Q1 2021 OFG Bancorp Earnings Call
Good morning, Thank you for joining O S. T. Bancorp's Conference call. My name is Maria and I'll be your conference operator today.
Our speakers are hosted I'll say on Fernandez, Chief Executive Officer, and Vice Chair of the board of directors.
And Maritza Arizmendi, Chief Financial Officer.
A presentation accompanying today's remarks.
Can be found on our Investor relations website on the homepage in the what's new box or on the quarterly results page.
This call May feature story certain forward looking statements about managements goals plans and expectations.
These statements are subject to risks and uncertainties outlined in the risk factors section of <unk> 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 instruction.
Instructions will be given at that time.
I would now like to turn the call over to Mr. Fernandez.
Good morning, and thank you for joining us before.
Before we get into the core of our presentation today I want to share with you my perspective on how things are progressing in the island on how that translates into our business at all.
After almost 17 years as CEO. This is the most optimistic I haven't been on Puerto Rico on OMG.
We're certainly not out on the woods, yet, but the island easing a far better place today than we were last year on our outlook is much better on this.
On the previous almost two decades.
Looking at the macroeconomic environment, where a lot more optimistic about the flow of federal stimulus on reconstruction funds to increase liquidity for individuals on small and medium sized businesses. The rate that people are getting their vaccinations and the islands bankruptcy resolution all of this resulted.
In the overall improvement on Puerto Rico's economy.
I hope this perspective helps investors understand the inflection point where in on <unk>.
Potential to deliver consistent solid we sold as many of the macro distractions from the past finally are being result on.
Oh, Gee and our business are gaining very good momentum on we're in an excellent strategic position to grow our market share in the years to come.
So, let's turn to page three on start with our presentation.
Combined with the continued success of our strength that he's focused on our agility on service we generated very strong first quarter results. While also increasing our dedication on purpose to help our customers our people on our communities from the pandemic and beyond for our customers our proprietary digital PPP portal.
Once again facilitated access by small businesses to another $126 million in credit to keep their doors open and staffs employed our teams helped our former Scotia bank customers.
Two on board and take advantage of more robust online mobile ATM on ITM offerings from.
Or are people.
We enabled vaccination for our staff and so far more than 40% have been inoculated. We continued our COVID-19 related spending to protect our staff on customers and we stepped up our investment plan to create a more secure hybrid infrastructure to make it easier for our teams to work seamlessly from.
On the office.
For our communities, we established a new outreach program to provide advice to small businesses affected by the Covid situation.
We want to help them find better ways to manage through the pandemic. We also provided a series of virtual seminars doing women's history month, and we sponsored virtual seminars for the next generation of college entrepreneurial leaders to help them better understand how innovation console business and community challenges.
Please turn to page four.
Confirming our multiyear strength they need to bring digital solutions to our customers and help them simplify their lives. Our overall digital adoption continues to grow.
You can see this you can see it in this slide.
The adoption levels are gross different digital solution.
These adoption levels confirm how much we have advanced our digital strategy, especially during COVID-19, but more importantly, how customers are sticking to digital online solutions, even us restriction on subside and the economy reopens.
A great example is how our customers are continuing to use our own line on our mobile platforms to scheduled branch appointments during the first quarter with scheduled approximately 8800 such appointments.
Our goal is to convince customers that it is easier and more convenient to use our digital online technology for routine transactions, allowing our people to provide cost theres more value added service build stronger relationships and even the process increase increased business development opportunities.
Please turn to page five to review our first quarter results.
We reported 56 cents in earnings per share compared to 42 cents in the fourth quarter on breakeven in the year ago quarter, which was the first quarter to be impacted by the pandemic.
Total core revenues were $128 million net.
Net interest income of $98 million benefited from PPP loan fees and lower cost of deposits.
Provision was $6 $3 million, primarily due to improved economic and credit trends. These included the release of some COVID-19 related loan reserves, partially offset by provisioning for a commercial loans workout before COVID-19 allow ones remain virtually the same.
Net interest margin ticked up to $4, 26% from the fourth quarter.
Banking and wealth management revenues totaled $29 million, that's roughly equal to what we did in the fourth quarter. When you eliminate seasonal items first quarter fee revenue reflected strong mortgage banking activities as we have consistently generated a higher level of origination on servicing fees both.
Benefits of the Scotiabank acquisition.
Noninterest expenses totaled $78 million.
This was relatively flat after excluding merger expenses in the fourth quarter and non core items. In this first quarter first quarter expenses were also in line with our previously announced plans for spending this year.
The effective tax rate was 32% compared to 22% in the fourth quarter.
Looking at the balance sheet.
Compared to December 31st assets increased reflecting higher cash balances.
Loans declined due to higher mortgage refinancing activity and to a lesser degree businesses with higher liquidity levels paying down lines of credit.
Loan production.
Production total an impressive $528 million, we have good pipelines on momentum going forward in all business lines.
We also saw strong deposit growth due to non PPP loans and Covid relief payments cash.
