Q4 2019 Earnings Call

Morning.

He for joining a web T. Bancorp's conference call.

My name is Christie and I'll be your operator today.

Our speakers today, our Jose Rafael Fernandes, President Chief Executive Officer, and Vice Chairman.

And where it so every Monday and executive Vice President and Chief Financial Officer.

The 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 presentation and other files page.

This call May can take my feature certain forward looking statements about management goals plans and expectations.

These statements are subject to risks and uncertainties outlined in the risk factor section.

Lets keep.

As he see filings.

Actual results may differ materially from those currently anticipated.

We disclaim any obligation to update information disclosed in this call as result of developments that occur afterwards.

We also direct you to the explanation of non-GAAP measurements that are included in our presentation and news release.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session I.

I would now like turn the call ever to Mr. Fernandez.

Good morning, Thank you for joining us.

Please turn to slide three.

Before the market open today, we reported fourth quarter and year end result.

With an update on our Scotia Bank, Puerto Rico acquisition, and U.S. Virgin Islands, and an update on Cecil.

I'd like to publicly welcome our new stuff customers on clients, who have joined Dawson's every sort of our acquisition.

We are committed to providing excellent opportunities for our stuff.

Excellent service products and technology for our customers on claims.

We are excited about the prospects for future growth.

Because it goes the old acquisition took place on December 31st.

Our fourth quarter and 29 team income statement on credit metrics reflect our pre acquisition operations plus acquisition related expenses.

But our yearend balance sheet and capital metrics reflect the car newly acquired assets and liabilities.

The fourth quarter was very busy closing on the acquisition, while continuing to build our business.

We had a loss of four cents per share mainly because of the $21.5 million in merger and restructuring charges and $6.6 million ignited provision for nonperforming loans that we decided to sell the third quarter.

Corporations worst strong net interest margin was five point, 35% the same as last quarter as we managed to transition to slightly lower yields on embark on our variable based commercial loan portfolio with our proactive effort to reduce high cost wholesale funding.

[laughter] loan production was the highest since the post hurricane come back the second quarter of 2018, most credit metrics improved.

During the quarter, we developed our integration plan.

Taking all regulatory approvals I'm close on the Scotia Bank acquisition.

That and that that added $2.2 billion, a net loans, including a six point, 44% low mark on $3 billion in core low cost deposits after accounting for a reduction of $200 million all non resi in accounts.

Yeah <unk> many of the final transaction details.

Under impact when oil Gee were better than originally assumed including the amount of merger and restructuring charges core deposit intangibles goodwill and intangible book value dilution.

Looking at the year after a whole earnings per share was 92 cents that included merger and restructuring charges on added provision for the previously announced NPL sales.

On a non-GAAP basis earnings per share was one daughter on 62 cents, which compares favorably to 2018.

We ended the year with record total assets or $9.3 billion book value per share of $18 on 75 cents tangible book value per share of $15 on 97 cents and stockholders equity of $1.05 billion.

Please turn to slide four.

We also want to thank all our teams for their exceptional work some despite their own difficult personal circumstances in helping you Barclays from our recent Seawheeze earthquakes.

I saw the earliest on the ground in effect an area Oriental beams helped organize shelters on relief centers in coordination on collaboration with some of our clients. We provided more than 4000 meal bottled water battery electric friends I know there essentials. We also are.

Page access to teams of doctors on structural engineers.

The quick response will not have been possible with our our compassionate stop and clients. We are extremely proud to serve our community.

Thankfully there was no loss of life on the part of our employees.

In addition, all our operations on main buildings remain intact.

Please turn to slide five to review our financial performance.

At $98.4 million coordinate revenues were down from a year ago and the third quarter.

There were three key factors first we continue to generate income from a growing amount of are you know loan.

Interest income however was down from acquired loans due to typical payback.

Interest income was also down from investment securities due to the sales of mortgage backed securities totaling $350 million into second quarter, and 300 on $22 million in the third quarter.

This generated excess cash for the Scotiabank, Puerto Rico acquisition.

I've already covered earnings per share and tangible book value. So let's look at our other performance metrics. They were all affected primarily by the merger acquisition costs, which cost efficiency ratio.

