Q3 2019 Earnings Call
Good morning, Thank you for joining Olesky Bancorp's Conference call. My name is Maria and I'll be your conference operator today.
Our speakers, our wholesale Alfredo Fernandez, President Chief Executive Officer, and Vice Chairman and medical Ice Monday, Executive Vice President and Chief Financial Officer.
A presentation accompanies today's remarks, it can be found on the Investor Relations website on the home page in the what's new box on the webcast presentations and other files page.
This call May feature certain forward looking statements about management's goals plans and expectations.
These statements are subject to risks and uncertainties outlining the risk factor section of Lses FCC filings.
Actual results may differ materially from those currently anticipated.
We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.
We also direct you to the explanation of non-GAAP measurements that are included in our presentation a news release.
All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session.
I would now like to turn the call over to Mr. Fernandez.
[noise]. Good morning, Thank you for joining US please turn to slide three.
Before the market open today, we reported third quarter, we sold which reflected the impact of several noncore should be transactions, we generate or 14% increase you know just an earnings per share I just a return on average assets on return on average tangible common equity also improved on reported net interest margin continues I don't know.
Similar to top performing peer banks in the mainland.
We're extremely pleased we are poor performance our levels of small business auto and consumer loan production core deposit growth Grady quality on capital and then overall net new customers all confirmed the effectiveness of our differentiation strapping [laughter] since we made already scotiabank announcement.
We have been engaged an extensive integration planning we're extremely excited about how the acquisition will significantly enhance our position as the premier retail Bancolombia, Ireland and establish a strong foothold you know another car would be a market.
As always thank store or GP, and the new members, who will be joining us from scotiabank for their commitment and dedication and all our retail and commercial customers for their loyalty and support.
[laughter], please turn to slide for.
During the third quarter, we took advantage of Boston this market conditions, both in the U.S. fixed income markets on here in Puerto Rico and decided to sell a good portion of our remaining npls to cell phone fully charged off loans out of pocket and to sell almost 40% or investment securities. If you're not was here's how we.
He's on other items affected our results first provision was increased by a net $32 million. This reflected at 39 million dollar increase primarily from deciding to sell $95 million on one phase principal balance NPL.
This was partially offset by $2.4 million the proceeds from the sale of $26 million or fully charge offs auto and consumer loans.
It was also partially offset by a 4.5 million dollar decrease in the allowance for loan and lease losses due to improving asset quality trends in Puerto Rico.
Second we had a 3.5 million dollar gain from selling $322 million low yielding mortgage backed securities.
I like to point out the tax to go as well as these strategic benefits from all these transactions.
First a further strengthen our already strong liquidity began balance sheet as we can do you have to deploy our growth strategy.
Originate that nonperforming loans loans are now, 40% lower year over year selling them enables us to free up resources reduce related expenses and increased operating flexibility.
Combined with our NBS sales, we are close to $1 billion in cash to fund our girls, Brian including pre funding, our 560 million dollar acquisition, Oh, Scotiabanks, Puerto Rico, and U.S. Virgin Islands operations.
Second our M.B.S. sale also resulted in another major reduction in higher costs broker Cds and wholesale borrowings, which which are now down at total 42% year over year.
From a management point of view all these gets rid of potential distractions. So we can focus all our attention on our integration plans with scotiabank on our growth strategies.
Please turn to slide five to review our financial performance.
Net revenues totaled more than $99 million.
While down slightly year over year, they remain up 3% year to date.
A key factor in the third quarter was about 8.7% increasing originated loan income, which offset declines in income from the run off of acquired loans I know investments acuity studios in mortgage backed security sales.
Core noninterest income come to you at very steady level.
I've 70 sold on an adjusted basis earnings per share gaming at 48 cents return on average ASP was one point, 65% return on average tangible common equity was 11 point, 18% efficiency ratio was 52 point, 10% and report.
<unk> tangible book value per common share was 17 daughters, and 11 cents up 5.8, 0.4%.
Please turn to slide six to review our operational highlights.
Total net loans increased 1.2% to $4.4 billion gross originated loans at 4.8% more than offset to continue pay down on acquired loans.