Total continued to build nicely and we are starting to return some of that to shareholders be on increases in common dividends and optimization of the capital stack via a redemption of preferred shares in January we increased the regular quarterly cash dividend come on cash dividend, 14% in March we announced the redemption of.
All three outstanding series, a preferred stock in addition to improving our capital structure. This enables us to effectively deploy excess liquidity on increased net income available to shareholders.
Shareholders by $6 $5 million on an annualized basis.
Stockholders equity declined to one point $11 billion I would like also to point out that as of the first quarter, we more than earned back all the tangible book value per common share dilution anticipated in the Scotia Bank acquisition significantly ahead of schedule.
To sum up the first quarter demonstrated another strong performance supported by the island's economic recovery solid loan generation improving payment activity in credit credit trends and good banking on financial services fees.
Now here's muddied start to go over the financials in more detail.
Thank you Jose.
Please turn to page six for our financial highlights.
First quarter core revenues were $127 $7 million. This compares to $132 million in the fourth quarter.
First quarter revenues included $1 $6 million in interest income from $92 million of PPP loans that were forgiven.
First quarter revenues included three items deep on $9 million in non interest income from our insurance commissions threep on $1 million in interest income from acquired loans prepayments on.
You mean on the dollars in mortgage sales that were held back from the third quarter.
When you take all that into consideration, where revenues increased $2.3 million or one 9%.
This was driven by one $4 million in lower cost of deposits and higher mortgage banking activities.
First quarter noninterest expense total $7 $7 million. This compares to 89 million on go lives in the fourth quarter.
The first quarter as you've said previously announced cost savings you'd only included one 8 million.
And not only in gains on sales force.
Valuation on foreclosed properties.
The first quarter included $10 $1 million emergent on restructuring expenses.
As a result, the efficiency ratio improved to 60 point, 84% jumped 67, 6% in the fourth quarter.
66.
649% in the year ago quarter.
Our objective is to return to their meat seafood percentage range.
Looking at our performance matrix P J.
And on average assets increased to one 121% from 94 basis points in the fourth quarter and virtually nil in the year ago quarter.
Our debt is continue to meet our needs to be on return on average assets about one percentage.
We tend on average tangible common equity rose to 13 point, 11% compared to nine 9%.
In the fourth quarter I'm very tall initially in the year ago quarter.
While our objective continues to be achieving return on average tangible common equity of about 12 percentage.
We're pleased to see that all of our key performance metric significantly improves.
Looking at capital tangible book value was $17 39 per share that's an increase of 11, 5% year over year and two 5% from the first quarter. This evening wine ration increased to $13 56 per session.
Please turn to page seven for our operational highlights average loan balances were $6.6 billion on the kind of 1% from the first quarter.
Most of them, but what's in our mortgage portfolio. This is to be expected considering the high level of refinancing activity in Puerto Rico on our strategy of selling most of our or our own new Belgium.
Core deposits were $8 $5 billion, an increase of 1% from the first quarter.
This reflects the continued high liquidity in the economy from Fairless team minutes, which is especially meaningful in Puerto Rico as well as our first quarter PPP loans.
I'd also mention non generation total $528 million or four $401 million, excluding PPP originations you know.
You seem to be BP.
But I love shown.
Young generation was driven by a strong year over year increases in mortgage auto and commercial lending.
Mortgage just like the new home sales on a refinancing.
Well it does affect the strong sales of new unused part most of our commercial lending was with small and medium sized businesses.
No yield was $6 61 per cent earnings based on sticking basis from from the first quarter line largely due to PPP loan forgiveness.
As anticipated in our last call I mean does from a T. D balances helped drive the decline in total homes.
Gross quality, Boston was 48 basis points, a decline of five basis points on the fourth quarter, we expect cost of core deposits to continue to improve this year as more CD balances we price lower.
During the first quarter, we acquired $127 million on mortgage backed securities for our held to maturity portfolio.
Then he thought wasn't that NIM increased two basis points from the first quarter, we expect a stable NIM this year.
Please turn to page eight.
Hello credit trend is positive across all portfolios our credit metrics also in line with generally improving trends, we have seen on a fairly consistent basis.
Net charge offs were $9 $1 million on 55% of total loans and you just saw a decline compared to net charge offs of 40 $44.8 million or 2.6% to 7% in the first quarter, which included.
$31 $2 million charge offs to acquire Scotiabank loans that were substantially on literature.
With this section of the fourth quarter of 2020 net charge off rate has been improving steadily from the first quarter of 2019.
I would like to highlight the other.
Net charge off rate this fell to 85% in the first quarter from 156% in the fourth quarter and two point, 31%.
In the year ago quarter.
Our non affirming low rate on our early thoughts on early on total delinquency rate almost fell as well from the fourth quarter in particular day.
Early delinquency rate fell to 215% in the first quarter from 268% in the first quarter and 316% in the year ago quarter.
But we shouldn't declined from $14 2 million daus in the first quarter. It should be noted that the fourth quarter included $4 $7 million to call. Their day on reserve amount of day Scotia loans that when we started it up.
First quarter provision included on reserve base of $3 $7 million day.