To go up on return on average tangible common equity on return on average assets to go down.

Efficiency ratio was also affected by some additional cost of nonrecurring nature, such as at 2.8 million dollar and contingent legal reserve on operational losses on $1.5 million, an incremental health insurance expenses and technology development expenses.

As we begin 2020 , we will be focusing on on full integration on our growth plans.

We estimate estimate this will require additional restructuring charges in the range of 7.5 million to $10 million.

Please turn to slide six to review our operational highlights.

This is one of the more important light slight in todays presentation.

Loans were down largely to the NPL sale.

With the Scotia Bank acquisition, you can see how loan jump from $4.4 billion to $6.6 billion.

We have continued to grow core deposits in 29 team for the Scotia Bank acquisition, you can see how core deposits jump from $4.6 billion to $7.5 billion.

As I noted earlier, we had a very strong quarter for loan generation all categories did well in particular commercial loan production, which totaled $229 million reflected the closing of large a middle market corporate loans as well just continue growth in small business customers all important don't Regal.

[noise] loan yield held fairly stable steady at seven point, 51%, while the cost of deposits ticked down to 69 basis points that plus the reduction in cost from broker Cds and borrowings enable us to keep net interest margin level with a third quarter on a ball year ago.

Oh levels.

[noise], Please turn to slide seven to review credit and capital.

As we indicated on our last call with the nonperforming loan sales out of the way our net charge off rate has begun to fall as well as provision on our nonperforming loan rate.

Looking at fourth quarter provision in addition to the $6.6 million sport NPL sales previously these gross fourth quarter provision included a 3.6 million dollar allowance for the remaining balance of one originated commercial loan pending insurance recoveries on abrupt bird feed that was come.

Bleed lead destroyed by fire.

Because of the effective use of excess capital into Scotia Bank acquisition capital ratios have now become more comparable to similar size peers, while continuing to be significantly above regulatory requirements for a well compete the life institution. So.

So at December 31st 2019, the common equity tier one capital ratio was 10 point, 78% and tangible common equity ratio was eight point, 97%.

Well, well total stockholders' equity decline, 0.3% compared to September thirtyth increased close to 5% year over year.

Please turn to slide eight for our outlook.

We are well positioned for 2020 acquisition enabled us to more effectively deploy our excess copy belt and 2019 with a record $6.6 billion in loans on a record $7.9 billion in deposits. This provides us with an excellent opportunity to generate fees.

Your loan an earnings growth.

Integration is well underway, we are moving fast while we still have to manage some of the effects on the three federal reserve bank interest rate reductions from 2019 on any potential economic impact from the recent earthquakes that hit the southern part of the island. We remain optimistic now we will achieve all the major.

Rolls on strategic objectives of our Scotia Bank acquisition. This year next we're very proud of our accomplishments. So far I'm excited with our outlook I look forward to share our progress in the quarters ahead.

That ends our formal presentation. Thank you for listening operator, let's start the question answer session.

Certainly the floor is now open for questions. If you would like to ask a question Press Star then the number one on your telephone keypad to withdraw your question press the pound key.

And your first question is from Alex Twerdahl of Piper Sandler.

Hey, good morning.

Good morning Hydrant Alex.

Hey, My first question as I couldn't help but to notice that the the tangible book value dilution pro forma came in a lot less or more favorable than initially expected when the deal was announced back in June .

So I'm just wondering kind of as you sort of started to integrate things and and look out to 2020, the cost saves number which we thought was potentially a little bit on the conservative side that when the deal was announced.

Are you prepared to make any adjustments to that or or have an update on sort of how we should be thinking about expenses for the year.

So regarding the.

The announcement back in June on the acquisition.

We created an acquisition model that.

Certainly is conservative prudent and.

Certain after after five or six months, we were able to think emitter Luca.

The acquired.

Assets and liabilities and and we were happy to announce that we didn't have to dilute tangible book value less as we anticipated. So so he played that phase out very nicely for us.

With regards to expenses.

We keep the same the same targets, we think that.

The we will continue to work hard on integration, it's going to be a very busy.

