Earnings Labs

Popular, Inc. (BPOP)

Q1 2015 Earnings Call· Mon, Apr 27, 2015

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Transcript

Operator

Operator

Good morning. And welcome to the Popular, Inc. First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to the Investor Relations Officer at Popular, Inc., Brett Scheiner.

Brett Scheiner

Analyst

Good morning. And thank you for joining us on today's call. Today, I am joined by our Chairman and CEO, Richard Carrión; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano, who will review our first quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings, our financial quarterly release and supplements. You may find today's press release and our SEC filings on our webpage at www.popular.com. I will now turn the call over to Mr. Richard Carrión. Richard Carrión: Good morning. And thank you all for joining the call. I'd like to first address the highlights and key events of the first quarter. Then I'll present an update on the assets and deposits we acquired in the Doral Bank transaction and provide our thoughts regarding the fiscal and economic situation in Puerto Rico. Carlos will comment on the quarter's financial result and Lidio will provide an update of credit trends and metrics. With that please turn to the second slide. In the first quarter Popular earned adjusted net income of $90 million, up $13 million from last quarter and up $4 million from last year's first quarter. We continue to generate strong revenues with capital levels well above peer averages. Tangible book value was $36.33, up from $35.89 last quarter. Our net interest margin up 4.57% decreased from last year's adjusted 4.70%, a lower spread income from…

Lidio Soriano

Analyst · Morgan Stanley

Thank you. Carlos. And good morning. Despite Puerto Rico's challenging macroeconomic environment, we are pleased to report stable credit metrics for the corporation highlighted by strong asset quality in our US operation and stability in our Puerto Rico operations. The Doral Bank failure and asset acquisition impacted our credit quality result for the quarter. Specifically, subsequent to acquisition approximately $7 million of taxable value [ph] loan in US operation entered NPL status. This increase is mainly driven by a single borrowing relationship that based on our fair value exercise also ready discounted on our books. In Puerto Rico, prior to its failure, Doral serviced, a residential mortgage portfolio of $150 million for Popular, on which US committed to advance contractual payment in respected of borrower delinquencies. In addition, Doral was required repurchase or substitute delinquent mortgage loans. Subsequent to Doral's failure, we are now reporting such loans based on the contractual delinquencies. After result mortgage NPL in Puerto Rico increased by $17 million. In Puerto Rico, excluding the previously mentioned Doral impact, our credit metrics reflect lower net charge-offs, lower NPL inflows and stable NPL. In the US, we continue to reflect strong credit performance with low NPLs, low net charge-off and stable NPL increase. Let's turn to Slide 7 to read the details. Non-performing assets remained flat at$935 million mainly driven by a decrease of $12 million in other real estate or in the US and a decrease of $17 million in covered or the real estate owned in Puerto Rico, offset by increase of $34 million in NPL. In the U.S., total NPLs held-in-portfolio increased by $8 million to $27million from the previous quarter, driven by the previously mentioned Doral relationship. Excluding this NPLs in the US were flat quarter-over-quarter. In Puerto Rico, non-covered NPL increased by $27…

Operator

Operator

[Operator Instructions] And our first question will come from Alex Twerdahl of Sandler O'Neill.

Alex Twerdahl

Analyst · Sandler O'Neill

Hey, good morning, guys. First off, we heard on one of your competitors' calls that you've been slow to bring down deposit costs. Can you talk a little bit about how your funding costs on the islands have trended? Carlos Vázquez: Yes. Let me say a few things about that. The fact is our funding cost particularly when you factor in the impact of the main deposits is slightly under 40 basis points. So that's pretty low and it has been maybe half basis points lower in the last quarter. But we think that's pretty low. Secondly, we generally price to keep our clients happy and not our competitors. So that's what it is.

Alex Twerdahl

Analyst · Sandler O'Neill

Okay, thanks. Then secondly, I was hoping maybe you could expand a little bit more on that possible realization of a portion of the DTA valuation allowance in North America. Can you talk about how that decision gets made? If it's your decision, your auditor's decisions, and whether or not there's any breaking point out there that we should be paying attention to? To whether or not it makes sense to get the tangible book value gain, or continue to recognize a 0% tax rate. Richard Carrión: Okay, I'll let Carlos handle that one. Carlos Vázquez: Yes. It is a little bit of the above, it is also depend on the continuous performance of our US business. So that is of course is more -- the most important influence into the profit. There is some bunch of that -- boxes that need to be checked on the accounting side well or the other. And we will continue to look at every quarter as I mentioned are accounted for more high view and I opinion on this as well obviously but the main driver is the continuous performance of our US business and then all kinds of accounting role that get trigger by that.

Alex Twerdahl

Analyst · Sandler O'Neill

Can you give us a sense for what the core profitability in North America is following Doral? Carlos Vázquez: No, we have segment report on the -- on our deck and we've seen the detailed there, on the quarter it was about $4 million that include one month of Doral core business GAAP, we need to adjust it for the one time event.

Alex Twerdahl

Analyst · Sandler O'Neill

$17 million Carlos Vázquez: Non GAAP basis for the quarter, the US was -- will be $17 million. That's one month, there is still some noise in that Alex before it was only month and there is a number of one time event there. That number will get clear when we report next quarter obviously we have a full quarter and lot of noise will go away.\

Alex Twerdahl

Analyst · Sandler O'Neill

All right. That's very helpful. Then my final question is, what is the normalized run rate for that non personnel credit-related cost that was $29 million in the quarter? If you look back into sort of 2005, 2006 time period, where would that have run? Carlos Vázquez: Yes. The problem with that number Alex is that I see no-- our OREO expenses are rather volatile. So I have to go back and check that input into that and I will get back to you on that, but the OREO volatile makes it hard to give you comparable response to that number which was whatever a year or so ago.