This reflects changes seen our probability wait till there is total simulation using Moody's S. Three on baseline scenarios.
The first call. It also included a provision of $3 $5 million part of commercial loans in work out prior to the pandemic.
Excluding the large quality operation in the in the year ago, but we shall also has been declining steadily steadily from the fourth quarter net 2019.
Now he or she is wholesale.
Thank you Marisa please turn to page nine for our conclusion.
Cultural history team on our fast field capital HR approach are continuing to prove both successful and adaptable.
As I said earlier, we're building good momentum in all of our businesses, our excess low cost core deposits continue to provide us with significant dry powder or most recent capital actions solidify our record of deploying on returning capital to shareholders.
Our agenda remains the same we will continue on its plan to invest for the future in transforming our business model. Our goal is to further simplify operations to improve efficiency and enhance our ability to serve customers. Our business focus is to utilize our excess liquidity increased loan generation and grow fee income.
We still face challenges from Covid high unemployment levels, our government's ability to effectively deploy federal stimulus on reconstruction funds on high.
Cost of electricity on the future looking brighter.
Lenny it's experiencing early signs of recovery with individual and business is benefiting from Covid relief and stimulus vaccination been extensively deployed reconstruction projects getting underway on a consensual agreement in principle to restructure Puerto Rico's debt on an end to my out migration last year with signs of.
Possible in migration this year.
At RFG, we're more than ready to benefit from them play a major role in the recovery of Puerto Rico on the U S. Virgin Islands, we want to help our customers rise up and fulfill their lives again.
With this we end our formal presentation. Thank you all for listening operator, please start the Q&A.
Thank you if you have a question at this time, please press star one on your telephone keypad.
If you wish to remove yourself from the queue press the pound key.
Our first question comes from Alex <unk> of Piper Sandler.
Hey, good morning.
Good morning, Alex.
Hey, first off Jose.
On your comments.
Thank you Arthur.
The most optimistic in 17 years I was wondering if you can give us a little bit more details.
Kind of.
<unk> alluded to a few things such as potential in migration to the island, but.
Are you able to see anything else on the numbers you know for job creation of real estate valuations.
Actual concrete data on population inflows are you able to share with us.
Yeah, So hey, Alex from a from a macro perspective.
Puerto Rico's economy is starting to show signs right in terms of the activity the economic activity that we're seeing but particularly we saw last year, though there was a net zero migration. So you compare that to 2019 and 2018, where we had 70 plus 60 plus.
A thousand people net in migration.
2020 was.
It wasn't a very positive year from that and so so we expect and we're starting to see the need for <unk>.
Workers and.
Low lower line workers and early entry level workers are needed in several industries, particularly agriculture construction on.
Medical services, even indication and we're starting to see that need and as the economy opens we we see also the opportunity for them from all of those that left to come back when you look at history, when Puerto Rico's economy gets into economic downturns.
There is migration to the U S and then when the economy starts to recover you'll see some of that migration on most of it coming back the challenge we've had in the past recent past is that.
The economic challenges have lasted for almost two decades. So so we haven't seen that.
Migration returning right. So our expectation is that he won't come back in droves immediately body as as the economy in Puerto Rico starts to show up.
Sign of.
Yeah.
Higher economic activity and we expect that to occur into the end of this year and the beginning of next year, we will see some of that and.
Some of those people that left to come back because opportunities without without low rise and we're starting to see that we were starting on where in the early evening. So yeah I'm.
I'm trying to the same the same way I've been in the past when you see the the the picture I'm trying to be candid on and relay that picture from the ground and when things were not looking well that's what I did with you on with everyone else that I spoke about well this is the time or worst.
Seeing the beginnings of.
A resurgence and it's going to take a couple of.
More more years to solidify that but it is moving in the right direction that means moving actually at the right speed two so where we're seeing that activity moving and we're seeing from our customers. We're seeing right now on the consumer side, we're seeing on the construction side from all those customers are our a very active so our expectation.
As for the economy to.
To grow from here.
That's helpful color.
Just kind of the next step from that is you know I think you said you know maybe see it more on the numbers starting at an interest.
The tail end of this year I mean, it's at the same time frame that we should be expecting maybe to see an inflection point in loan balances.
Moving PPP as well as you know as we think about the reserve levels. You know everything you said it certainly doesn't it.
On it make you think that a reserve of three two percentage is still appropriate and so you know tackling those two issues you know how should we be thinking about.
How about you.
Yeah, you threw me a couple of questions in that one question, but I'll try to answer them all on if I Miss any please let me know if I can answer it but regarding loan growth I actually think that the liquidity levels that we have in Puerto Rico and for sure in the financial systems are.
Are very high and they will continue to increase because I don't know if you realize that but.
The first quarter numbers do not reflect any of the $200 stimulus checks because they are starting tools.
Send them to reference and deposit on them in their accounts just a couple of weeks ago. So so what what youre seeing in deposit growth is primarily a reflection of the 600 dollar stimulus checks and other 1200, so I suspect that we will have more liquidity in the system. So from.
Regarding loan growth, we will see consumers on them.
Businesses with higher levels of liquidity on on paying down some of those those credit.
