Q4 2019 Earnings Call

and and really minimizing the impact of

We'll need the rain environment mph are down or down Thirty 32% during during the year during the year. We also grew up well deposit by 6% to Thirty million and reduce Brokers is like 22% or 122 million if we have materially transformed they make of birth or the Blessed mix now knowing that it's varying represents over 25% of our deposit base and broker is below 5%

It beforehand a call to Orlando. I really want to recognize my security team my officers and employees the support of the board, you know for all the hard work and achievement of the year really position the franchise well for twenty twenty and the future learning powers of the combined franchise will drive, you know future Capital generation, and if a third base, we are working hard on on integrating integration plans or depending acquisition and preparing or to better serve our customers and be larger competitors. We look forward to 20 20 as a transformational year for for our company with that. I will turn the call to to Orlando so you can cover the quarter in more detail. Thank you.

Good morning. Everyone has used on the earnings really.

So we generated 36.4 million of earnings in the quarter, which compares to what is 6 million we had last quarter, but I thought well, you mentioned the fourth quarter included ten point nine million in merger and we start doing cost of our recently and I was a transaction with Santander including voluntary separation program. We we offer at first time in December and I'll touch up on those bit later if we exclude these items and some other things that happen that are not necessarily from our perspective. Our non-GAAP adjusted net income for for the quarter was 42.8 million or nineteen cents a chair which compares to the non-GAAP adjusted net income of $45 back in the in the third quarter.

Free tax free provision that's how they also mentioned continues to be strong at 72 million and it's been consistent over there over the last few quarters the quarter provision a loan officer McWhorter with $800 million, which is 1.1 million higher than last quarter mostly on on Residential Mortgage Loans that are driven by by some some of the charges on on loans that by graded uh to non-performing and evaluated Point Birman.

So like to point out as as you saw on the on the release that during this first quarter Corporation is an opt-in. It's not in the new standard for credit losses or fame and based on we expect so far based on all the work done an increase of approximately 93 million on the alarm for credit losses month that includes loans debt Securities held to maturity of balance sheet and any other credit related items.

Our net interest income for for the water came under pressure as we had mentioned before as a result of the declining interest rates are interesting converts down four and a half million compared to the third quarter. However, you remember last quarter. We had at one time item of three million related to an acceleration discount equation on the payoff of a large commercial. But in addition to that we did have one point 1 million reduction associated with the repricing of the wage rate commercial loans.

we we do have

I had mentioned prior calls. We do have about 44% of the commercial portfolio all commercial construction in Syria and all them. It's floating with with labor and birth or 20% in floating with with Prime.

Margin for the quarter was for $70 which compares to 489 last quarter, but then it's kind of creation. I mentioned improved that margin by ten basis points. So if we add yours last quarter margin to to normalize levels, we would have seen any kind of nine basis for this quarter as compared to the last quarter month going forward margining, but at the end of went on break move in on the outside makes the new forward rate indications are slightly off her them prior forecast. And the expectation is that we might not see the original red car that was expected for for twenty twenty under this assumption additional reductions in margins would not be high could be a little bit but not a lot going forward but depends on on this expected movement on birth.

on the right

Not interesting come for the quarter with with good at twenty four million increase three million two point 1 million of that was related to a gain on on on a sale of a thousand performing commercial mortgage loan. We had helped her set for for some time but was the last number forming helper settled on we had on the portfolio at this point and we all suck but positive impact from charges taken last quarter on on a private label and we didn't have to take any this quarter.

On the expenses the total expenses were a hundred point two three million, which is 95 million higher than last quarter. But out of that 9.6 of the increase was related to 2, I'm sorry 10.3 million of the increase was related to the merger and restructuring costs that I I mentioned before included them are the typical all the legal fees Financial Consultant. Peace other other Consultants we use for the for for the transaction page as well as we initiated during the quarter of voluntary separation program with First Bank employees to to accelerate our position in and try to capitalize as quickly as possible to expect that efficiencies from from the upcoming transaction. So we we started moving in in that front and that's going to really use some of the expenses during the year off.

Well, we're all expenses. I would say that if we look at what's happened are the end of 2020 and I mean 2019 and 2020. We we have completed or are about to complete a number of Technology projects that you know tend to increase our expense advisor will increase our expense pays. These projects are all driven cars improvements services and products that we have. So we we look at the the expense levels going forward. We we expect that excluding Oreo those expenses our goal be more closer to to the eighty nine to ninety million range that the $87 million that we had seen before and and obviously that excludes any expenses associated with continuing to complete the transaction. They'll go and transaction that we have on the table.