Operator

Operator

The next question comes from Ken Zerbe of Morgan Stanley.

Ken Zerbe

Analyst · Morgan Stanley

Thank you. Just a question on loan growth. Obviously, I would expect average balances to take up a little next quarter, given the remnants of Doral. But when you look out over the next 12 months beyond next quarter given the situation on the island, do you have any kind of thoughts in terms of loan growth expectations? Carlos Vázquez: What we said is that now we expect to remain flat given the growth we are seeing in the US making up for the run off and that too adjusting for the Doral acquisition.

Ken Zerbe

Analyst · Morgan Stanley

Got it. Understood. Okay. Then on the FDIC income in this quarter looks, if I add up all my numbers right, it looks like that the net increase in the FDIC income was up about $8.5 million including if I read that right, the reimbursed. The mirror accounting on the expenses was actually greater than the expenses incurred this quarter. Is that just said all timing differences? And would you expect that to revert lower next quarter?

Lidio Soriano

Analyst · Morgan Stanley

Yes, the mirror accounting on the expenses could have a timing difference as you can only bill them after incurring a charge on a loan. So you might incur costs ahead of that; that's maybe the difference. As far as going forward, it will depend on the expense activity during the quarter.

Ken Zerbe

Analyst · Morgan Stanley

Okay. Just last question for you. I know you guys talked a lot about operating in kind of crappie environment for the last eight years. If just given the downgrade that we saw from SMP, if the government is unable to come to a reasonable solution and it defaults on its obligation, not the direct exposure but more from a loan perspective exposure like -- obviously you guys have probably given this a lot of thought, what would you expect to happen from the lending side? And how would that affect your commercial customers? Richard Carrión: Well, obviously it would impact the whole macro environment as the effects percolate through the system and suppliers get affected. We've hopefully it will not come to that and some kind of less solution can be reached before we get there. But we are prepared to deal with it but it is part of this scenario we've looked in our stress test.

Operator

Operator

The next question is from Jordan Hymowitz of Philadelphia Financial.

Jordan Hymowitz

Analyst · Philadelphia Financial

Yes. I was just wondering if the situation on the island overall would delay any regulatory decision that would enable you to return capital? Are they completely independent of each other because they are different bodies or is one tied to the other? Richard Carrión: Well, far be more for me to try to get in Fed or regulator's mind but obviously they will be looking at the regulatory environment. They will be looking at the results of the stress test and how we handle that particular scenario in terms of what it does to our capital. So it is something that we'll probably start to getting into those discussions in the next few weeks.

Operator

Operator

And the next question is from Adam Hurwich of Ulysses Management.

Adam Hurwich

Analyst · Ulysses Management

Hi, good morning. Just a follow-up on your comments regarding recognition of DTA in the US. That is a GAAP figure. Could you just give us how we should think about regulatory capital and the impact, if at all, the impact of the recognition of the DTA on regulatory capital? Richard Carrión: It would be very small if any in the sense that you can only use the one year-- the one year of DTA. No my controller is shaking his head, and under the Basel III. So it will be nil on the -- the impact of regulatory capital.

Adam Hurwich

Analyst · Ulysses Management

Under Basel III, it's a one year or is it a 10%? Richard Carrión: No, it is none. They take it off. Carlos Vázquez: That's all formula on Basel III, it is more complicated. Actually we can go offline and provide but it is formula driven. And it has other component like MSRs et cetera if you like. You get better --

Adam Hurwich

Analyst · Ulysses Management

Okay. We'll get into that later, thank you. Richard Carrión: Yes, the important part, it will be limited or no impact to regulatory capital.

Operator

Operator

Next, we have a question from Taylor Brodarick of Guggenheim Securities.

Taylor Brodarick

Analyst · Guggenheim Securities

Great, thank you. Core efficiency obviously improved this past quarter and it looked better the last few quarters. I guess post Doral and some of the strategic actions you've taken, do you have any sense of what other levers you could pull to improve it? Or do you feel like you are approaching an optimal efficiency with the franchise you have? Richard Carrión: You can always do better, Carlos mentioned we are trying to get with the Doral, trying to get 300 or below in terms of quarterly OpEx. And obviously it would improve if we start getting a little growth that would improve we can keep it up the 300.

Taylor Brodarick

Analyst · Guggenheim Securities

Okay. Carlos Vázquez: The other thing that weighs heavily on that is that we continue to have high workout costs. We have still a significant workout portfolio that we are working our way through. So eventually that will hopefully start trickling down as well.

Taylor Brodarick

Analyst · Guggenheim Securities

Great. I guess one more question. You said sound about -- with the capital plan, the announcement would not occur correct until 3Q until the next quarterly earnings call, is that correct? Carlos Vázquez: Correct. Richard Carrión: Probably it will occur whenever we get an answer.

Taylor Brodarick

Analyst · Guggenheim Securities

Right, yes, yes. But that's your expectation; got you. Okay, very good.

Operator

Operator

[Operator Instructions] And showing no further questions. This will conclude today's call. Thank you for attending today's presentation. You may now disconnect. Richard Carrión: Thank you.