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OFG Bancorp
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Good morning. Thank you for joining OFG Bancorp’s conference call. My name is Laurie and I will be your conference operator today. 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 & 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 risk 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. Fernandez.
Good morning. Thank you for joining us. Let’s start by turning to Slide 3 please. We achieved strong core growth in the fourth quarter and the year. This was based on the continued success of our strategy of differentiation, providing superior customer service, convenience and technology, coupled with Puerto Rico’s emerging economic rebound. Our plan is working and I like to take a minute to review our accomplishment.
For the year as a whole, we generated impressive results across the board. Operationally, originated loans were up 17.3%. Average deposits grew 6.4% year-over-year. Non-interest-bearing deposits were up 25%. Customer account expanded 4.6%. Net interest margin increased 10 basis points and credit quality consistently improved. Financially, earnings per share increased 73%, return on average assets expanded 47 basis points and return on average tangible common equity increased 431 basis points. As we announced last year, we converted our Series C preferred into common stock. This has significantly boosted stockholders’ equity and enabled us to reduce our payout of preferred dividends. Shortly thereafter, we increased our quarterly common dividend 17% to $0.28 per share annualized and all our capital metrics hit multiyear highs. I am also pleased to note that according to S&P, OFG Bancorp was the best performing bank stock in 2018. For all of this, I want to thank our highly dedicated team at OFG Bancorp and Oriental, our valued retail and commercial customers, our loyal shareholders and the indomitable spirit of the people of Puerto Rico following Hurricane Maria.
Let’s turn to Slide 4 to review our fourth quarter performance. Earnings were $0.45 per share. That’s a sequential increase of more than 7% and significantly ahead of a year ago when we reported $0.30 per share for our first quarter after the hurricanes. Capital continued to grow. Tangible common equity increased $114 million, reflecting core growth plus $84 million from the conversion of the Series C preferred. On a per share basis, tangible book value was down slightly from the preceding quarter. That was strictly due to the Series C dilution. On a year-over-year basis, our tangible book value per share was up more than 3%. All performance metrics continued to be strong. Return on average assets increased 8 basis points from the third quarter to a year high of 1.5%. Return on average tangible common equity increased 73 basis points from the third quarter. It also hit a year high of 11.67%. The efficiency ratio at 51% continued in our expected range. At more than $101 million, net revenues increased from the third quarter. They were up 12% year-over-year and continued to exceed $100 million for the second quarter in a row. Net interest income at $82 million was about level with the third quarter. Growth of the originated loan portfolio, increased yields offset the continued pay-down of acquired loans and reduced cost recoveries. Excluding cost recoveries, core net interest margin remained in the 5.2% range. Fee revenue remained strong at more than $19 million.
Let’s turn on to Slide 5 for some of our key operational highlights. For the fifth quarter in a row, originated loan growth outpaced the pay-down of acquired loans. This resulted in net loans of more than 9% or $375 million year-over-year and originated loans of more than 17% or $539 million. Loan yields remain high at 7.48%. Compared to the third quarter, this reflects higher yields on originated commercial loans, a higher proportion of higher yield commercial and auto loans and a decrease in acquired loan yields due to reduced cost recoveries. New loan generation was $323 million. All five key loan categories maintained solid levels of production.
Average cost of core deposits rose about 1% from the third quarter and 5% year-over-year. The cost of core deposits increased only 4 basis points sequentially continuing to reflect minimal to no deposit beta in our markets. Credit quality continued to improve. The non-performing loan rate declined 17 basis points. It has now dropped four quarters in a row. The net charge-off rate fell 20 basis points. That included a $1.8 million recovery on the sale of previously charge-off loans. Total provision fell $3.3 million, reflecting the recovery I just mentioned as well as improved performance of originated and acquired loans. Our customer count is up 4.6% year-over-year and 10% since early 2016. We are achieving growth and servicing more customers in part through increased adoption of lower cost automated and interactive channels. Services like these enable us to step up our ability to reach out to customers and clients, facil, rapido, hecho as we say at Oriental.
