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OFG Bancorp
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Good morning. My name is Laurie, and I will be your conference operator today. Thank you for joining us for OFG Bancorp's Conference Call. Our speakers are José Rafael Fernández, President, Chief Executive Officer and Vice Chairman; Ganesh Kumar, Senior Executive Vice President and Chief Operating Officer; and Maritza Arizmendi, Executive Vice President and Chief Financial Officer.
A presentation accompanies today's remarks. It can be found on the Investor Relations website on the homepage in the What's New Box or on the Webcasts, Presentations and Other Files page. This call may feature certain forward-looking statements about management's goals, plans and expectations. These statements are subject to risks and uncertainties outlined in the risks factor section of OFG's 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. 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 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. Fernández.
Good morning. Thank you for joining us and welcome to our third quarter earnings call. My prepared remarks will focus on the most significant highlights of the third quarter, so we can maximize the amount of time for Q&A. There are supplemental slides in the appendix.
Let's turn to Slide 3. We are extremely proud to announce another consecutive quarter of superior core performance across all parts of our business. Earnings were $0.42 per share, that's a sequential increase of 20%, earnings per share was also significantly ahead of the breakeven quarter a year ago, that included special hurricanes related loan loss provision. Our third quarter confirms the success of our strategies, our technology, and most of all, the diligence and capabilities of our entire team. We're now seeing the result in the form of higher earnings per share.
Capital has continued to grow. Tangible book value per common share was $16.23, this was a sequential increase of more than 6% on an annualized basis. All key performance metrics continue to build strong momentum going forward. Return on average assets increased 19 basis points from the second quarter, return-on-equity at 10.94% in the third quarter is now in the double-digit percentage range. The efficiency ratio improved 400 basis points from the second quarter, this reflected revenue growth and the absence of the lease cancelation cost we had in the second quarter.
Total net revenues increased 5% sequentially exceeding $100 million. Net interest income increased 6% quarter-over-quarter, primarily due to growth of the originated loan portfolio and net interest margin expansion. Excluding cost recoveries, net interest margin increased 6 basis points, fee revenue remained strong at more than $18 million.
Please turn to Slide 4 for some of our key operational highlights. For the fourth quarter in a row, originated loan growth has outpaced the paydown of acquired loans. This resulted in net loans up 10% or $388 million year-over-year with originated loans up 18% or $543 million. Loan yields increased 25 basis points sequentially, this reflects, one, higher yields on originated commercial loans; two, higher proportion of commercial and auto loans; and three, a slight increase from higher-yielding acquired loans.
Average core deposit balances rose 3% from the second quarter and 6% from a year ago. Non-interest-bearing accounts remained high at $1.1 billion. The cost of core deposits increased only 2 basis points sequentially reflecting minimal to no deposit beta [ph] in our market.
While lower than the second quarter, loan production continued at a high level of more than $350 million. Auto lending was a record $140 million, up 7% from the second quarter. This reflected continued pent-up and the market's adjustment to one less competitor in auto lending. Commercial lending at $105 million, consumer lending at $43 million, and residential mortgage lending at $28 million; all performed excellently.
We believe the psychology of business owners and retail customers is gradually turning positive. They are starting to embrace market opportunities in the aftermath of last year's hurricanes. The recently established OFG USA subsidiary added $37 million, this reflects seasonally lower deal flow compared to nearly $100 million we generated in the second quarter for our plan, production continued to consist of commercial and industry related loan participations across an array of industries and geographies.
Credit quality remains stable. The non-performing loan rate declined 18 basis points, primarily reflecting a drop in the commercial loan rate. The net charge-off rate declined 42 basis points primarily due to lower net charges in the auto business. Provision for originated loans increased solely due to growth of the portfolio. This increase was offset by a decline in the provision for acquired loans. We believe this strong core operating highlights reflect the continued success of our strategic differentiation. We're focused on continuing to deliver superior customer convenience and service through innovative product and technology solutions, and to provide value-add to our customers.
Third quarter highlights include continued growth in our customer accounts. It is now up 4% year-over-year and 9% since early 2016. We are achieving growth and servicing more customers in part through increased adoption of lower cost automated and interactive teller machines online and mobile channels. Services like these enable us to step-up our ability to reach out to customers and clients; facil, rapido, hecho as we say here at OFG.