Year 2020, as we continue to focus on growing.

While we integrate so like I internally.

Say that we need to run the.

The car 200 miles per hour and while we changed the tires. So that's kind of our attitude here, we think we have announced an excellent opportunity.

No not only 2020, but beyond he given these acquisition and where we stand a from a competitive landscape but.

On the expense side, we keep that where we are and.

We like to over over deliver so we we will stay there.

Maybe to that point just for expenses just the right starting point as we go into the year just given that it looked like Gina expenses were a bit elevated in the fourth quarter. You know, what's the right I guess I don't even if you want to do it on a stand alone basis and layer in the Scotia.

Additions or maybe just give us sort of what you're anticipating the for the first quarter what might be the right kind of entry point for the year.

So we don't want to go into providing any type of guidance above and beyond what we said back when we announced we were sticking to those numbers are certainly on the expense side, you, you'll see that progression as the year goes by the as you can imagine the the cost saves don't don't have any one day.

Or one quarter, but you'll see we'll we'll update you in the quarters ahead Alex.

We are we're excited for for the year, though we have in front of loss and.

I'm excited to share the the successful using in future quarters.

But so just sorry to belabor the point, but expenses in the fourth quarter, what the core expenses backing out the merger expenses from right. Yeah. Thanks, 57, Yeah got it I'm, sorry, I didn't I didn't address no one.

We we apart from the legal contingencies study, we feel it's a it's a onetime thing.

And the the other two if these related on where where do we really focus internally and we focus on our people and so we've provided.

A better better healthcare and and we are.

Investing in them the same thing with our customers. So we continue to invest in our technology and ER and these are part of our efforts to upgrade our technology platform to sort of better on customers. So and that's one of the the spike comes up in the fourth quarter in terms of.

General expenses, the we do not expect those two to be recurring in nature, but.

Well, we want to make sure that.

At a time night and so you understand the the rationale behind them.

Okay did you break out the the legal contingencies that aren't that aren't going to be.

Recurring.

They are they are all the nonrecurring.

Yes, the specific assessment that were made during the quarter for specific cases. So you know this node on agriculture and.

Yeah.

<unk> expense enter in terms of the dollar amount I must have missed it and this isn't somewhere in the release.

Yes, again, yes it did.

Okay and then.

Just kind of as we look at the loan growth of course, a loan growth in the fourth quarter was those cuts the origination volume was like three times, a normal quarter, which is great to see.

Can you just give us an update sort of on what's going on there is that driven by some of the recovery efforts in Puerto Rico is driven by new opportunities because of the deal and what the pipelines look like as we head into 2020.

Sure.

We've been talking about last year, we talked about we had a good pipeline, but things, we're getting a little bit delayed.

Hey, and we were very excited.

Hey, unhappy with the results that we had last year on the commercial front, particularly.

The.

The small commercial small business small commercial and an area that we're focusing but.

Fourth quarter also we close some of the middle market loans and some other larger loans.

Following the pipeline for a while we were able to close and before the year end. So we're happy with that too.

Are you looking to 2020.

We do have a healthy pipeline on the commercial side and.

Hey, we look forward to.

To deploy our our excess liquidity in growing those those bookings.

The us pertaining to which type of industries not necessarily recovery, so moving some of the recovery.

Commercial lending growth might have happened more into second and third quarter.

But the under origination side, but this fourth quarter he was more.

Cnine lending more traditional different industries from services healthcare et cetera.

Okay and then just a final question for me you guys are sitting at 9.3 billion in assets is 2020 again to be re mixing year, where you're you talk about driving 200 miles an hour will change in the tires is that 200 miles an hour just going to be on the loan growth side and funded with with the security side of the balance sheet or do you think the balance you could actually approach 10 billion to potentially cross it.

It appears.

No we were not targeting crossing the 10 that 10 billion dollar Mark anytime soon.

As you as you know there is an incremental costs to operate on bad debt level. So.

We will continue to manage the balance sheet strategically to make sure that.

We we grow.

As expected.

Well when we talk about growth we're talking.

On the loan side and.

A.

I managed the bunching, so we don't a cross the 10 billion dollar Mark.