No performing assets decrease of 14 and 1/2 million fourteen point seven million for the quarter to three hundred Seventeen total performing assets not performing loans the great like twelve point four million with several options of 7.9 million in commercial and construction and and 5.6 million in in non-accrual Residential Mortgage Loans. As I mentioned. We we completed the sale of 6.7 million of a non-accrual commercial mortgage loan help ourselves. And we also collected or brought current an additional six point two million in in the commercial number for me portfolios where we did see a migration of six million current relationship in the Virgin Island that that offset some of the reductions Oriole portfolios have continued to decrease as slower migration.

however

If you look at inflows overall includes, we're bit higher 33.7 33.5 million, which is 1.7 million higher than last quarter, but that was highly driven by the the 186 million case construction portfolio.

The Waterwheel so sorry doctrines of adversely classified. It's it's $34 million in the quarter.

Let's start solving the water were almost nineteen million 18.9 million is about 84 basis points over its loans compared to about $14 of water or 61 basis points of loan with supposedly 2.7 million of that with Consumer Portfolio, which allowed has to do with the fact that the portfolio has been growing. So we have a tire portfolio and and that will deal some increases Dollar Wise on charge of not necessarily percentage-wise the ratio of the allowance to offer loans State Highway at seventy 3.6% That was slightly down from the 76.5% We had last quarter and our commercial not performing am sorry that 42 cents on the dollar as you can see in the on the presentation.

Just briefly on the year hourly already mentioned that we we believe 2019 was an excellent year for our institution. We saw improvements in ALT key metrics, you saw some of the components listed in their earnings wise the full year net income was 167 million or 76 cents a chair which compares to 201 million month last year. However, remember that last year we had a sixty-three million benefit from from the partial reversal of the VTA valuation allowance. If we had just said speak the the items again that are non-core on both years. The non-GAAP adjusted net income for 2019 was 165.6 Million, which is 7/8 cents a chair which compares to to adjust the data, $137.62 a share in 2018. Overall the 22% Improvement. Yep.

Got bases Roa adjusted our way also with pretty pretty hefty this year with up to 1:33 from 1 until 12 a.m. Significant improvements in in the early components of the institution.

With that I think that we will open the call for questions and then some of your offending items.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up the handset before pressing the keys to withdraw your question, please press star then to our first question is from what I'm seeing pooniwala from Bank of America Securities. Go ahead. Good morning guys. I guess the first question it would be helpful to get a log of an update. Oh, yeah, they are 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 the recent events, you see some of the federal aid inflows and just Pig

Check the activity slowing down over the coming quarters.

You know so far so far, you know, it's it's actually barely barely to to really tell but we haven't seen a real impact outside from from the authors from the fact that area which is you know, the salary offer tow Rico and and you know, when you look at the Overland the size of the island, you know the size of the population in a in the areas nearby that south west region compared to where most of the economic activity takes place. So that's why when we look at the numbers of total loss during our portfolios. They are you know, what we what we consider low obviously, you know, there would be some impact in the region. I think the other Faith Like a good half of a released tourism which you know, it's also too early to tell but I have to say that, you know, we have to think about the competitive factors also with a dog

you know the additional reconstruction efforts and and funds that will

That will that will be in the island to continue supporting the you know, the the Reconstruction of the area, you know, obviously the timing how much additional time if if we continue the reoccurrence or not of of earthquakes of similar magnitude, that's another factor which you know since basically January 7th, you know committed to lower lower severity, you know so far on the on the on the on the other reasons, we have not seen, you know the change in in what we do every day for for the month of January in terms of business volumes and activity considering the seasonality of January , which is is always in a slower month than than and December as an example. So but both so far in general, we don't expect, you know, any significant impact to the economy on this on this page.

Different magnitude to to we experience is twenty-seven.

Think 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 house also to do with the disruption that was created wage, which was a majority of the of the root of the issues where the lack of electricity and Telecommunications.

Go ahead and just on a separate note. And non interest-bearing deposit for a very very strong. Just wondering if we should expect some seasonality and outflows of what we saw in the fourth quarter that's 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 on the deposit. We we divided a better here. It's we have roll them both for the vehicle and and Florida Florida that tends to be a little bit more money a lot of tile in terms of those those accounts into a lot of money comes in and out. So we we could see a bit of of that Puerto Rico is there's always a you know, somebody took place during the latter part of the year that are used in the beginning of the year. But so far we've seen pretty consistent penetration and the deposit front in in Puerto Rico regarding margins. I the answer is yes at the end. You know, we we again the sixty-plus percent portfolio floating has been affected by the commercial portfolio by the declining rates, you know, assuming most recent expectations the the library component that we use it's typically through Thursday.

Libor so the expectation of the library is not going down. It's saying platter like

Up and any there is no additional rate Cuts clearly Prime would say, you know, at least a current level that would limit the the exposures a bit that we have on the margin remember at the end. There is a little bit of a mix also because if we continue to achieve the deposit growth which we want to achieve a great one and then it goes tight with volume growth and and portfolio Investment Portfolio, but clearly from the that interesting, prospective if wage would say Flight of the emergence would be would be a small.

Understood. Thanks for taking my questions.

Again, if you have a question, please press * then 1 our next question is from Alex from Piper Sandler. Go ahead.

Hey, good morning, guys.

