Q4 2020 OFG Bancorp Earnings Call
Good morning, Thank you for joining O F Chief Bancorp Conference call.
My name is Christie and I will be your operator today.
Our speakers for today are Jose Rafael Fernandez.
Didn't chief Executive Officer, and Vice Chairman and Maritza, Arizmendi, Executive Vice President and Chief Financial Officer.
A presentation accompanies today's remarks, it can be found on the redesigned investor relations website on the homepage and the what's new box or on the quarterly results page.
This call May feature certain forward looking statements about managements goals plans and expectations.
These statements are subject to risks and uncertainties outlined and the risk factors section of O F. G SEC 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.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would now like to turn the call over to Mr. Fernandez. Please go ahead.
Okay.
Good morning, and thank you for joining us.
First I want to wish you all a happy new year and that you all remain safe and healthy.
There was ever a year, where we fulfill our purpose to our customers our people and our communities. He was 'twenty and 'twenty, we were more than ready and my skinny stuff.
You know our job as managers is to lead through good and bad times, when we look back at 'twenty and 'twenty.
We're so proud of our people who have been so dedicated so resilient and who have persevered through all the challenges of 'twenty and 'twenty, while maintaining our high levels of service to our customers, giving back to the communities, we serve and delivering excellent results for our investors.
So our teams in Puerto Rico, the U S Virgin Islands and on the main and once again. Thank you.
We're extremely pleased with our results.
For our customers. Despite everything we swiftly process their service requests applications for loan deferrals and the rapid influx of stimulus checks.
For our commercial customers, we implemented and easy to use 100% digital service for applying processing disbursing and forgiving PPP loans.
Both retail and commercial customers took full advantage of the digital and technology, we have been providing.
As we say at RFG Fascine capital H O.
Our people adapted quickly to working remotely we stepped up spending for COVID-19 related items, such as testing healthcare and Worksite safety.
We made significant investments to ensure our teams had robust remote work capabilities.
We also work to do our part for our communities and the beginning of 'twenty and 'twenty, we supported the earthquake effect that towns in the southern part of Puerto Rico. After that it was corporate related donations and security and more than $100000 and grants for nonprofits and Puerto Rico and the U S. Virgin Islands. In addition, we converted.
Our internship scholarship and financial seminar program to virtual formats to maintain and sense of continuity during these challenging times.
We will continue in 'twenty and 'twenty, one to help our customers people and communities to adapt to the challenging and changing COVID-19 conditions.
Please turn to page four.
As you can see and this slide we continued to see higher percentage of adoption and all banking technologies.
Particularly pleased with the 50000 online appointments made small R&D day platforms and our online Bill payment solution. All of this made life easier for our customers. During the pandemic he'd also helps further our strategic and operational goals.
In all likelihood.
And migration should build on the progress we achieved in 'twenty and 'twenty.
Please turn to page five to review our fourth quarter results.
We reported earnings per share of 42 cents.
It is important to note and this included three major items.
$6 $4 million and merger and restructuring charges Finance Scotia Bank systems conversion and integration.
$3 million in merger and restructuring charges for branch consolidation in 2021.
And $1.5 million in Covid related spending.
All of these amounts are pretax.
Also keep in mind, our tax rate was 22%.
It's higher than the third quarter because of a greater proportion of higher tax income, but it is also lower than our estimated tax rate in 2021, which we currently anticipate being in the 30% to 32% range.
Third quarter revenues were a record $133 million net interest income was $99 million similar to the third quarter banking and wealth management revenues were a record $34 million.
Wealth management included $4 million and annual insurance commissions and approximately $3 million of that was from additional and insurance business that came with the Scotia acquisition.
Mortgage banking included 2 million birds and revenues from secondary market sales of mortgage but were held back from the third quarter due to our systems conversion.
Noninterest expenses were $89 million, excluding the merger and restructuring charge and COVID-19 related costs net.
Non interest expenses amounted to $77 million.
This reflects significant cost savings, which might even further we will discuss in a few minutes.
Regarding the body.
And since we're under $10 billion as we had anticipated loan production continued to be solid at 480 $485 million and capital continue to build with a CET one ratio increasing to 13.08%.