Great. Thanks for taking my questions now you're welcome good they you too.

Thank you. Your next question is from Glenn Man of KBW.

Hi, good morning, guys.

Hi, good morning Lynn.

So the net interest margin held up.

A little bit better than than we were expecting and Jose in your comments you kind of referenced.

Some of the balance sheet management that you've been able to do and I was just wondering you know kind of going forward. What does your outlook in terms of the NIM for for West GE on a standalone basis.

So.

As I mentioned to Alex we don't want to give any guidance specific guidance, what I can give you color on how we see it and we still have some some good opportunity in the 2020 to continue to optimize our funding given the excess deposits that we have and we'll certainly take advantage of that throughout.

The year us as the funding matures and.

And again.

You maximize the use of our well the acquisition, which which provides us the core funding.

Okay, and what are you seeing in loan pricing down on the island.

No not much change from what we spoke in the last quarter, a where we're seeing.

A relatively.

Aggressive pricing, but numbers is hardly any change from the third quarter.

Color done again.

I guess just to kind of circle back to expenses and not to tip of labor the point I think.

My understanding from your comments, where that you didn't expect the 2.8 million in contingency legal reserves and the 1.5 million, an incremental health insurance and technology development expenses to be recurring.

Is that correct.

That is correct that is correct.

Okay.

And if I, if I kind of take out that is the piece of the health insurance out of compensation and employee benefits. It was still a bit elevated was that kind of seasonality in the fourth quarter yearend bonuses do you expect that to a to moderate a bit for for Oh Gee on a standalone basis.

So you know part part of it has to do with.

Yearend, but but in reality.

We were also making sure that.

We are in competitive on the.

Compensation side and.

We've made some adjustments about a year that you have not might not necessarily see the the full effect of those adjustments the until the fourth quarter, but.

I am in our case.

First quarter is when we went through the end of the year bonuses and all that stuff. So those has already been accounted for an accumulated as we as we move forward.

Okay.

Then just on the tax rate, if I kind of normalized tax rate. It was a little bit higher than I was expecting for for a couple of Standalone was there anything unusual in there and.

In the past, you've kind of giving guidance for the tax rate for off just standalone basis.

Now, let me talk in general Glenn.

Yes, the last year.

And I says many narrowed we three assets all the forecast that we did through the year. So we have a catch up to compensate for higher.

Total income than expected, but going forward, we will see the stock spraying getting back to 30% to 33% that has been like great referrals for the last two years.

Okay.

And that that would it looks like well I had alright. Thank you have a good day.

You're welcome Thank you Glenn.

Thank you again, if you would like to ask a question Press Star then the number one on your telephone keypad.

Your next question is kind of growth Joe could you have all been securities.

Good morning.

Good morning, Joe how are you all right.

First off I, just wondered if you could share very any.

I guess little bit of summer one of the merger.

Integration milestones are coming up one.

Going forward.

So let me let me give us a first say we closed the Scotia transaction acquisition a late in December on December 31st.

So we before that we were spending most of our time planning for for the integration as soon as we.

Began the year integration planning turns into integration a execution and were first of all welcoming all the employees on all the clients and so far the.

The plan has been executed to the dot inspite of the fact that three business days. After we acquired the operations of Scotia Bank in Puerto Rico into USPI. There were two earthquakes in this low importantly island. So hey, we adapted quickly to our two to the environment. We operate in we help the communities we serve while we.

We continue working on the integration a and executing on the integration plan us as being planned.

You know that effort is led by Dinesh Kumar, our Chief operating officer, and we've been doing this for we've been done we have done three of them actually these will be the floors.

In our 10 year here as leaders and the only reputation so.

So far Joe.

We're on target and.

We are intensely working to get it done as planned and we don't have any a quirks to report so far as you know integrations always throw you curves once in a while we this time had a environmental curve but.

We we manage it.

Nicely and.

And we're able to go out to the communities also and on help out. So we're extremely proud of what we have accomplished in 2019, we are extremely excited for 2020 and.

And the progress and the earnings growth potential that we see going forward. So look forward to sharing the.

The results in the upcoming quarters with you on the rest of the.