On the sale of nonperforming loans that we announced earlier.
Loan production totaled $291 million compared to $347 million into Euro go quarter.
Auto and consumer lending remained strong at $142 million on $48 million, respectively, commercial lending $66 million reflected continued growth of small business customers.
Core deposit average balances increased 3.4% to $4.6 billion. Approximately this reflects growth in commercial loans net new customers on our larger core retail funding base.
Loan yield declined seven basis points, reflecting higher returns on originated loans and lower yields on acquired loans originated loan yield increased 11 basis points from the.
Net effect of federal reserve rate hikes last year, and a larger proportion of higher yielding originated commercial on auto loans in the portfolio.
Core deposit costs continue to remain relatively low up only 18 basis points year over year. The end result was a net interest margin of five point, 35%.
Please turn to slide seven to review credit on capital.
The net charge off rate provision, obviously increase I said, we sold of our nonperforming loan sales.
The sales however, we do use the NPL rate 100 on Friday, 45 basis points year over year as well as the total delinquency rate.
And excluding items provision of $11.7 million declined $2.8 million, reflecting better asset quality and improving economic conditions capital continues to build once again, our ratios increased across the board to new multiyear highs.
Total stockholders' equity increased 8.2% to $1.05 billion, our tangible common equity ratio climb to 14.07%.
In our news release, we provided a formal indication of how seasonal implementation will affect us we're estimating on increasing the current allowance in the range of 16% to 23% for the originated book and no effect on the acquired book.
Please turn to slide eight four outlook.
To sum up we're building excellent momentum as we prepare to close on our acquisition of Scotiabanks, Puerto Rico on USPI operations, we expect to receive regulatory approval by the end of the year. We're excited for our future what for what our future holes as we will continue for US we will become the premier retail banking Puerto Rico.
With this we and our formal presentation. Thanks to everyone for listening operator, let's start the question answer session.
Thank you in order to ask a question simply press Star then the number one on your telephone keypad again that a star one if at any point you wish to withdraw your question press the pound King.
[noise]. My first question comes from one of Brett Ratner Chen of Piper Jaffray.
Hey, good morning, everyone.
Good morning, Brett.
Wanted to first ask Jose Rafael can you just talk about first socket you know when you look at the macro picture in Puerto Rico, you know the stats tend to be flattish did yeah index is kind of bumping along at 120.
Cruise ship visitors.
Ben down a little but auto sales or are okay. There was a report last week on Bloomberg I referenced a few other things talking about the potential for.
Puerto Rico to only get 39 billion of the 69 billion of.
Funds from FEMA Todd was just curious if you could give us some color on what you're seeing economically in Puerto Rico, and then once you've heard about the potential decline of funds coming to Puerto Rico.
Sure.
So what I, what I think we're living right now here in the island's transition me on the economy transitioning.
From a not only the after myself Mario or a <unk>.
Reconstruction and ER and but also for the last 12 13 years of economic contraction. So federal funds are coming end are coming in slower than anticipated.
There's still a little bit thereof.
The uncertainty regarding.
Yeah, the magnitude of how many funds are gonna come around to the island, but the truth is that.
There's there's very little.
Knowledge in the ground in terms of this specifics right in terms of the dollars and on on on when are those funds coming in they are certainly to clean primarily for for.
In the roads and there's start Theres a lot of rebuilding on the roads and bridges.
There's still a working progress in terms of the electric power authority Danny's restructure there's still a lot of.
The expectations on the housing funds coming in for rebuilding and actually building new homes.
But we are seeing some of our larger construction services clients being awarded.
Yeah.
Yes.
Projects to to build and read on rebuild homes and those those phones are have already been allocated the being awarded and the have yet to be a disbursed because there's still some hopes to go through so my expectation would be that we will continue the end of a year.
We have seen so far this year with lots of noise on when the monies will come in and how much will come in and how the fiscal bore portrays in Washington, how much you used to fiscal plan, including in terms of Oh federal funds, but but I I do believe that they're there there are lots of.
The moving parts and there's lots of.
Yes.
