of thing that and Ah I wish I had a magical answer, but but it's really it's how we see things moving and what we expect some of it it's going to it's going to move the n. their resolve has to be what we show rates better for the bottom line.
So keep in mind that obviously, we feel have some benefits from a.
From the tax implications.
And and and that's a that's something that when we look at investments we do consider that there could be a the the effective rate, it's sometimes a bit better than any what's the quoted yields.
That that change a bit if you. So our number of copies sold effective tax rate went up like from 29 to 30 in the quarter.
When you consider everything meaning all the company's including.
Companies, where we have some losses that are non deductible.
And part of it is because we have seen some chip as loans have grown from from nontaxable to taxable kind of revenues.
So that that comes into the formula of the analysis of what makes sense, but.
You know.
Not not more than clearly, it's a function of where we see them at the main benefit reinvesting or or paying down maturing borrowings.
Okay. Thank you and.
Good job on keeping the core expenses within your range I just wanted to kind of touch on the Oreo again I was wondering if I heard you correctly Orlando when you said that there was a revaluation in there when you look at the Oreo importing Puerto Rico was down this quarter. What are you seeing and kind of that core level of Oreo expenses that you have to maintain properties kind of pay taxes.
On the real estate you on are you seeing any change in that because you know.
Lower unemployment does it cost you more to have workers to maintain the property what do you kind of thinking that Oreo.
The core expenses.
Have been fairly consistent it's a it's a matter of volume.
You know I I mentioned that we still have inflows that we have to deal with but we're seeing a good amount of outflows as you saw in the the amount of sales we had in the quarter net it was positive where I'm from from the perspective of a reduction in the outstanding Oreo balances.
They've all appealing it's really coming more from from the fact that we appraise properties that are LS other real estate owned a once a year and and there are some that are better than others and as like water comes by where we have some of those properties.
Those could have some impact this quarter, we did have two or three of the properties that have been there for a longer.
And that did affect the numbers.
But but in reality, we still feel that the base expands is very much in control that.
Our group is doing a very good job of moving things out.
Not yet at a point, where we can say, we can reduce significantly the department.
Eventually we feel that that would be a good thing that we can move those people back to production.
Rather than have them dealing with we bought properties.
But you know not not not a human would change on that on that front.
Okay. Thank you for taking my questions.
Thanks. Thanks.
Our next question comes from Arren Cyganovich City.
Aaron Please proceed.
Thanks, Yeah, I, just wanted to touch on credit quality a little bit.
It looks like the charge offs you had a charge in there from.
Kind of cleaning up and properties what do you what do you think in terms of kind of the.
More run rate you expect for charge offs over the near term and and.
Provision I guess related we've been kind of under provisioning relative to the charge offs recently.
Well the team this quarter, we had a large charge off of one property that you know we've been working with us for quite a while hopefully it can get to a.
Finish point that during the year or that that was previously reserved for and that's what are the reasons you are seeing that that difference.
With inflows coming down we're not seeing a changes on an early delinquency have remained fairly consistent over the last few quarters. So we're not seeing deterioration in that sense.
We will.
We should expect some charge offs higher than provisioning because of that because we still have legacy assets, where we're working with.
ER and we went to them you know work through those non performing and I know the question you know we try to make sure that we are our property reserve if not charge love depending on on the on the specific of the property.
And and a charge off is required. So it has been restarted priorly previously so to me we will see you still feel that provisioning in the next on the short term, it's going to be indicted 10 to 50 million range. I mean, we had mention a two or three quarters ago, and but charge offs will see volatility based on the on those large ones you know.
If you had excluded this 11 million or would have been significantly lower in the quarter, but but we still have some properties that could could see levels of charges like that I've been reserved in the past.
Okay all right. Thank you.
Thanks Aaron.
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I would now let's turn the call. This concludes our question and answer session I would now like to turn the conference back over to John Pelling for any closing remarks.
Thank you and we greatly appreciate your continued support at this time, we will conclude the call.
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