Credit balances that they have credit cards auto loans and also a L.
Lines of credit for the business. So I would not expect loan growth by the end of the year, but my expectation is on our expectation is that come next year when when liquidity starts to.
Subside on flow through us as interest as individuals and small businesses on medium sized companies start.
And using that that those deposits, they're there they will come back on we will start to see loan growth into next year, meaning calendar 2022.
That's our expectation from loan growth. So you mentioned something regarding.
A R R.
The allowance if I'm not mistaken. So this is this is this is the way we see this look.
We we are still in the middle I would say in the light of later innings of the Covid pandemic, Puerto Rico has a rio.
Reopened but not fully.
And I've always said that the Covid pandemic is is dealt with like like the scientists have said in the past with the hammer and the dance well, we're right now in a little bit of a hammer here in Puerto Rico, where where you were having.
On the the a little bit of a resurgence uncovered on youre seeing the government talking about you know maybe not locking down but at least on increasing restrictions. So having said that it's not the end of the world is just like the the latter air force as well.
Net vaccination rolling even faster and I think we did that in the diet on Puerto Rico is pretty.
Available, but a vaccination or are well on its way so I suspect that by the summer we will have some more news regarding.
The Covid pandemic and and when you look at our our coverage on the loan reserves, we will evaluate the the.
And the levels of the credit continues to improve on our economy continues to open so.
We don't want to be too premature given what we're seeing here in the island.
Did I Miss any of your questions Alex.
No that's great color and then just a final one from me and then I'll get back in the queue is just with respect to capital obviously.
Some nice actions we saw this in the first quarter with the dividend and the preferreds, but you know maybe you can start by telling us what.
You see as your governing capital ratio and what your target for that might be and you know what sort of the priority is for getting to that target will be you know sort of what the timeframe for that will be yes.
So.
Let them. Thanks for the question I think.
Let's first look I havent looked back here for a second on if you allow me indulge for a second here you.
You know the preferreds that we are redeeming.
They were two of them were reissued in 2004.
When when I became CEO.
The other one was issued when we acquired BBVA in 2011 or 12.
And so.
So when you when you look on our history.
And we're the only bank who's paid them poorly.
We're the only bank who's never stopped paying those dividends.
And I said allow me to indulge because we as a team are extremely proud of that.
We have managed 20 years or so close to.
Very difficult challenging income environment on our.
Preferred shareholders, who supported us and believed in us.
Uh huh.
Never never lost a beat from US we delivered 100% so.
First just wanted to get that out of the way.
Short term, though I think.
We need to deal with the execution on that redemption, and we will be finishing it off in this second quarter.
And then when you when you look at on.
Well, we have done with our common dividend we increased it in January our board of directors has decided to look at the dividend twice a year. So we will start looking at the on.
On the dividend at the beginning of the year and also a.
At the middle of the year. So we also want to make sure that our common shareholders, who have also been long standing supporters of a voss.
Also get get on that and.
And long long term.
We want to see how the Puerto Rico economy.
Reopens, how a gross and what organic opportunities, we have to deploy that excess capital on excess liquidity.
So when you look at ourselves today, and Youll see common equity tier one capital ratio of $13 56, and you'll see our earnings potential and you guys have your own models.
Really we do have a very good opportunity here not only to return capital to shareholders, but also try to manage strength with the.
With a CET, one ratio closer to 11% to 12% and ER and on again.
I'm assuming that our.
That.
Again the.
The economic reopening.
<unk>.
Plays out as we were expecting and obviously the economy.
It starts growing in a consistent basis for the next several years and that's our expectation we're confident about it but you.
You know we will have our challenges will have R. R issues to tackle as everyone else dogs and on where.
Looking forward for the first time in many years to be constructive and ER and be able to generate good returns.
Okay, and then just as a follow up to that with respect to the dividend and reassessing. Yet you know later this year is there a target payout ratio I mean, you guys are now I.
I think around 14%, which is it seems like it's maybe around half of what you might expect out of out of a bank. Your size how should we think about the target payout ratio and then in that same meeting that you discussed the dividend does that also when you would consider.
Another common share repurchase authorization.
Yeah. So the the payout ratio for the dividend we on that's why the board decided to look at the dividend twice a year, because we want to make sure that that we.
You can get more into the more normal payout ratio, which is closer to 25% our target. So we want to build towards that.
Regarding our share repurchase I think it's too early to talk about that at this point I think.
I said earlier, we went all kind of get through the redemption, let's look at the dividend and and let's see how the economy reopens on gross and what organic opportunities for us to deploy the capital really we want to have capital available to lend to our commercial on.
On individuals' commercial clients on individuals' also.
So we see that those opportunities are and we want to have.
The other ability so we'll have more news on the in the several next several quarters, but.
At this point in time, I think we're focusing more on the redemption on the preferreds and looking at the dividend and we'll we'll give you more and more news shortly on the dividend.
Alright, Thank you for taking my questions.
Yep. Thank you for your questions Alex.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from Glenn <unk>.
S Keefe Bruyette <unk> woods.