Please turn to Slide 5 for our outlook. Last quarter we changed the title of this slide after years of talking about the challenge ahead, we're now looking at the opportunity ahead. Our results demonstrate that change is happening. To further that, we're continuing to develop new commercial relationships in Puerto Rico and on the Mainland. To service customers better and faster, we have an aggressive effort to optimize internal processes and implement new technology. Since Maria, economic activity has been driven primarily by businesses and consumers rebuilding. We now believe businesses are again [ph] to invest and expand going forward. We're excited about the prospects for continued growth in the fourth quarter and next year.
Having said all that, there are still some things that have to happen in Puerto Rico. We need a lasting solution to PREPA. However, I have to say we're encouraged with the pending legislation that would privatize, depoliticize, regulate and diversify electric power on the island. Long-term, this could be a real game changer. We must also permanently resolve Puerto Rico's fiscal problems and we need to reduce regulation and taxes to free small business to become the engine of economic growth going forward. But all of that is not stopping us at OFG and Oriental. We're increasingly optimistic about our ability to differentiate ourselves, to provide credit and financial services and grow business and continue to contribute to Puerto Rico's economic revival.
With this we end our formal presentation. Operator, please open the call for Q&A.
[Operator Instructions] Your first question comes from the line of Brett Rabatin of Piper Jaffray.
I wanted to first ask just a couple of things on the balance sheet. You had great deposit growth and you got some excess cash at the end of the quarter; maybe can you just give us a little bit of color around what your plans are for that cash? And then, just thinking about the margin going forward, it seemed like it could continue to have an upward bias depending on the positive flows from here I suppose?
From the balance sheet question that you ask, A) the cash we're using -- and will be deployed as opportunities arise. We are recognizing in this market that we have the ability to be opportunistic and take advantage of potential lending opportunities here and also in our U.S. subsidiary. So we will be deploying that accordingly and always viewing it from optimal capital occasion. So that's kind of how we view the balance sheet. I think for the first time in several years, almost a decade, we have an ability to grow and we will be as always, a prudent but also opportunistic.
So, I -- that's kind of little bit of how we see this going forward and we don't look at this on a quarterly basis, we look at it more on a longer term basis and how we build the franchise and how we grow relationships in the markets that we are operating.
And then, I want to ask -- I know it's been kind of a hard question to answer but just -- as your capital levels; can you give us maybe any insights into -- if you think you might be able to start doing more with the capital potentially next year?
So as you know, we're [indiscernible], so we're doing something, number one. Number two, we continue to have the dialogue with the regulators. I think the environment is improving, and that gives us a better tools for the dialogue. I would expect that would continue as the next couple of quarters, and as we collectively become more and more comfortable, we will start making decisions in terms of how best to allocate our capital. Now having said that, let's just be clear we're seeing a good opportunity here to grow; we see an opportunity to expand our franchise and we will be optimal capital allocators. And unfortunately in the past the environment was not as conducive for growth and now it is, so from a franchise perspective I think we have it [ph].
And then, maybe just one last one on loan growth. Does that continue to be driven in large part by auto or just commercial growth becomes more of a factor in your outlook? And could we see the loan portfolio potentially grow -- I don't know, if you want to give any kind of approximation but it would seem like over the next year it might actually have more of a mid-to-high single-digit pace possibly?
We're seeing some good loan growth on the auto portfolio. I think that's the main driver so far. We also see opportunities in the small commercial and mid-sized commercials here in Puerto Rico. And certainly we would continue to look into the U.S. subsidiary that we have launched last year. So yes, I mean that's what's driving it and since we have -- now we're an economy that is rebuilding, there are quite a few opportunities for our clients to take advantage of and we want to make sure that we are there for them.
Congrats on the solid results.
Your next question comes from the line of Glen Manna of Keefe, Bruyette & Woods.
I just wanted to follow-up on that loan growth question because it was really good loan growth in Puerto Rico. And typically, the third quarter was seasonally slow, especially on the commercial side, so maybe could you just tell us what you were seeing out of some of your commercial customers on the island?
Why don't you guys turn to Slide 10 since you want to talk about growth. Let's just talk a little bit -- first, on what has been our performance in the last several years. And if you go to Slide 10, you will see there originated loans since 2016, it's up 22% on our core deposits around 12%. And while we've grown customers almost 10%, so what I'm trying to say here is growth is coming from us being able to take advantage of the market opportunities but it's also been driven because we're doing things differently and we're differentiating ourselves from the market. And if you have to be specifically -- how much is each; I can't tell you but I can tell you that we are -- in each of the markets that we won't tell you but I can tell you that we are in each of the markets that we're operating in we are inching up on market share and that's very encouraging for us.