Let’s turn to Slide 6 for our outlook. To sum up, our strategies and the plan we put into effect following Maria are working. In 2019, we will continue to focus on growth capitalizing on our momentum. To better service our customers, we will pursue our ongoing program of internal and external improvements and we will continue to deploy technology to benefit customers in their daily lives. As for Puerto Rico, we are beginning to see specific industries and sectors transition from recovery to emerging growth. Many are in areas where we have developed marketing inroads and banking expertise. For the next several years, the economy is expected to expand with the influx of $80 billion in federal and private funds. As you have recently read, there has been a slower pace of funds coming to the island that could potentially reduce the rate of expected growth on a short-term basis. But having said that, I would like to make it clear, we continue to expect OFG to generate loan and deposit growth in 2019 on top of the excellent year we’ve had in 2018.
And as we have repeatedly said, Puerto Rico needs to catch up to the rest of the region and the world and become more competitive. For that to occur, we need to fix the PREPA problem, resolve the island’s fiscal and financial challenges, execute on a long-term plan for economic growth and reduce regulation, taxes and electricity costs. All these will especially benefit small businesses and entrepreneurs, the sustainable and traditional engine of economic growth in many states of the union and the world.
With this, we end our formal presentation. Operator, let’s open the call for Q&A.
Thank you. [Operator Instructions] Our first question comes from the line of Alex Twerdahl of Sandler O’Neill.
Hey, good morning.
Good morning, Alex.
First off just wanted to drill in a little bit on the deposit flows during the quarter, I think you attributed some of it in the press release of the outflows during the quarter to insurance companies. And then José in your prepared remarks, you seem pretty optimistic that deposit growth will resume in 2019. So I was wondering if first off you could sort of quantify how much of the deposit outflows in the quarter were related to insurance company payouts going out of the bank and then kind of what gives you that optimism going into 2019?
Alright. So as we mentioned on the release and on our remarks, Alex, our deposit balances in the quarter were at the end of the year pretty much affected typically, because insurance companies are deploying their cash to pay for the claims and we also have some large institutional accounts that also regularly at the end of the year they kind of take the cash out. As we have seen already in the beginning of this year, some of those deposits are coming back, particularly on the institutional clients that I mentioned. And we have expected the outflow of the insurance company deposits for a while. And in our case, we have seen it at the end of the fourth quarter. With regards to our outlook in terms of loan and deposit growth, I certainly do not mean to communicate here that we are going to replicate the level of growth, but we do expect to continue to grow our loan balances and we expect to also have some deposit growth – core deposit growth. It’s an opportunity that we see as we continue to position ourselves as a top of the line service provider in the banking industry, bringing in the technology for commercial and retail clients. And we feel that, that’s what we need to aspire for, but certainly, Alex, I am not meaning by that statement that we are going to continue to replicate the extraordinarily good rate of growth that we have had in the loan side as well as on the deposit side.
Got it. So in terms of the insurance money specifically is that mostly done at this point or where kind of are you in the – are those companies in the process of paying out claims?
No, there are still some – there is still some money that needs to be paid out, but there was a big chunk at the end of the fourth quarter that came out.
And then do you have any sense for that money, is it going to pay down loans that customers have or is it sitting in deposits other institutions or is it going off island?
I don’t know. We basically monitor the inflows and outflows, but we don’t know the destination of the inflow. I mean, we know the destination of the inflows but not the destination of the outflows.
Okay, that’s helpful. And then just turning to the loan growth, which continues to be pretty strong albeit not quite as strong as the second and third quarter, can you sort of comment on sort of the levels that we are right now for loan originations where auto seems to kind of be – continue to be pretty strong, commercial continues to be pretty strong. Mortgage maybe a little bit light kind of all relative to the pre-hurricane levels if you will. Are we now kind of around sort of new normal levels for originations or you think we are still depressed in some areas?