Hey, listeners out there that have invested interest on on Uh huh.
Particularly bondholders on how these things come out. So so I think we'll we'll continue to have done quite a bit of noise and and create somewhat the uncertainty that he's keeping the economy relatively flat and my expectation would be the next year from funds will start flowing in a more.
Consistent basis and.
And the impact from the economy as most of the local non political economist in the island are projecting and and we'll see the result, so far.
I am encouraged I am encouraged with what we're seeing and ER and our customers commercial and consumer are.
Certainly know much better financial position that they they were.
A couple of years ago, and their balance sheets show it.
Okay. Appreciate all the color there.
I'm also curious with all the changes in the balance sheet here can you give us an idea of how interest income.
My probably out with a four four pieces originate loans acquired cash and securities, which is obviously lower this quarter how that affects the fourq your run rate for non interest income.
Yeah. So first let me just say couple of things here. We we were very opportunistic this quarter interest rates in fixed income securities are again.
I would say record lows again or multi decade lows. So.
Given the acquisitions that we are pending to get approvals from on the Scotia, and the fact that.
The value of that transaction these $3.8 billion all of our core low yielding low cost deposits.
Are you make a heck of a lot of sense for us to just not on have to rely on on a broker Cds on wholesale funding that are a lot more expensive. So so we don't need to.
The.
Have done extensive funding. So so that's the first thing we we took advantage of that and we know it's going to have a little bit on a short term impact but.
The transaction expected to close in the fourth quarter. He will really managing the bank for the longer term, Brent and not necessarily for for the fourth quarter. So if we'd had a little bit of a.
A reduction in interest income into the fourth quarter because of the sale of a securities. We we we take it and we move forward because the we added value comes in with the acquisition secondly on the NPL sales.
Uh huh.
Look we are getting rid of on a copy told that was not well used and what we're seeing is interest from the U.S. kapito coming into the island interested in buying this we're seeing a better bid and again, we were pretty good in the quarter.
And.
Getting getting.
These transactions firmed up and we're excited to get rid of those assets will be able to reviews.
Operating expenses on that sale alone in other tuna, one and a half to $2 million simply because we won't have to workout.
Quite a few residential and small commercial loan so so again.
Those were none none if they didn't impact interest income because they they were basically not generating any interest income for us but.
What do you clearly cleans up a lot of.
On necessary work and dedicate our resources to what we're here for and what we're here for is to grow and this acquisition with with the acquisition of Scotiabank, Puerto Rican USPI gives us tremendous.
Potential and tremendous momentum for us to to grow and take advantage of.
Well, how the economy's transitioning to.
To a new face a here in Puerto Rico.
Okay, and if I could sneak in one last one just on Scotia, how that review process is going I know you're looking for regulatory approval can you give us any update on the timing of the transaction.
There's not much I can add regulators.
Engage with us and we are engaged with them and.
And the bill they'll have to go sort of their process, where a conscious that.
The.
The the level of Oh information sharing is active and real time, and we're confident that might be ended the year, we should have.
The positive response on the approvals.
Okay. Appreciate all the color.
Thank you Brett and good day.
Our next question comes from the line of Alex Twerdahl, a Sandler O'neill.
Hey, good morning.
Good morning out.
Just to clarify the last question. There you said that you are reasonably confident that the you'll get regulatory approval by the end of the year. You also confident the deal will close by the end of the or.
Well, yes, okay, just just clarify there.
And then just wanted to ask a little bit more on the loan growth numbers and we saw this quarter criticized loans go down a little bit, but I think they're probably impacted by their loan sales.
So maybe you can this gave us sort of some color and help us to start a little bit more on sort of what the organic core loan growth for looked like during the quarter and then also kind of how your pipelines and walking into the end of the year and into 2020.
So so you're absolutely correct.
Even though you see loan balances going down there.
Primarily impacted by two two areas one is the runoff from the acquired book, but more importantly, the the sale on the NPL. So if you look at it ex the NPL sales our loan. He we had loan growth. So what we're seeing into the fourth quarter were seeing good bye.
Thanks still a we see.