So we -- when I say that we are a growing, it's -- part of it because we have the back win from what we're seeing here in the market and the economy but also because of the work we've done throughout the last several years on getting ready for this. We don't have a crystal ball but now that we are living it, we are taking advantage of the efficiencies we put in place, we're taking advantage of the technology that we have invested in, and our customers are starting to embrace that and we are encouraged with that. So I wouldn't be able to Glen go specific to you and say, well, next quarter we'll see higher commercial or higher auto or -- we are really following the strategy that we have put in place and the results have been quite robust. So hopefully, one of these days the market will realize that we're growing and that we deserve better valuation.
And on the OFG USA growth this quarter; was that a function of the slower loan growth in the U.S. or was that your appetite for those loans given your growth in Puerto Rico?
Obviously, it's pretty cyclic, the market is cyclic but the opportunity is far out [ph]. If we wanted to do these numbers, we could have done it but as I said last quarter, we've been picking and choosing the credit we feel comfortable in participating in, and it's more of a factor of that judicious approach rather than lack of supply.
And on the provision in this quarter, was there any embedded recapture of the hurricane related provision? And can you tell us -- I think you had put up a $27 million hurricane provision back in 3Q '17, could you tell us how much of that is left?
Well, provisioning for this quarter reflects in general the trends in our [indiscernible] ratios. As you can see, we have getting back to pre-Maria levels and in certain instances, better than the Maria levels like it was in the net charge-off or the outer portfolio. So in general, the provision reflects that and we continue to assess all risks associated with the portfolio including any related Maria associated risks.
And do you have the number of how much of that special originally [ph] is left or not?
That's something that we always discuss further in the 10-Q, so we can elaborate in that report.
Your next question comes from the line of Alex Twerdahl of Sandler O'Neill.
I got dropped a little bit into the call, so I apologize if you've answered any of these questions but just to kind of follow-up on that last question about the hurricane related reserve, and I know that you talked about a little bit more in the 10-Q but what -- like, at what point would we be sitting here and knowing that enough time has passed that that reserve has either have been allocated into loans being charged off or released back into either of the general reserve or released back to shareholders.
In general, the reserve have been used both, to allocate from service that still are in the portfolio and to some shares [ph] that we have experienced so far. I still remember, second quarter we have higher titles [ph] due to the expiration of moratoriums but in general, we continue to have some allocations within the portfolio related to Maria and we will continue to monitor until we think that that results are not going in the portfolio or we still needed them.
Will that be like a year from the end of the moratoriums?
We don't have any specific period, each portfolio has it's own characteristics so with each evaluated individually.
And then, obviously deposit growth has been a fantastic story in Puerto Rico following the hurricane, particularly in low deposit betas but can you just touch a little bit on this quarter what drove the high core deposit growth that you're seeing in from insurance payouts; you're seeing it from other sources kind of is a retail or is that commercial, like maybe just talk a little bit about what's driving that and where you see it going from here?
It's pretty much all of the above. We have good retail core growth. We also have some good commercial core growth on the deposit side. We're not seeing that proportion not being still that it was earlier last year, we're not seeing that proportion not being still that it was earlier last year -- and later -- late part of last year on the insurance companies, we're seeing that those balances not being that significant as they were in the years at all. But all in all, we are very satisfied with our core deposit growth across all areas.
And as you look out, rate pressures for -- to bring in new deposits, are there any -- is there any rate pressure is starting to materialize on the island?
Somewhat I would say that the rate pressure right now is primarily coming on the more higher sensitive type of clients who look at treasury bills and look at short-term kind of deposits in the states and there is a little bit of a pressure on that. But all in that, we don't see any changes in the market here in Puerto Rico in terms of deposit costs.
And could you just touch a little bit on -- it looks like the auto early stage delinquencies ticked up a little bit, is there anything to read into that there? Is there anything that could have caused that specifically this quarter?
You can look at our balance, our auto portfolio is higher. So when you look at it from a dollar perspective, it is higher but when you look at it from a percentage perspective of the size of the portfolio, it's actually lower than pre-Maria levels. And yes, we noticed that it's part of our ongoing never-ending process of optimizing on the writing and optimizing on our servicing, and we'll go at it [ph]…
Also, in that title for that portfolio for the quarter was particularly low, lower than what we saw pre-Maria level. So we feel comfortable with the levels of asset quality in that portfolio.