I think we in some types of loans like for example on the auto loan portfolio, we feel that there is still kind of in a new level, but at certainly not at the same level that we were last year. So we are seeing higher competition in that regard and it’s going to be harder to keep the rate of originations on the auto side at those levels. But I don’t think it will return back to pre-Maria levels. I think on the residential mortgage side, it’s an area that we feel has remained below our traditional levels and will remain there. And then on the commercial side, we see good opportunities in certain industries and sectors that we have an opportunity to continue to deepen relationships there. And we think that we can take advantage of that.
I really appreciate taking my questions.
Yes, thank you.
[Operator Instructions] Your next question comes from the line of Joe Gladue of Merion Capital Group.
Yes, good morning.
Good morning, Joe.
Just I guess question too on the loan yields, yes I understand the decline on the yields on some of the acquired loans from BBVA and Eurobank. But just wondering it looks like that the yields on acquired BBVA portfolio gotten down considerably lower than the yields on non-acquired loans. So, are we close to a sort of a stable claim on those yields, or do they have – do you think there was much more decline allowed to go on those?
Joe, just to point out on the BBVA portfolio, I think on the third quarter, we had a higher level of cost recoveries than the very small amount that we had in this quarter. And that’s what brings the yield down in a higher fashion. But our expectation is net of cost recoveries we see that yield somewhat level.
Okay. And I guess switching over a little bit to just delinquencies, just noticed there was – I guess a significant rise in delinquencies on the Ginnie Mae buyback options, just wondering if you could give us some color on what was going on there?
We are actually looking into it. We clearly see it also. It’s got to do a little bit with the end of the moratoriums for the federal programs and that lasted longer than the moratoriums that we gave on the non-GSA type of loans. So we are doing a deeper dive into that and our team is looking into it, but it doesn’t particularly have any red flags from our side.
Okay. And then that gets on there, I know it’s a much smaller increase in everything, but I did notice the increase in auto and leasing delinquencies as well.
Part of it has to do with the volume. We have increased our portfolio quite a bit in 2018. So from a dollar perspective, it’s gone up. And again, we are on a real time always looking at different, a slice and dice of the portfolio and when we see some opportunities for us to do better from a credit perspective we look at it. But again, we are basically seeing these levels better than pre-Maria and directly related to higher volumes in terms of the originations. So again, we are very cognizant of the increase, but not particularly alarmed.
Okay. Alright, thank you.
Yes. You are welcome, Joe.
[Operator Instructions] Your next question comes from the line of Brett Rabatin of Piper Jaffray.
Hey, good morning, everyone.
Good morning, Brett.
Wanted to first ask José Rafael, you mentioned PREPA in your prepared comments, I wanted to hear your thoughts on the announcement last week and kind of how you see that playing out this year?
Hard to tell, encouraged by the PPP, but by your actions, I will – when I refer you meaning the government – by the government’s actions, we will figure out if they are doing the right thing or not. So it’s for me too early to tell. The jury is still out there and they need to deliver in order to gain trust from the private sector.
Okay. And then I know we have had this conversation quite a bit, but you are now at 20.5% total risk-based capital, what has to happen for you to be able to use some of that, is that possible this year, can you give us an update on capital actions?
It’s an ongoing dialogue that we have internally here at the board as well as with our executive team. It’s also a dialogue that we have with our regulators. And when you have an opportunity to grow and gain market share and you have an opportunity to develop your strategy into a longer term, a successful venture, I think returning capital is not necessarily put on – as the first on line. Having said that though, we – we’re always looking into ways to optimizing capital for our investors and we continuously look at the best way to deploy that capital, Brett. But at this point, we’re very satisfied with the levels of capital that we have and the ability for us to deploy it in a – as you’ve seen so far in 2018 in a double-digit ROTCE and 1.5% [ph] almost ROA. So I think we have good places to put the capital to work.
Okay, fair enough. And then maybe just one last one, you talked about, probably you talked a lot about deposits and I’m just curious there has always been this thought that Puerto Rico might be less competitive for some period of time that deposit betas could eventually increase. Are you seeing that now and is that part of your expectation for ‘19 as the deposit betas to pick up from Puerto Rico?