The commercial small and middle market commercial business, we see good pipeline, we continue to be encouraged with what we're seeing on auto lending.
We're seeing a slight improvement in mortgage lending also consumer lending remains steady we had a good quarter again this set third quarter with $48 million in originations on the consumer side. So what we're seeing is.
Hey, good momentum into the fourth quarter and ER and again, we're working on many workstreams right now as we are planning the the closing on the integration of Scotiabank. So so we have our hands full but having said that I see where our teams continue to be very focused on.
I mean on generating the the business and and executing on our plan on the fourth quarter.
Okay Cool and then just talking about the provision a little bit going into next year for software really appreciate the color you've given on cease all in sort of the day, one impact to add to the reserve.
How should we think about their reserve in the provisioning into 2020.
With C., so as well as.
Having said all adjustment due to some macro factors in Puerto Rico. This quarter, how should we kind of thinking about the want a good starting point for the reserve in the provision for in the starting beginning next year than to how that is actually impacted by Cecil.
So before I pass it to money. So just wanted to see a little bit.
Big Big picture.
And I mentioned it earlier when when bread asked us to question.
You know, it's a little hard for us to to be able to give you more color on the provisioning next year's simply because we were in the midst of closing and acquisition. So so that will have its own its own intricacies, a well, but from a macro perspective our expectation.
Is that a credit trends will continue to move into right direction and and therefore that you have a somewhat of an impact throughout the year maybe size any additional color understood.
I'll just comment we have been focusing in having them all are ready for day, one when we show we duty and day, one impact and I did momentum it's too early for us to do some color on how they too will impact the wrong and leave us off provisioning and both are also.
Thanks, and we'll be working with Dan So unless we have some information we will share with you.
Okay and then just final question can you just help me sort of Jive the the.
NPL sales kind of what was the mark on the loans I saw that Theres 29 million of mortgages and 9 million of commercial Npls there were sold.
How can we get that back to the $95 million and unpaid principal balance.
Good luck with that Hey, Alex.
Yeah, I in Indiana, Alex you know I, just find one share any any pricing for competitive reason.
The figures are there and I, we felt this slivers of pricing that was good.
Battered on while we sold before it put it here.
Yes.
But again.
Yes, I mentioned we.
We're happy with the pricing, we've gotten better than what we got pre pre Maria and better than we saw in the last 12 months for sure.
But.
But we.
We really don't want to be sharing too much specifics there in terms of that pricing can you share with us kind of how you determine which npls you sold off about a third of 'em. If there any common characteristics between them that made them, particularly.
Selling and whether or not we should expect further loan sale gains in subsequent quarters. Yeah. Two two okay. You out you asked two questions I'll give you two answers.
The.
Way, we looked at it was let's focus on residential because they are small 120 115000 per loan let's focus on small commercial because again those are.
More costly to workout than the bigger ones in terms of the operating side.
So so that's how we looked at it I mean, they're all nonperforming non accrual loans that.
The worrying bankruptcy some of them and we just had to Oh.
Spend a lot of time on them and that's kind of what was the first driving force behind that.
Many of them were non accrual many of them were.
Having.
Cash flow challenges in their own businesses. So so that's kind of where we can from number to do what should we expect more more sales well I mean, I don't know if you realize put the level of Npls that we have is quite low and so we do not expect do have any additional sales. We do we do feel now.
Weve cleansed all these.
Legacy Npls from residential and small commercial particularly in.
He and were well good to go so again opportunistic in the quarter and ER and happy to get it done with additional liquidity coming into the market.
Thank you for taking my questions Yeah welcome.
Our next question comes online or Joe Gatto Alden Securities.
Hi, good morning.
Hi, Joe.
Yeah, Let me start right now I guess, you talked about a little but not the balance sheet going forward, but with.
Typically your run with a level securities that maybe I know sub 10% to 20% of total assets. It's well below there now do you think you'll be sort of drifting back towards that level. After the Scotia acquisition.
Playing on running with a lower level of securities going forward.
Were brought we're planning on having a lower level of security is going forward or drove our expectation is to be able to first deploy the cash to.