Hi, good morning.
Good morning, Julien how are you.
Thank you.
I just wanted to follow up on on conditions down on the island I mean, there was a pretty significant announcements last week.
Indicate projects on the island.
Be approved with a little faster rate than they've been approved over the last few years.
Theres been a double whammy on the island with Covid causes depletion in inventory what are you hearing from your customers and how they're kind of gearing up for those.
Two events, maybe an inventory restocking and.
<unk> coming a little bit faster and have.
Have you seen it in your pipeline yet.
Yeah.
So thank you for your question on Glenn.
Let me just start by saying that since the beginning of the year are the.
Washington Executive branch and Congress.
<unk> been much more.
A.
Constructive with Puerto Rico, Let me also say that the current governor on Puerto Rico has also worked.
So far very positively in regaining the confidence and the trust.
From Congress and the executive too so so.
Two to each their own right. So that that helps I think the the current administration is also constructively working with the fiscal board and that has also helped.
On reaching some of those agreements at least in principle.
What it looks like we're on our way.
On a very positive.
Way to get bankruptcy behind us sometime later this year or maybe next year. The big question on remaining is still the electric power authority on.
I know for a fact that they were working on debt. So so that's that's one thing the other the other thing is when you asked me about what do our customers on commercial clients are saying to us they're mostly construction services. They are already engaged and they have been engaged in.
Some somewhat last year on the rebuilding with roads and bridges on the infrastructure I think that's starting to accelerate now and were seeing them.
<unk>.
We're seeing new projects coming in on being being put to work. So those those construction services companies are starting to to increase their level of activity.
I also think that we're very shortly later in this year are going to start seeing home construction from the <unk> funds that are being released and I think again some of those construction services firms are are seen that.
That opportunity and they are ready to <unk>.
I mentioned in my remarks, I think or somebody on the tour.
Alex's question earlier that if there is a need for for workers and and I think it's transitory part of it has to do with the excess liquidity in the system, but that's not going on last forever. So I think.
There is an opportunity here to add more people to the work force, particularly on the on.
On the reconstruction side of the on the economy.
The cash construction results also Glenn the how how on economic revival starches with construction. So we are we're in the early innings on that and you can see it in the air.
In the island from the consumer side I'd like just to mention that.
We're seeing good auto sales were seeing good consumer consumption and good sales on all of the REIT The places.
There are some challenges right now with inventory. So you know and I think that's not particularly towards the recourse thing is particular to the world and because of the chips and and some of the.
The parts that are missing on auto on other on other products, but but our clients are recognizing that and they're starting to either build their inventories or.
Starting to look at a.
Larger facilities for them to hold larger amounts of inventory as they are seeing demand growing particularly on the retail side.
Mhm. Thank you.
You mentioned your digital numbers that day, if they've kind of stuck on after COVID-19 that kind of fits with the theory that once someone goes digital.
Can not to go back what do you think that means for the future of branching on the island and what the right size of a franchise flip premise.
No.
On the branches in the island and on how the future of branches in the island is no different than the future of branches in the United States at the end of the day.
Digital adoption is here to stay on its year to grow.
And we've been on that side of the equation for the last five years and we've been pushing it.
And as I said on other calls in the past the Covid.
Pandemic has.
Accelerated that very nicely our job is to continue to provide that infrastructure continue to provide that.
Those dilutions to our customers and help them understand the benefits of it make their lives simpler and that's kind of what a while we're at it.
And on what Youre seeing is precisely that youre starting to see more on more of our customers feeling more and more comfortable using digital and starting to recognize that the branches are the place to get value add is non to cash a check or to deposit a check or pay alone it's more on too.
Sit down with our expert bankers and and have a conversation about what their goals and their aspirations are and.
And decide what is the best way for them to manage their finances, and and we're moving in that direction on I think that's the future of banking in Puerto Rico on them and certainly it's been in the United States for a while now.
From what hearing Puerto requests people recognize the benefits of digital on the time.
They save and the benefits and value add that debt a good conversation can can bring to help achieve financial success for our customers I think that's what differentiates us too and we're really excited to be able to deploy them now as to your question on what's the.
The right size of branches.
Who knows but we're being very methodical and very.
With discipline on how to how to look at it and.
Really really proud of the work we've done on the retail side on the retail channel and our teams have done an excellent job. So.
In the next several years, you'll see how to how do we continue to.
It pushed the envelope with digital solutions and value add to our customers.
Okay and then the last one from me on with the understanding that I heard marita, what moving to sit on my part what you said on the path that your practices is to sell a lot of your mortgage loan production. It is a significant part of your originations and you kind of alluded to on your comments that construction could include some home construction and home renovation is there any point that you.
Change your mind on that and maybe start to portfolio some of it some of that residential.
Residential mortgage production.
Yeah, Theres going to be a point at some point, where we start to see that it makes sense for us in terms of our.
On duration and yield right. So at the end of the day most of our originations our 30 year fixed rate.
Mortgages and and.
And we feel that at this point, we rather not kind of a.
Speed of the.
The excess liquidity utilization and.