Looking at our numbers and we continue to see signs of recovery with solid loan production regular payment activity stable credit trends and a sequential quarterly increase in banking service fees, which reflect improved day to day economic activity.
Now here's matti and start to go over the financials in more detail.
Thank you Jose please turn to page six for our financial highlights.
And we start with tangible book value per share one of our key areas of focus at close to $17. It increased more than $1 year over year and by 46 cents.
And the third quarter net.
Efficiency ratio increased sequentially to 67% when you adjust for may get well with expenses it improved about 400 basis points to 58%.
We can't and average assets and tangible common equity was close to 1% and 10% respectively. When I reported basis.
And then the merger charge and the Covid expenses. These two metrics would have been more in line with our didn't outperform and subject.
Please turn to page seven for our operational highlights.
As wholesome nation at Nanjing, and Asia was a solid $485 million that include exclamation guns, and $224 million auto lending, but $138 million and mortgage lending of $98 million.
Average loan balances declined slightly from prior quarter and due to Paydowns and.
And long deals it's true.
Six six points to 65%.
Average core deposits increased but and upbeat and balances declined $170 million on a linked quarter basis. Because this was primarily due to our decision not to renew and any additional high cost deposits.
Oh, sorry, we sold because of course, the postage pumps, you need to fall to 53 basis points.
Cash balances increased $162 million and the water.
The result was a six basis point sequential decline in net interest margin to four point 25, 24%.
Please turn to page eight to review the quality.
And net charge off rate increased to 167% that reflects our decision to charge to a quiet as supposed to a bank loans.
We're substantially and previously reserved at this time of a debt position.
We sold was $14.2 million.
And this includes $4 $7 million to call and debt to charge it off commercial loans acquired from a special bond debt I just mentioned.
First quarter, 'twenty, and 'twenty long before <unk> fell to 1.4% of total loans.
Loss from 2% in prior quarter and 30% in the second quite F 'twenty and 'twenty.
No nonperforming loan rates for non BCD loans remain fairly steady to point to 85%.
While nonperforming loans rate for P. C. The loans the case from.
Oh boy and 26% just two point, 11%.
Turning to capital and stockholders equity increased 2% sequentially and 4% year over year.
At times, you won't from an equity ratio increased two 9% well ahead of both the fire and water.
And the year and little theaters and one we made the acquisition of Scotiabank.
Please turn to page eight I'll stay holding all or most of them. The first half of 'twenty and 'twenty due to the pandemic.
We completed the Scotiabank cost savings program in the fourth quarter.
And the completion of the system conversion, we realized $32 million annualized savings exceeding our estimate of $35 million about how about 90%.
Looking ahead, we expect to earn fees from our.
We expect to win and people talking about true.
These savings in 'twenty and 'twenty, one as we plan to step up invest.
Investment and the containment and transformation of our business model.
Non 10 were weighted to reducing expenses and increasing operating leverage.
Objective is to return to an efficiency ratio and in the mid 50 range.
Now here is jose or his outlook for 'twenty and 'twenty one.
And you're right.
Thanks.
And our history and culture.
Please turn to page 10.
We believe our history culture and team and.
And our approach to business as well as our most recently small demonstrate.
And our ability to respond quickly and adapt to changing economic conditions.
During the fourth quarter, we continued to build good momentum and our core businesses and develop a strong pipeline of new loans.
With our strong balance sheet, we're well positioned financially and strategically.
Our agenda for 'twenty and 'twenty one clear.
And with our strategic plan to further grow and improve performance in all operating areas.
Need to further increase loan generation and growth and income and.
And as I mentioned, we plan to continue to invest from the future to further simplify operations increased operating leverage and enhance our ability to serve customers.
Our outlook is more optimistic than last quarter, we still face challenges from Covid high unemployment levels and largely ineffective government operations name just a few but we believe as the economy started moving the right direction and the future looks brighter.
When you have ministration, and Washington, Puerto Rico fees on the cost receiving significant amounts of approved loans.
Construction on stimulus funds for several years to come and key.
And that should benefit from the influx of federal funds might be production and distribution of resilient and diversified and electricity improved infrastructure and I can.