To close and finalize the transaction on that make the payment but also they are planning forward is for deploying into loans and have the ability to focus on on our most important markets the small commercial and middle market commercial auto.
With that acquisition of of Scotia Bank will have a lot more scale in the residential side. So we'll be able to do a little bit more there too. So we won't happen immediately as you can imagine but.
But do you eat in our planning the pension is not to extend duration on the fixed income securities market, and ER and better deployed under the higher yielding loan.
The buckets.
Okay, all right and again you did.
Just discuss some of the.
Loan outlook and pipeline everything just wondering if you could give a little more color on.
The.
US originations looks like.
And this was the lowest quarter since you started that that program for originations is that.
Because you kind of reached the level, you're comfortable with or is there anything else going on there.
Well I mean, we mentioned in the past or the US not burn continues to be an important and part of our water strategies going forward. He has the ebbs and flows zone. Some quarters, we'll do 12 million like this quarter or others will do 40 or 50, it just depends on what what we see.
And ER and ER, and again, where weve been very prudent very conservative so lots of things can come up Oh power.
Only but we're not necessarily the going after it so.
So we're being very methodical and that's why you'll see that ups and downs on a quarter to quarter basis.
Alright fair enough and I guess I'll just ask if you could give yes, some some color on ER.
Deposit pricing trends in the island, and where are you expecting them to go.
Well with Federal Reserve bank, bringing down.
And your fed funds twice this year and the expectation on one or two more cards, I think and be a potential pressure to increase cost of funds in the past.
It's certainly subsided, a we still have excess liquidity hearing the marketing Puerto Rico, a so that has been very helpful. Throughout these.
You know the ending to the high higher rate cycle now that we're back into a lower a rate cycle.
And of course with the acquisition of Scotia binding gives us tremendous.
Strategic benefits, because we really have a solid core low cost.
A funding base.
With almost 500000 clients. So so again, we don't foresee significant or any pressure going forward in terms of.
Yeah, the cost of funds.
There might be some competitive pressures.
In the local market.
Trying to.
To focus on us, which we are seeing but.
Well, we know how to hopefully defense too. So so we don't expect that to to affect us going forward Joan.
Alright, well. Thank you that's it for me.
Thank you Joe let me good day.
Our next question comes from the line of Glenn manner of KBW.
Hi, good morning.
Good morning.
I just wanted to follow up on Alex Alex's question, I'm trying to kind of getting to what was the organic loan growth rate I know Jose you said that it was was.
Loans were up but when I look at.
Loan held for investment at period end versus the second Corp, third quarter versus second quarter. It looks like they were down 97 million how much of that 97 million drop was due to moving the loans to held for sale.
So.
Glenn part of the reason why we're not giving that number is because we're being very cautious with.
With and pricing in terms of the sales. So so again, we're using unpaid principal balance on the the metric to disclose the the sales which was $95 million between acquired on and originated loans.
But in the end when you see.
We we have organic loan growth primarily from the auto originations, which was around $40 million, we have around $30 million of.
Repayments every every month. So you have an idea there and the same with consumer we had a very good quarter and then residential mortgage has been trending down because of repayments all along so again commercial small business.
[noise] auto and consumer are the drivers for us to remain a growing aren't core loan book a in into the numbers for this quarter.
Well, so that's the thing and I think what's kind of mass and all of this is when you look at originations and your back out the U.S. loan.
Program over to USA.
Do you need in loans on the island were actually up like 3.9% quarter over quarter, which is pretty good because the third quarter is usually a seasonally soft quarter for you guys Yep Yep. So so those are those are good numbers for us too. So we're seeing 2% to 3% annual average growth into loan portfolio. When you. When you look at it then the run rate.
For this quarter was when you look at it from one organic perspective, excluding the sales of the Npls.
It remains around 2% to 3%.
Okay.
And maybe just a little bit of color.
Some lower yielding securities right now it's in Kashmir paid out some brokered deposits, what's what's the NIM trajectory here do you hold this level do you increase in kind of the impact of what's going on in the mainland in terms of of the rate environment.
Yes, Hey, what.
Right.