And manage it from the cost of funds perspective that are a as we've talked in the past, but at this point I think.
Interest rates need to go a bit higher for us to feel more comfortable you saw that we bought some mortgage backed securities in the quarter that was when when interest rates kind of ticked up to a level, where we said okay. We got we got a good start.
On on health held to maturity, but that's kind of how we look at all on liquidity levels on how do we mortgage banking activities for off a nice fees that we're generating so you know at the end of the day.
I think interest rates need to.
Higher for us to decide to keep it on the portfolio.
Okay, and I said I am going to ask you one more then because you kind of led into it there Murray.
There was about 126 million on mortgage backed securities put put on the balance sheet is this the beginning of something the full execution on something or where do you expect you would go with that because.
With more stimulus coming down from the island theres going to be more deposits and capital you've been getting your share so.
Yeah. No. This is not the beginning of anything in particular, Glenn I think this is just on.
Managing our asset and liability and I'm, making sure that now we.
Opportunistic on some increases in interest rates, we do think that the economy in the United States is on on <unk>.
Significantly this year on the next then interest rates are most likely going to move higher so we're in no hurry to get ourselves any.
Long situation on the investment portfolio at this level. So this is this is just more on asset on liability.
Kind of a decision.
Okay. Thank you for taking my questions.
You're welcome and thank you for your questions.
Yes.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from Steven Martin from Slater.
Thanks, a lot.
On a recent shareholder and had been building my position over the last six months. So it was a well timed I think.
Could you most of my questions have been asked and answered but can.
Can you talk about the prospect of stay tuned and its potential benefits.
Can you talk about.
What may be in the infrastructure.
Infrastructure plan to benefit Puerto Rico.
Can you talk about the.
How do you see the hospitality industry in Puerto Rico recovering from Covid.
You know that hurricane.
Have a day.
Yep.
So welcome welcome to our to our call and thank you for being a shareholder.
Let me start with your last one hospitality.
And then May Kid hospitality as you would imagine in the happening here in Puerto Rico also.
We've taken care of most of our.
Jim.
Hospitality commercial clients, we gave them the deferrals on all most of them are out of the deferrals, we really don't have much deferral left.
Right now what we're seeing in terms of our hotel.
Hotel <unk>.
<unk> and on the level of <unk>.
Percentage of occupancy we're seeing increasing.
Increasingly above like lets say 60, or 65% some specific weekends and holidays, but in general it's still well below the levels that they were before the pandemic theyre more in the 30% and 40% levels depends on which hotels right the higher end of <unk>.
Once that are in Dorado on.
And by a beach.
Yeah.
Our Ritz Carlton reserving Dorado on as well as the buyer reach.
In.
And Luis are those those are high higher end and.
From the information that we have there.
Fully booked.
The other ones that are more cash flow less expensive, they're still having a lower levels of occupancy.
Occupancy.
Into the future I think are.
Given what's happened on recovered I think hospitality, Puerto Rico as on island per Se on us.
A Caribbean Island will benefit and will recover nicely on probably we benefit even more from the aftermath of COVID-19 given the weather that we have here. So so that's kind of.
Our take on the hospitality in terms of.
The second question that you asked in terms of the bite and infrastructure plan I don't have any specific details on things are really very fluid over there and and as you can imagine we don't have that much granularity on what's going on over there, but I do tell it can tell you that.
The infrastructure plan is going to include we expect that it will include Puerto Rico as a as one other beneficiaries how much we will benefit it's hard to tell but there is going to be a.
Some from infrastructure funds coming on Puerto Rico from the whatever they approving Washington, which is as I said on you know more than I do it's very fluid right. Now. So we expect that and then your first question about who is the 64000 question that has been asked for the last Oh.
You know since let's say 80 years.
And really at the end of the day.
That is on on the answer to that question is in Congress.
Puerto Rico is still relatively divided through the middle in terms of remaining US we are becoming a state so he's going to take I think a lot of effort.
For for Congress to.
To take a look at Puerto Rico from us of statehood per se anytime anytime soon but.
And again politics come in play to and Democrats and Republicans also need to come to terms with that issue. So.
I wish I can give you a more specific answer to that question on this day Hood, but.
I would say that in the short term on face short term I would say in the next five years, it's very hard for me to visualize Puerto Rico, becoming a state but.
But the.
The work is in the hands of Congress and on Puerto Rico and on the political.
Community in Puerto Rico need too.
<unk> also come to some level.
Understanding on what's what's the path for Puerto Rico, and we're still sending very conflicting messages to Congress on and on Washington in General.
Thank you very much.
You're welcome. Thank you for your questions.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Our next question comes from Alex total of Piper Sandler.
Just had a couple on technical follow up questions if I could.
First off on rates I think you said that the NIM you expect the NIM to be stable for 2000 22021, rather could you just walk through kind of what the moving parts.
That gets you are like what the assumptions are that get you to that NIM stability. This year in terms of things on the.
The timing of PPP forgiveness.
Moving cost of deposits cost of funds.
Cash things like that.
Yes.
Thank you.
You already identified key items that we're looking at.
In the next couple of quarter.