And litigation and government efficiency.
We're also very hopeful with regards to the multiple vaccines that have been proven effective against Covid.
Talking about the effect on the economy here and around the world, Although that's very important but the effect. They will have on human lives and the people and Puerto Rico, The U S Virgin Islands and elsewhere.
A lot of families small businesses and their employees have suffered because of the pandemic ease and vaccines are as successful as expected we will see the N of COVID-19 in a relatively short period of time.
And Oh, Gee, our moral and ready to help our customers rice up and fulfill their lives again, while we all play a major role in the recovery of Puerto Rico, and the U S Virgin Islands.
With this we and our former presentation. Thank you all for listening operator, let's start the Q&A.
Certainly at this time, if you would like to ask a question Press Star then the number one on your telephone keypad.
And your first question is from Alex toward all of Piper Sandler.
Hey, good morning.
Good morning, Alex.
I was wondering first I'll start with some of those comments.
About cash flowing down to Puerto Rico, and and just get your thoughts on sort of how both the stimulus money and additional stimulus checks as well as some of that and Hurricane Maria relief money will actually impact deposit flows and O M. G over the next couple of quarters.
And that's a tough question Alex and.
And to predict you know when you saw what happened last year with the first cares Act and the PPP and the 1200 dollar checks and ER and you know and not only happened here in Puerto Rico and you happen also in the states. So as we have a new administration coming in Washington, and there they are announced.
Seeing a the intention of coming up with additional.
Stimulus packages and given the AR and the state of the Covid.
Covid pandemic I think hard.
Hard to predict the level of deposits for the and certainly easier to predict the economic impact of those phones and and those those stimulus and programs.
Programs that will flow through to Puerto Rico also I think the administration is also a telegraphing a infrastructure a plan for the United States and I think Puerto Rico is stands to benefit from that also.
So when I make reference on and on the remarks about are the funds that will flow to Puerto Rico and.
Really and.
And more of the significant amount and the and.
Direct economic impact and that he will have short term and longer term and.
So and.
And from our perspective, not at OFC, we we expect to a higher deposit balances and we certainly have will have higher a balance sheet and larger buying and balance sheets, given the those deposits and it's on our end.
Yeah.
Best interest to deploy that.
Excess liquidity to help the economy in Puerto Rico, and the U S Virgin Islands, and the operating area.
And we are the areas, where we operate.
Okay. That's helpful. And then I guess, just another way of kind of digging into that a little bit more is just given all of that and do you view, the $10 billion and asset threshold as being inevitable and 2021 and just given the.
The outlook for debt.
And deposit flows or do you have tools to to still manage the balance sheet.
And where it is.
Well. So so we're we're working to grow so regardless of the stimulus coming and are not assuming that they've come well will read through the $10 billion. It's in our in our radar and we're very close to it. So so I think 'twenty and 'twenty, one well will probably be the year, where we do that.
We need to work hard and making sure that the way, we do it and it's in a way where it mitigates the the regulatory oversight intensity and the cost associated with that as well as with the and lower lower fees from Durbin and and we're at it and that's why we keep on.
And making sure that we and investing in our in our as I mentioned in my remarks, and our business model to make sure that we transformed ourselves and every year and and keep ourselves and I'd say as a very good alternative for our customers and the markets that we operate so 'twenty and 'twenty 'twenty one.
And most likely will loops and will be a year, where we go by the 10 billion.
But we just want to make sure that you understand that we're also planning on the backend of it to deal with the repercussions on the short term.
Okay and in the short term what is the impact on Durbin and from crossing the $10 billion.
A short time and money.
At the end of the day.
It's at the end of the year, where durbin comes into effect.
And so so if and so.
And so if we cross the 10 billion by the end of this year Durbin will have an effect six months I believe after that date. So it's not in 'twenty and 'twenty one event in terms of the the costs of passing the $10 billion and plenty of money to and.
And I believe there is some some.
Standing.
No.
Mitigation and.
And <unk>.
Orders from from from the regulatory side that will probably.
And push that cost further into 'twenty and 'twenty and 'twenty two.