Well, we're seeing a Glenn is it something similar to what haven't thought this third quarter does the fed move rates during July so we have only.
As a production Oh, Gee maintenance brining, the NIM, well, which seems like these next Florida would be something very similar we will see probably a slight reduction minded.
Hey, Geopark loans, but it will compensate that reduction in the wholesales phone.
So that's how we see the NIM going forward property.
They all are going down 34 basis point that we need this quarter.
Okay and I I.
Refresh my memory, when you announced the Scotia Bank deal you were going to sell 1 billion of Securities Post closing are the securities that were sold this quarter is that inclusive of that amounts or should we expect you know 700 million in in sales post closing or is it still a billion in sales post closing.
No we were opportunistic Glenn in the quarter when we saw interest rates on dropping so so we kind of a pre empted that transaction that we announced when we when we.
And I was at the ASCO Chembio. So ER. So we've done the sale when once we.
We do the closing the investment securities that are carried from Scotia, we'll take a look at them but.
They will carry on into our balance sheet.
So I'll answer your question you know, we announced post deal, but we did a pre deal because of market conditions.
Okay, but theres a pretty significant difference in the amount right 330 billion or a million. This quarter and then it was 1 billion I think when you announced it right when you and yeah.
Well, we remember last quarter. We also sold securities. So so that that adds a little bit more so there's not much on a different maybe 200 million dollar difference and we're building cash. So we don't need to sell we don't need to sell.
And just I know you know in a quarter, where do you have these kinds of adjustments and things moving around the tax rate can flip around a lot I think merged so you had said last quarter you expect to the second half tax rate of around 32%. It was 26% this quarter, where do you expect that to go.
Well, the yet and they as I think that's great for the year is estimated a steady following 15% and he's basically the changes the mix of this transaction because who have higher proportion on opex semiconductor taxable income and Thats why did it get reduced from the.
Hey, you know and expectations.
So 30% more or less going forward.
Okay. Thank you.
Yep. Thank you again, Glenn have a good thing.
Again, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad again that is star one.
Our next question comes from line of Pat Robertson of Piper Jaffray.
Yeah.
I just wanted to follow up on two things one I'm just want to make sure I understood. The pro forma liquidity are there when we.
Close the deal you know, how much liquidity or anticipating having on the balance sheet.
So given the the transaction.
The transactions that we did this quarter and the past quarter.
We expect to have the sand the same level of liquidity that we announced it just that.
We preempted the.
The sale of securities in this.
On the previous quarters. So no there are no no different expectations there.
Okay. That's one big clear on that and then I will say RFL can you just talk about first Sakai when I when I look at the commercial loan production I mean, that's kind of trended. Obviously you know took you last year was kind of a different quarter, but the numbers of kind of moved out a little bit over the past year and I'm. Just curious if you could give any.
Color, if that's a function of activity or you're just seeing heightened competition from from your peers or I know you want to become.
No wonder choice to the S. I mean market in Puerto Rico can you give us any color on rather production trends on commercial.
Actually the production trends this year in the small commercial are.
A lot better than last year, they actually were very happy with the a small business commercial lending.
Business this year was pushing the comparisons.
In a even somewhat of an they got the ways. The a the largest the larger ticket items and a and there you you have a team.
More competition, and and that's kind of where we're.
Well, we are having said that we do have seen also the postponement of some and transactions that are in the pipeline and than we expected to close this quarter, maybe they close in the fourth quarter, maybe either pushed into the first quarter of 2020.
But there there's still live transactions and significant ones. So.
All in all I think the along the way we're.
We have transformed the retail channel and the way we have focused on the small commercial client.
Is starting to pay off in a more consistent basis, and we're extremely happy with their performance on that sector and looking forward to build on it.
Once we do the acquisition and into 2020.
Okay, Great appreciate that color yep. Thank you.
Again, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad.
And there are no further questions at this time I would like to turn the call back over to Mr. Fernandez for any additional for closing remarks.
Thank you operator, thank you to all for listening in today.
And I wish you a good Monday in a great week.
Thank you ladies and gentlemen, this does conclude today's conference call. You may now disconnect have a wonderful day.