Your next question comes from the line of [indiscernible].
Let me start with [Technical Difficulty] quantification of how much that could add to the island but it seems like that might be a huge opportunity.
No specifics but certainly confirmed when you just said there is evaluation by investors locally and from abroad from the states at -- looking at that opportunity zones that have been created, Puerto Rico is 94% opportunity zone; qualified as an opportunity zone. So I don't have specific numbers but I certainly can see the interest.
[Operator Instructions] Your next question is a follow-up from Alex Twerdahl of Sandler O'Neill.
Just wanted to ask another follow-up on the new customer flows that you've seen recently. What -- I mean, is there been any change in what's driving -- have you seen or you're seeing [ph] new customer flows for a long time and you read all these reports and you kind of see the numbers of people leaving the island; is any of the new customer acquisition, recently people returning to the island?
You can't project our results into a macroeconomic trend. We are not the leading market player over here which is the advantage we have as a challenger brand, we are growing our market share and that does not necessarily mean the market is growing. But however, within the shrinking market of customer base we do see a lot more cash flow and deposit levels picking up than last year.
But in terms of the new customers, I mean is there anyway they like to -- and I'm not looking for any specific numbers for just to quantify who is coming over from a competitor, who is the new account because they just graduated from high school and need a bank account, who is -- people returning to the island, who is the new customer or the new company that's just formed; any sort of complexion?
Look, I think at the end of the day there is not meet very many household creations and new inflows into banking customers. So it is really the growth that you see in our side is purely from market share growth.
And then, how do you think about that -- go on.
I was just going to say Alex, remember that there is significantly less competitors too. So the market is shrinking but at the same time the population has shrunk but the market also has less competitors and that is also good for a bank of our size and with our approach.
And then how do you think about the progression of loan demand and opportunities over the next couple of years? Obviously, we're starting to see the consumer piece pick up pretty meaningfully, we have been seeing that. We're probably not going to see a lot of construction for another -- I don't know, maybe a couple of quarters, just some of that hard money starts coming down. And then, how do you think about the progression; is that kind of the right way to think about it that maybe is really driven by consumer today and then it's going to move towards commercial into the next couple of years?
Yes, I think you just described it as we're seeing it too. We are seeing the consumer first as they are rebuilding. You see in the small business and businesses in general, kind of picking up the pieces after the hurricane and the next stage is now evaluating their businesses and looking at if there is money to invest to gain opportunities and there is going to be some consolidation in several industries that would also play into the growth. But in general, I think it's -- we're in the latter stages of the first stage and we're going to start moving into now the other one which is more of an investment stage.
Your next question comes from the line of [indiscernible].
Congratulations on a very strong quarter, it's great to win at this inflection point in -- for the Puerto Rican economy and how bank be into capitalize on it. I just have two questions on that front. Do you foresee Oriental participating in the construction space, in construction lending and also infrastructure lending as the money is deployed for the recovery process and the rebuilding of the island?
We are really not seeing ourselves in the housing construction building business. We have not been in the past and that's part of who we are as an institution. So from that perspective we won't but we certainly will have been and will continue to participate on the construction side of the industry which is all declines that are indirectly involved with that business. So for sure, we will.
And then, two more questions. One, why the investment side of the ledger decreased -- have not retaining those mortgages; what was the reasoning behind that? And do you foresee deploying more money into the investment portfolio taking advantage of these higher rates in the curve?
We're always on the lookout there but we also want to deploy capital in the most effective way, and even the IBE provides you a tax benefit. We do have kind of an ROE target that we look into. As interest rates go up we'll continue to re-evaluate but at this quarter and the last couple of quarters, we're seeing a better way of utilizing our capital, investing in loans and growing our loan balances given the yields that we can get there.
[Operator Instructions] There are no further questions at this time. I'll now return the call to Mr. Fernández for any closing remarks.
Thank you for joining us today. And thank you for participating in this call. We have preliminarily scheduled our fourth quarter conference call for Friday, January 25. Until then, thank you again. Have a great day, and a wonderful weekend.
Thank you for participating in OFG Bancorp's conference call. You may now disconnect your lines and have a wonderful day.