Okay.
And then now that you're done with the the systems conversion you have almost $2 billion of time deposits still on the balance sheet debt. We're around one 5% during the third during the fourth quarter I know you've got some promotions out rollover at the beginning of 2021, but maybe you could just give us a sense for how we should be thinking about depart.
And it costs and just specifically from those higher costs and ones, whether or not they're going to roll off the balance sheet and reprice and sort of how we can apply that going forward yes.
Most of those higher cost deposits are our Cds that were part of the acquisition of Scotia and from some on CD campaigns that we did at <unk> back a couple of years ago, they're rolling over and and will will benefit from from the from the effect of that a suitable to the 'twenty and 'twenty, one and and.
And so those will be repriced according to market conditions at the point they mature.
Do you have a sense for how many mature and the next six months or this year even.
In fact like $7 million to $800 million.
Okay.
Thank you for that and then just final question for me just as I look at the expense guide and this is a very helpful slide.
And it talks about the branch consolidation for sure and there's a bunch of consolidation expense for 'twenty and 'twenty. One if I remember rate branch consolidations were never contemplated and the original cost saves number.
So that additional cost saves that we should be expecting or how should we think about sort of the run rate of expenses.
Including both the branch closures as well as you cited some additional investments.
So so again and the numbers that you're seeing and do not include the branch closings because the branch closings have not taken place yet so you're not saying those seen those savings yet so the the way we look at the branch closing closures or is more the redundancy and theyre very very close.
Lee located to each other I and from the acquisition.
And so the way we're.
Looking at this is we're going to cause those redundant branches, but we're going to keep most of the personnel we need to deal with the volume we need to deal with the business activity and and we'll have some more some of those resources also relocated to other areas, where we need to.
And some additional resources so.
When we look at the.
And the expenses.
And the flight and you make reference to is.
Precisely what we are seeing 66% of the $38 million in Uh huh.
In a year and expenses will flow through into 'twenty and 'twenty one but.
But we do not expect a significant amount of.
A cost benefit coming from the seven or eight branches and we will be closing and 'twenty 'twenty one.
Okay. Thanks.
Thank you I'll get back into the queue for now thank you.
Yeah. Thank you Alex.
Thank you. Your next question is from Glen Manna of K B W.
Hi, good morning.
Hi, Glenn how are you.
How are you.
And good.
To follow up on what Alex was asking and kind of about the the balance sheet a bit and you know.
You have almost $2 2 billion and cash and equivalents on the books right. Now do you have any better idea of how the deposit cadence is going to play out and.
<unk> be comfortable with putting any of that excess liquidity into the securities book.
So.
And again, it's hard for us to justify going long and duration with and 30 or 40 basis point spread.
And we'd rather take credit risk, we think are the economy and Puerto Rico has stabilized and is and it's moving in towards a very nice spot in the next several years barring any unforeseen.
Event.
And so so the way we look at this is we have a and <unk>.
<unk>.
Marketing the island, where there are only three banks and are I think there is a a enough for everyone to to deploy there their cash and their liquidity certainly is not going to happen in one quarter or one year. He is going to take a while because the amount of.
Liquidity that is flowing into the economies and the world is significant so, particularly in the United States and Puerto Rico, So she's going to take a while.
But I don't see us deploying assets into the securities portfolio unless interest rates start on the lung and showing some increase and we were not expecting and or and or modeling that into the future and Glenn.
Hum.
Mentioned that about 2 million and mortgage banking was from.
<unk>.
And sales that you had held back from from the third quarter and it looks like the fourth quarter mortgage production was better than the third quarter and loans held for sale.
And were still high at about $41 million is there anything that's held back for next quarter and the first quarter are we going to see that mortgage banking dropped down to its normal run rate are we going to stay a little bit elevated here for a bit.
So I think it's gonna look more.
And I don't think it's going to be $6 million, but he's going to stay elevated I think we as you saw on the production and the loan generation side, we were doing close to $100 million and in mortgages a quarter most of that is and agency.
Agency paper conforming paper so we.
Our motto right now again for the same reasons that I explained earlier on the securities portfolio, we don't want to have.