We still see additional cash coming in as well as I mentioned in regarding the most recent stimulus that was approved so we will see more level of cash flow that will put pressure on our NIM and then the lower costs on phone will compensate for that that pressure on the cash balances. So that's why we ask.
Our beta scenario is to have.
Stable NIM for the rest of the debt of the year.
Got it and then.
One other things that I've asked you about in the past and just wanted to drill in on our debt is just the amount of cash.
On an average balance of the $2 2 billion during the quarter went up at the end of the quarters should continue to go up based on your commentary, earning just kind of 10 or 11 basis points.
And then I look at on the deposit side.
One thing that kind of jumped out at me is that the cost of deposits on now accounts and savings accounts actually increased a little bit.
In the first quarter, which I was hoping you can touch on maybe what caused that and then just you know is there not just a huge opportunity here to really lower cost of deposits.
Yes.
On a more aggressive way.
Yes so.
Thanks for your question Alex.
So we called out last quarter, and we said.
We finished the integration.
On the conversion with Scotia Bank, we as part of the acquisition we had some.
Seized on are coming maturing this year, they're starting to mature.
Some of those bonds has kind of moved to the savings and checking so first.
What we decided was too.
Take care of our customers and I'm not.
Tinker with additional stress above and beyond covered integration conversion et cetera from our Scotia bank clients and we didn't want to move those those.
Deposit cost back then.
Now, we're starting to see the debt.
<unk> getting off the.
Maturing and at the same time on some of them are moving mostly higher balances C. These are moving to the savings and <unk>.
And as you alluded to we have.
And a slight pick up in the cost of those deposits and that's dry powder that we have on we are actively working towards on this is you know kind of our strength and you know it's kind of a.
Take advantage of that and that's kind of.
Some of the.
Yeah.
Benefit that we expect to generate in the probably by the end of the year, where we start to look at those accounts and.
And reprice them. So so that's kind of how we see this.
It's been a very nice 2020, 'twenty was a really challenging year to do a conversion and integration on acquisition and we just wanted to make sure that given.
Given all the.
Although noise that that creates a we extracted all day value from the Scotia acquisition, which particularly is driven by our customers and.
And that's kind of how we think about it but you are right and we do have on opportunity there and we are definitely looking at it.
And are you able to share with us in terms of the Cds that you expect to re price or potentially migrated over to savings in the second third and fourth quarter is there a dollar amount that you can give us.
I don't have it with me right now.
But if you if you want we can provide up to you.
On at a later time, Alex I don't have that specific information.
Okay and then another comment on the prepared remarks is that you're targeting an efficiency ratio on the mid 50% range. I was wondering if you have sort of a timeframe on achieving that and if that can come.
Just from the balance sheet and sort of what youre seeing in the current rate environment or if you really need higher rates to get that efficiency ratio lower.
Yes, I think I think are probably right, we probably need a little bit of a break on the.
On the higher interest rates, so that we can.
Comfortably achieved.
Goal.
But we're also we're also optimistic about 2022 and <unk>.
Our level of Oh.
Fee and net interest income generation so.
Regardless on interest rates, so I think it's going to take US a couple of let's.
Let's say a year or so.
For us to start feeling more comfortable on 50%.
A range on efficiency.
And again.
There are many moving parts.
And one of them is a cost structure that we continue to look into and we'll update you throughout the next several quarters on that end on.
On how we deal with the cost side, because we we.
We do want to continue to invest for for our platform.
I think Glen mentioned about digital adoption on all of that it doesn't it doesn't happen out of total.
Seen are we need to invest in technology on our infrastructure and.
And theirs.
On the timing issue, so we need to make sure that.
We by the time to invest on our vision on our strategy going forward and that's kind of what we're doing we're here for the long haul long haul on and we are truly.
Truly believers on on.
On what we're doing how we're doing it on how we're going to be successful about it.
So that's what our focus is so give us give us a little bit of a breathing room on the efficiency ratio for the next year Youre on a house.
Got it and then you guys just popped above the $10 billion threshold again this quarter is that something at this point that you are committed to being higher than $10 billion or is it still.
Is there still some remixing and potentially delaying durbin even for it that's a consideration.
I don't think Theres any way back I think we crossed $10 billion.
The rules are the rules, so we need to do it and we're going to have to make the investments and deal with the reality.
So that's kind of how we see it and we were very effective of preventing that from happening at the end of last year, but with with what I have said here today and on the expectations that we have I see it hard to.
Prevent us from from consistently being above 10 billion total mark.
Understood and then just a final question from me another thing that jumped out as just the.
The write up on the value of foreclosed properties that you saw on the expense line I know, it's on the first quarter that we've seen that but it is the biggest sort of gain that you've seen in the last couple of quarters is that being driven from commercial properties from mortgage properties and sort of what what's really lead.
Yes, it's residential mortgage and.
Again, it's what we're seeing on the on.
On the ground, we're no longer seeing high end properties with.
With increasing.
Increasing in price, we're starting to see across the board in the different sizes.
Home values, not only no longer stabilizing theyre starting to go up on we're starting to see professional young professionals moving from renting to buying in and trying to.