Of the Street.

Okay all right.

Just one other question you know.

I guess, we've talked about.

About the.

Yes, it's sort of going slow with the U.S. operations and keeping that too.

Manageable piece of the loan portfolio. Just wondering if you are now with the bigger balance sheet.

With the Scotia acquisition if that.

Changes your thinking on on the size of the U.S. portfolio any.

So so with regards to us.

Loan operations that.

But we we have.

And in reference to the acquisition that we just did I think the way we look at this is where worries the growth coming from I think is going to come primarily from Puerto Rico, If we see some opportunities for us to deploy some some copy dolls idol, Puerto Rico for sure we'll evaluate them.

But as you as you know a our main operations are here in Puerto Rico now we have the Virgin Islands, where we also have.

Between these there so I think we're in a very good spot we have Puerto Rico, we the.

Momentum coming in we have USPI, which is a new market, whether we are we're now serving and and then we have the the U.S. loan operations were what we also have opportunities over there. So we will look at all three but.

But the main to arent, Puerto Rico and use VI.

Great. Thank you.

Thank you Joe on the Great thing.

Thank you have a follow up from Alex Twerdahl at Piper Sandler.

Hey, just a couple of follow up one I appreciate the C. So guidance that you guys gave the day one guidance and the in the press release, just wondering if you have any sort of color outlook you can provide us for how we should be thinking about provisioning in the first couple of quarters of 2020.

Hi, lend money go after them in general suite, we continue to work with their model and.

In an ongoing basis, which is that provision I will will be defined mostly for the long growth underlying charter.

And that's where we see it so right now we know about Karen allowance coverage of two point 15 with the added estimate that we just a share with you would be accretion our allowance coverage to around two point, 80%. So I'm, assuming all valuables remain equal Juneau and.

The change will come from from loan growth.

Okay and then.

As I think about charge offs, obviously very hard to predict but just given some of the clean up the NPL sales et cetera, and stuff that you did later in the year would you expect the charge off level to kind of come down a little bit in 2018.

Well that that.

So where one of the scenarios fluid mining we are they didn't give list they will lead Churchill behavior, but remember that as we will be keep growing.

Also was mentioning there some portfolios like auto loans that you know charge off will continue in dollar wise to continue.

[laughter] labels trend, even though at the loss ratio were keeping the same so you know a labor officer Joe.

Relationship wise, probably will remain the same but volume wise.

We can see more inquiries because of the loan growth.

So he and the commercial and residential side I think since you mentioned since we sold some of those nonperforming loans, certainly will come down but plenty process on the consumer side, we need to replenish charge offs. So.

Assuming that the.

The scenario is the same in terms of the past several quarters a.

Again, it will be will be affected by growth, yes, the the provision will be affected by rules.

So that's that's how we look at it but it's again.

The day to comes in March 31st, we'll we'll update you win when the core quarter ends and on the next conference call, but Thats, how we look at it.

And then are you expecting any additional merger restructuring costs in 2020.

Yes, we mentioned in my remarks, we're estimating between seven and a half on $10 million the owner of additional merger restructure charges that totaled 21 on change that we reported today.

It basically comes out in total less than what we anticipated on what we announced back in June of 2019. So.

We are we're again part of part of getting things done in 2020.

Okay and then just final question you guys. As you mentioned a couple of times are basically fully levered and look a lot more like other banks now, but how should we thinking about capital obviously.

Out of wood to chop with the integration and wouldn't expect any additional capital actions released a couple of quarters, but is that the right way to think about it or I mean.

Right on point, you're going to be.

Yes, you're right on point.

Okay right on point, Alex we're going to.

Execute integration benefit from the added earnings growth.

They grow our capital and then.

I think about.

Other things into 2021.

Perfect. Thanks for taking my follow ups, Yes, you will have a good day.

Thank you once again, if you would like to ask a question Press Star then the number one on your telephone keypad.

And at this time there are no further questions I'll now turn the call back to management for closing remarks.

Thank you operator. Thank you also to all our stakeholders who are listening. Thank you again and have a wonderful day.

Thank you. This does conclude today's conference call you may now disconnect.