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 and post Cecil just kind of take into account which happened to you reserved and and expectations for longer with etcetera.

That's The $64,000 Question

So I I mean at the end remember that once you had up Cecil in essence, we're taking lifetime losses lifetime losses are a function of expected economics and I'm going forward and and it's expected and lost historical laws and correlation of factors in our Market. There are factors such as unemployment office home price index that are critical factors in those losses, assuming, you know, those components would stay consistent from quarter-to-quarter home or implications would be then a volume either growth or reduction not so much in terms of your loss component. So in reality Chef Alex first quarter will I would say that other than for any significant change in economic assumptions, which are not something that you typically see dramatically from 4 to quarter.

What would have to do with how?

The volumes I think that I I had mentioned that that assuming assuming a normalized thing of growth. I wouldn't expect Cecil to be a huge difference in terms of provisioning for the years as compared to Prior year, you know, the one-time head obviously would be the the large component but but it depends a lot if we achieve a lot more growth than we'll see some of that impact but you know, will that would be compensated by revenues off or you said on the loan side? So it it's stopped to really give you a very very concrete one. But again if you mean stabilized assumptions economic assumptions and unemployment components in Puerto Rico, I would say that it's all volume related movement.

Okay, and then do you think about long growth in 2020 and I know you guys have shown some probably some pretty decent Trends, you know, especially since you've been jogging against the run off in the residential portfolio and NPA reductions, et cetera one. Do you proceed the residential loan reductions coming to an end anytime soon, or at least slowing and then to kind of a Thursday at your pipelines right now and kind of what you know on the island and sort of go ahead and into twenty twenty. You know, how do you feel about how about a loan growth Outlook over the next couple of quarters the month, you know, when if you look at the plan itself how we review it and how we our our loan strategy? Yes, the mortgage portfolio, you know, if you continue to create a bit of the probably the rate of reproduction is going to slow down at some point in time later, you know in the year orientation could get closer to the payments we yep.

We're doing a strong orientation.

What we're focused on the conforming side of the equation, which is reflected in the in the General sell and then on interior symptom the the consumer we still see additional opportunities for jobs in the portfolio as we did over the last couple of years and the commercial side. We have significantly less non-performing loan move out. So so if if the pipelines, you know translate into closings, we should see an increase in the commercial book. Am I better rate than prior years because some of the girls that we achieve in Prior years was upset by the reduction in that we we also achieved so we don't have that large mpls reduction Target for this year because we're really approaching we still have some work to do there, but we are approaching a normal life.

Portfolio so from that perspective. Yeah. The answer is we should see better growth in the car.

Rachel if if the pilot light materialized we haven't seen indications yet that that's not going to happen. But you know the environment can change. Yeah.

Got it. And then just to final question you as you continue to move closer to the to closing the Santander transaction. Do you foresee any meaningful balance sheet clean up being necessary before the deal closes?

Know if you look at the the mass of the deal that we share back in October those numbers stand obviously, you know, there's some balance sheet optimization that that anybody will require at the point. I I will say more have to do probably regarding the deposits or or you know Securities portfolio. But remember we not get us in this deal. So there's not a lot more than those other matters that would be done for for either are or liquidity just to make sure I'm up to the the the the balance of an income statement, but you know it it looks like like the picture that we presented back in October .

okay, and

In terms of the timing of the deal closing do we have a better sensor one that might actually the the the exact date? No. No, it's there's no there's no exact dates here. It's just a sip of event. We continue to work on the on the approval and I think we stand by by, you know, our best estimate is what we what we project. What we propose is your color presentation something where, you know near the last part of the second quarter perfect. Thanks for taking my questions. Thank you.

Our next question is from Glen manna from KBW. Go ahead.

Hi, good morning guys morning. I I had to jump on the call late. So Orlando I missed most of your commentary on the I guess if if you look at the moving parts and you know ten basis points was from you know, the interesting cost recoveries in last quarter and maybe six or seven basis points from the actual interest rate environment. What do you expect for the tradition that name here? Could we see stabilization into one q19 or or would you expect some some kind of modest further deterioration?

I was mentioning.

Set up if we assume the you know, the expected the the most recent escenario. It's probably an expectation that there is not going to be another rate cut off that there will be some stability with some improvement in in in the live where if that were to happen. My opinion is the margin impact. It's it's a small from where we are now dead since we we do have a large chunk of the commercial portfolio. It's it's as you probably saw the release it's 44% It's like rebates and 20% of its prime base. So those two components move quickly if if rates go down so, you know, it's a bit of mix also on the assets, but with those assumptions the impact margin shouldn't be shouldn't be much it could be a little bit but not a lot based on where things have. Yep.

Replace a recently.

Okay. Thanks guys.

This concludes our question-and-answer session. I would now like to turn the conference back to John peeling for closing remarks off on the investor front. We have the KBW conference in Boca coming up on February 13th. We are also attending the credits with 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 whether it's beautiful here. So if your timer 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.