You know buy their homes. So so again those are the data points that are not showing any statistics because the statistics R. R.
On a backward looking you know they look through the rearview mirror.
I sit here today, we're seeing a lot of.
Home remodeling and we're seeing a lot of.
A three to 500000 dollar homes being bought we're also seeing.
75 to $200000 lower kind of income type of homes also.
And in place and the prices are on I'm, not saying they are skyrocketing lagging some areas in the states, but are picking up and those are small green shoots that confirm what we've been saying in the call today.
Got it thank you for taking my questions.
You're welcome. Thank you for your question was on.
Okay.
Again, if you would like to ask a question. Please press star on the number one on your telephone keypad.
Our next question comes from Jon Kaufman on for Greg.
Jose can you talk to us about.
What youre seeing on Moody's economic forecast real time, and does that appropriately capture the informal economy workers getting paid in cash.
And then how much does that Moody's economic forecast.
Hi.
Okay.
Your model.
On about risks.
So I think.
I was able to understand your question you were breaking up in the middle but regarding the Moody's.
Our model and the probabilities that we assigned to.
<unk>.
I think it's very hard for for the Moody's to model to take into consideration the the underground economy on the unofficial economy. However, you want on call it.
And I think.
It just reflects.
So it's a model model are made up on variables and on some of those variables are accurate on some other nuts.
So again I don't have much insight to provide to you above and beyond the <unk>.
Question on right about the formal economy I don't think is included in there.
And it's gone on continuing to evolve right on the model is going to continue to evolve.
As things play out.
In the economy in Puerto Rico, So I.
If you had another question regarding this issue on it.
Please feel free to repeat because I was hard to understand.
The full question.
That's fine just the second question what is the latest that you are hearing on increased activity out of pharmaceutical companies mainland pharmaceutical companies.
And their activity levels, our staffing on the island and what are you hearing coming out of DC out of the legislature on any efforts there too to a Puerto Rico on attracting additional pharmaceutical activity on the island.
Yep.
Last day information. We've got is two smaller pharmaceuticals are moving production to Puerto Rico, there's establishing some on some of their production in Puerto Rico that was think announced earlier this year or maybe late last year, that's going to happen sometime.
During the year.
I think.
I don't know if people realize but 25% of the.
GDP of Puerto Rico is pharmaceutical, it's either met medical devices, and or pharmaceuticals, and we have still 90% to 95% of the global production of.
All kinds of medications and medical devices from Tylenol Advil too.
All the the usual suspects in medications so.
That is still in play and on what we're seeing here now is with Covid the opportunity for that infrastructure to be optimized even further.
We seen any changes there or not yet and I think it's going to take.
A couple more innings for that to play out because there is politics involved and in Washington on in Puerto Rico, So regarding debt issue and.
And it's and if any.
On opportunity for us to continue to look at.
The <unk>.
The infrastructure of the island to make it more competitive on more efficient for those players to come to Puerto Rico. So we'll be competing with some other states in the United States. We have an advantage with the infrastructure that has already been built from those companies, but we need to do a better job is on island to provide efficiency and energy and and on the.
Services, and all that stuff, but to be honest I think it's too early to call. It.
On a.
Pharmaceuticals, increasing there.
The production here in Puerto Rico, it's something that's still in the works.
Thank you.
Thank you for your questions.
And we have now reached the top of the hour.
Does anyone have any final questions.
So if there are no other questions.
I think the operator for coordinating this call and I would like to thank all our team members, who have helped our customers through the pandemic they've done an outstanding job and also thanks to all our stakeholders listening today looking forward to our next call have a great day.
Thank you. This concludes today's call you may now disconnect.
Yeah.
Yeah.
[music].
Yeah.
[music].
Okay.
Okay.
[music].
Yeah.
[music].
Okay.
Yeah.
Yeah.
Yes.
Yeah.
[music].
Yeah.
Okay.
Okay.
Yeah.
Sure.
Yes.
Sure.
Yes.
Yes.
[music].
Okay.
Alright.
Yes.
[music].
Okay.
Yeah.
[music].
Yes.
Okay.
[music].
Yes.
Okay.
[music].
Yes.
Okay.
Yes.
Yes.
No.
Okay.
Okay.
On.
Your line.
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Right.
Yes.
Moving on.
Sure.
Sure.
Got it.
Yes.
Yes.
[music].
Yes.
And on.
Yeah.
Okay.
Thanks.
Alright.
Okay.
Yes.
[music].
Yes.
Okay.
Okay.
[music].
Okay.
On the.
Yes.
Great.
[music].
Okay.
Yes.
[music].
Okay.
No.
Yeah.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Yeah.
Okay.
Yes.
Yes.
Okay.
Yeah.
Okay.
[music].
Yes.
Yeah.
Yes.
Okay.
Okay.
Okay.
Yes.
Sure.
Okay.
Okay.
Yes.
Yes.
[music].
Okay.
Yes.
[music].
Okay.
No.
Yeah.
Yes.
Yes.
Okay.
Yes.
Okay.