I think it’s going to be a little tricky in 2019 because higher more sophisticated commercial accounts, they basically see how rates are playing out in the States, so it’s becoming a little bit more difficult to keep on those high-end clients the cost of funds. Thus, the good news is that we don’t have a large dependency on that. We do have some fluctuations as you saw this quarter from some large accounts that kind of raise some flags for you guys, but at the end of the day, we particularly depend on core retail and small business deposits and we feel that we have less pressure in terms of raising rates given the excess deposits in the island.
Okay, fair enough. Thanks for the color.
You’re welcome.
[Operator Instructions] Your next question is a follow-up from Alex Twerdahl of Sandler O’Neill.
Hey, just wanted to drill back into that capital question that Brett had asked. Maybe – you talk about returning capital to not necessarily to be first in line but with 16.5% [ph] common equity Tier 1, it seems like and growing with double-digit returns on tangible common equity that just internally you should be able to generate enough capital every year to more than cover any of the growth that you have. So I mean is there something else that we’re missing here like a reason to keep capital ever so high, obviously, I know what’s going on in Puerto Rico and the macro situation is yet – it’s far from being fully resolved. But something a little bit more meaningful than a $0.07 dividend as we put in place in the near-term?
No, I think you answered the question yourself. I mean, it’s a dialog that we keep on having. It’s not that we are eliminating that option from the table but it’s a continuous dialog and we will come to the market and announce any decision in due course, but at the end of the day, there are several variables as you described and several dynamics that we need to engage with particularly on the regulatory front. So again, Puerto Rico remains to be an area of high focus even its past uncertainties and even though the uncertainties seem to be declining as days go by, it is going to take a while. So we’re looking at everything, Brett, and we will make the right decision from an Investor Relations and from a investor/shareholder perspective all the time.
How do you guys think about M&A, I mean, now like there’s a huge set of opportunities out there, but how do you think about M&A, and how do you think about it relative to kind of that $10 billion threshold that has been somewhat of an impeder to M&A at other institutions?
Yes. So M&A, we – I think we have quite a bit of an experience in M&A and we’ve always been very value focused and we look at M&A as an opportunity for us to continue to grow, but at the same time from a strategic perspective. So that’s how we view M&A and if there is an opportunity for us to expand regarding our strategy, we will certainly look at it and looking at it also from a value conscious perspective.
Okay. Thanks for taking my follow-up.
Yes, no problem.
Your next question is a follow-up from Brett Rabatin of Piper Jaffray.
Hey, just a few more follow-ups. One, would you guys happen to have the reserve for the hurricane and do you have still on the balance sheet?
That’s Maritza.
Yes, well within our quarterly assessment, we did include the assessment for the risk that came through the hurricane and we still have some general valuation allowance on each part of the regular assessment.
Okay. Can you give a number or close to approximation?
No, at the end, Brett what we do is that we include it in our general valuation allowance in – during each quarter. We evaluate the risk. We do – we apply our regular methodology and there is still some risk that stays within. So I don’t have a ballpark figure right now with me that I can share with you, but in general, there’s still some reserve related to the risk of the hurricane.
Okay.
At the end of the day, it’s becoming one.
Yes.
The allowance is becoming one. And if you think of it that way, it’s relatively relevant, the specific Maria allowance per se because it’s part of a whole portfolio credit review.
Okay. And then maybe just wanted to ask about the early stage delinquencies, any color on auto and – especially auto and then mortgage, what’s kind of leading to a modest increase in those and do you think that abates or what’s the trend there?
Well on the mortgage side on the early delinquency, it’s relatively flat or actually down from the first quarter of ‘18, so really we’re not seeing anything in particular there that worries us. On the auto, I mentioned it earlier, it’s a little bit has to do with or mostly has to do with the increased volume. There might be some opportunities for us to fine tune our underwriting on some FICO score verticals, but at the end of the day, Brett, we’re originating more loans and that means – from a dollar perspective we should expect higher delinquencies and eventually higher charge-off. So that’s part of what the business model looks like.
Okay, fair enough there. And then just thinking about growing in ‘19, can you talk about auto sales continue to be really strong in Puerto Rico through the end of the year and I think the forecast as for 16% decline in auto in ‘19? Is commercial more of the growth in ‘19? And then I know you’ve made a hire in OFG USA, can you talk about that as well?