Hey, hold a 30 year mortgages at two and a quarter, so and and have some credit risk.
And embedded into at least a little bit we'd rather originate and sell a at least for now and later as interest rates go up we'll adopt but and so yeah. We we see mortgage banking activity remaining at an elevated rate given the originations debt that we're having and and the model that we're operating.
And which is originate and sell so you'll see that.
Okay.
And and on the seasonal insurance pickup from Scotia Bank that was really eye popping out and I don't think we saw anything and the prior three quarters.
What does that do you think next year.
First do you think insurance kind of drops down to that.
Run rate and then do you think next.
It's a similar amount or was there something special and it this year.
So Glenn I'm really I'm glad that you you asked me that question on insurance when when we bought the Scotia Bank.
Yeah.
Two of the main components.
Added significant scale to us that we did not have that scale, one was mortgage and.
And and including servicing and Youre seeing the benefits of it and the other one was insurance and insurance is tightly correlated to the mortgage business because of the.
Title and insurance and the.
What's the other reinsurance the.
Yeah.
PREPA.
The insurance dwelling. Thank you for the dwelling insurance. So so when you look at our insurance business. This year. We are we have steadily increased our and commissions and when you look at the fourth quarter, where we're getting not only what we used to get from Oriental insurance agency drug to the acquisition.
But we're also getting the incremental.
Benefit from all the dwelling commissions that are contingent debt that are part of the and.
And the servicing portfolio that we have and and we serve those clients from our insurance side. So we're equally unhappy and equally happy with the AR increase and insurance.
And commissions coming at the end of the year and we expect to replicate that in the fourth quarter of this year.
And also.
Okay and.
Starting PPP Ram to maybe if you could just discuss your thoughts on PPP and Ram to maybe the cadence of pay offs youre expecting from PPP round, one and round two next year and then if you could just discuss long growth X P. P. P M and what Youre thinking about for next year.
Sure so.
First I you saw what we did the first round last year I think our team was outstanding and not only in the getting those loans on the books, but also the way we go to those loans on the book, which is it's a soup to nuts, a digital approach, which.
Which is what what is incrementally differentiating us hearing and the markets are.
When you see now the second round, and you'll probably see less and demand.
Demand for the P. B piece theres going to be significant amounts, but but they're there and there's some rules that have changed on the second round and.
Well, probably see 50% of what we did maybe a little bit north of 50%.
And what we did last year on the PPP.
With regards to.
<unk> balance sheet and loan generation I think our last.
Last year and given all the challenges and all the things we have to to work through.
And internally and externally given the integration and Covid and all that I think our teams did an excellent job in generating loans new loans and.
And and we reach a high or and record. This past year I think we're on on and on very good momentum right. Now I think we'll see auto remaining at a and a good trend and <unk>.
Same with mortgage as I mentioned earlier small business lending is one of the areas where.
We continue to see good trends and good demand and we're happy with.
The way, we're executing that strategy on the retail channel and and how close we get to our smaller and <unk>.
Business and professionals and help them out, particularly during these very difficult times and how close our teams are to those clients and and and how we help them navigate a very difficult environment and the larger commercial lending.
We have very good pipelines on all I think that that Oh and.
And segment of the market is it a lot more competitive.
The the the competitive competitive landscape here with three banks and they they they all have a lot of appetite for big tickets and and and frankly, we do we don't want to do it and in ways that we don't feel is within our shall we say ballpark and so so when.
And we when we look at that side of the equation, we see good momentum, but we're keeping ourselves within the guard rails of our stripe and we don't want to get outside of it because it becomes.
A little.
Undesirable, let's call it from our from our.
And let's say profitability side.
Okay. Thank you.
You're welcome.
Thank you at this time there are no further questions I will now turn the call back over to management for closing remarks.
Thank you operator, and thank you all for listening in today.
I hope, everyone stays safe and healthy and look forward to the end of the stomach and a and a weekend all and get back together looking forward to and healthy year and see you in the next call. Thank you.
Yeah.
Thank you. This does conclude today's conference call you may now disconnect.
Yeah.
Yeah.
Okay Google.
Okay.
Right.
Mobile.