So on the other – on the auto side, the numbers that are published include kind of a floaters [ph] – fleet. So we don’t do that. And when you exclude the fleet from the numbers, I think the expectation for 2019 is to have equal to slightly lower new auto sales and that’s kind of the market from a market perspective. What was your second question, Brett?
Just – I was thinking about the growth that you’re – you talked about, you want to still grow, you’re not expecting to grow as much as you did in ‘18 for ‘19 but you’re still expecting loan and deposit growth, and I was just hoping to get a little more flavor for – if you’re expecting commercial to be more of a growth factor for this year.
I think so – yes, I think commercial will have a little bit more growth. We did have some commercial exits last year that hampered our balance growth. So if we’re successful at not having those exits in 2019, I think by just replicating the same level of originations on the commercial side, we will have a larger contribution in terms of the growth on the commercial side.
Okay. And then the last part of that was just OFG USA and I know you made a hire there and you grew at 30 plus million this quarter. What’s the outlook for that?
It’s moving along. It’s something that – it’s a decimal point in the whole big picture. So it’s something that we set ourselves to go after and do it from a geographic diversification perspective. I think we have in 2018 done an excellent job and as we said getting our feet wet. We are going to be – continue to be methodical and thoughtful and we will slowly build that, but it’s not going to change the strategic content of OFG Bancorp anytime soon.
Okay. Appreciate all the additional color.
Yes, you’re welcome.
[Operator Instructions] Your next question comes from the line of Glen Manna of Keefe, Bruyette & Woods.
Hi, good morning, Jose.
Hi, good morning, Glen.
I just wanted to drill into that point about a short term or lower pace of funds coming on the island could potentially rather reduce expected growth. Kind of, if you could just expand on it and say where the pace is slowing and if it is in the short term, does it really affect the recovery of the island? And just as a follow-up to that, kind of what has come on the island, how much has it really primed the pump as far as growth that you’ve seen and if you could give us some color on that?
Yes, I don’t have much to add above and beyond what has been published in terms of the slowdown in the funds. We don’t have some – we don’t have a significant deposit relationships with the government and therefore we don’t have that visibility. So we’re going by what we read in the press and what we discuss internally regarding the data that’s shared by FEMA and some of the other agencies in United States. So we’re seeing some slowdown and that’s what we’re conveying to you guys and definitely if the economic forecasts expect at certain level of rate of deposit – funds flow to the island in 2019 and that rate is reduced, well then the growth is going to be somewhat affected, but that does not mean that we expect the economy to fall into a negative territory at least at this point in time and we do see momentum in some specific industries as we mentioned. And those industries are certainly benefiting from the recovery and now from the beginnings of emerging growth.
Okay, great. And when we were down on the island in December, we were speaking to some of the people in the hotels and they were saying that this is lining up to be a really good high season, occupancies could be higher than pre-hurricane levels. Maybe give us some real time observations given it’s about 20 degrees up here in New Jersey today, and then maybe there’s a lot of people escaping that to Puerto Rico?
I think the hospitality industry in Puerto Rico got a big boost last year from mostly FEMA workers staying on those hotels. At the end of the year, we’re starting to see real tourism coming down and as the weather gets colder, as you mentioned, the expectation is that occupancies will continue to increase. We do have a good amount of some clients on the small and mid-sized type of hospitality businesses and the information from the ground is that there is a lot of tourists coming to the island.
Great. Thank you for taking my questions.
Yes. You are welcome.
There are no questions currently in the queue. This will be the final call for questions. [Operator Instructions] At this time, there are no further questions. I’ll now turn the call back over to management for closing remarks.
Thank you, operator, and thank you to all our stakeholders who listened in today. Looking ahead will be in February meetings in Florida and we’ll be reporting our first quarter results sometime in the month of April. So until then thank you again and have a wonderful day.
Thank you. That does conclude today’s OFG Bancorp conference call. You may now disconnect your lines and have a wonderful day.