OFG Bancorp (OFG) 2016 Q4 法說會逐字稿

Good morning.

My name is Paula and I will be your conference operator today.

Thank you for joining us for this conference call for OFG Bancorp.

Our speakers are Jose Rafael Fernandez, President, Chief Executive Officer, and Vice Chairman; and Ganesh Kumar, Executive Vice President and Chief Financial Officer.

There is a presentation that accompanies today's remarks.

It can be found on the investor relations website on the home page in the What's New box or on the Webcast, Presentations & Other Files page.

Please note this call may feature forward-looking statements about management's goals, plans, and expectations which are subject to various risks and uncertainties outlined in the risk factors section of OFG's Securities and Exchange Commission 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 which occur afterwards.

(Operator Instructions) I would now like to turn the call over to Mr. Fernandez.

Good morning and thank you for being here today.

Please turn to slide 3. Before the market opened today we reported another strong, steady quarterly performance.

Earnings per share of $0.27 was better than the prior three quarters and significantly better than a year ago.

The Oriental Bank franchise continued to deliver.

Loan originations were at the highest quarterly level for 2016.

Customer deposits were up close to 4% year over year and we increased our customer base on a net basis by 5% for the year.

Credit quality remained high.

Early and total delinquencies were below the third-quarter and year-ago levels.

The nonperforming loan rate was the lowest it has been in five quarters and OREO and repo balances were down more than 20% year over year.

Major performance ratios improved.

Net interest margin, excluding cost recoveries, increased 19 basis points; the efficiency ratio at 55% was at its best point in more than a year; and return on average assets of 0.96% increased to its highest level in five quarters.

Capital continued to grow.

The leverage ratio and the tangible common equity ratios grew to the highest mark in five quarters.

And at $15.08, tangible book value per share was up close to 4% year over year.

None of this happens on its own.

It takes a lot of hard work, dedication, and effort and so would like to take on to thank our Board, our management team, and our associates, every one of you, for a job well done.

Please turn to slide 4. At the beginning of 2016, there was considerable uncertainty here in Puerto Rico and we promised that we would increase our focus on the business in order to deliver consistent quarterly results.

We are very pleased that we have been able to deliver on that promise.

From a financial point of view, key elements to making that happen were expanding net interest margin, maintaining strong credit and pricing discipline in the face of intense competition, reducing credit costs, and optimizing noninterest expenses.

The result has been improved return on assets and return on equity, while we continue strengthening our capital position.

Please turn to slide 5. From a business point of view, we achieved significant progress in 2016 executing on our strategy of differentiating Oriental through high levels of service and speed of execution.

Oriental is positioned as an innovator and challenger brand.

Our goal is to become the premier retail bank and the best performing bank on the island on a consistent basis.

In 2016, we led the market with new mobile applications such as Oriental Biz with mobile check capture for small business clients and cardless cash for retail customers.

This was on top of a long list of innovations we have already introduced in previous years.

These, along with our effective cross-selling efforts, have enabled us to consistently attract new customers.

As you can see on this slide, we grew our customers every quarter in 2016.

Through our high levels of service and product quality, we successfully converted these relationships, enabling us to end the year by maintaining or expanding our market share to the number two, three, or four in key areas.

Now here's Ganesh to review the quarter in more detail, after which I will make some closing remarks.

Thank you, Jose.

Good morning to all of you.

I will continue from slide 6.

You can see our key business trends in our slide -- in this slide.

Jose mentioned some of them; let me point out a few others.

Originated loan balances continued to grow, as you have seen before.

The dip in the third quarter is due to the exit of the PREPA line.

Associated yield increases are primarily due to the growing proportion of the higher-yielding retail loans.

Customer deposits declined a bit due to cyclical fluctuations in our large commercial account balances.

When you compare to the last year, the customer deposits are up $153 million, highlighting the growth in our customers' segment with the bulk of this coming from retail channel and business line.

Banking and wealth management revenues increased sharply from last quarter and up year over year as well.

As usual, we continue to optimize our expenses, balancing the reductions with the investments in new capabilities.

The efficiency ratio is now at the best level for the last five quarters.

This is within our target range and we are comfortable with this.

Please turn to slide 7 to see our new loan and fee generation for the quarter.

We closed on $258 million in new loans, excluding the renewals.

We had an excellent quarter in commercial with some new loans.

A new credit in the hospitality sector accounts for the increase in this category.

Auto loan production was also up close to 12%.

Industry sales of new cars in 2016 was up, but our success primarily comes from our strategies to maximize on our existing dealer relationships.

Residential mortgage production was in line with our average, up about $52 million a quarter in 2016.

Consumer lending was down slightly from a strong third quarter, but up about 12% year over year, reflecting our emphasis in this category.

I mentioned the fee revenues earlier; this quarter we generated more than $20 million with increases across the board.

Banking services revenue was up more than 6%, due to higher seasonal electronic banking transaction volumes.

Wealth management was up sharply due to annual insurance revenues.

Mortgage banking increased more than 20% due to higher mortgage servicing asset valuations.

Now please turn to slide 8. Trends in this quarter at the income statement again are in line with the last few quarters.

We have emphasized consistency right from the beginning of this year.

Interest income from originated loans continued to grow as the portfolio grows and from the mix I mentioned earlier.

While the income from the acquired loans continued to decline due to run off and lower cost recovery opportunities, investment securities was up a little due to lower premium amortization, but also from purchases during this quarter.

Interest expense declined from a full-quarter benefit of the third-quarter reductions in Federal Home Loan Bank advances and the subordinated capital notes.

Provision for loan losses fell more than $10 million.

If you recall, in the third quarter we had provisions for two Puerto Rico government-related loans and one commercial loan.

The FDIC loss-share expense declined, reflecting levels from earlier quarters in 2016.

Total noninterest expenses fell $2.5 million.

Most of the operating expenses categories were lower due to tight controls we exercised during the quarter.

Credit expenses were lower by $1.6 million as last quarter included annual property tax payments.

Lastly, the income tax expense was $7 million higher due to year-end adjustments.

For the year the effective tax rate was 30.5%.

Turning to slide 9, you can see our loan book translation and the NIM evolution.

The main point I would like to highlight in this quarter is the increase in core NIM to 4.89%, excluding recovery, due to a variety of reasons including the loan mix I mentioned earlier and [as to last year] the reduction in our borrowings.

Eliminating the non-accruing PREPA line also helps to widen the margin EBIT.

On slide 10, you can see the credit performance continues to hold steady, considering the prevailing market conditions.

Net charge-offs in commercial loan category is due to one loan we had provisioned for in the third quarter.

Mortgage [infills] were higher due to year-end assessments.

The NPL rate fell due to improvements all around.

Early and total delinquencies are also below third-quarter and year-ago levels.

Let me point out that much of these improvements over the last quarter has been due to our efforts in refining our loan servicing capabilities.

Turning to slide 11, our capital ratios continued to exceed requirements for a well-capitalized institution.

We continued to improve sequentially for the most part in every category since 2012, putting us in a very strong position today.

Similarly, on slide 12, you can see positive trajectories in tangible common equity and tangible book values over the years.

The average tangible common equity of $661 million was up 2.4% from the year ago and the tangible book value grew 3.8% from the last year.

Please note the slight dip in tangible book value this quarter is due to lower OCI valuations.

Turning on to slide 13, you can see some trends over the last five quarters.

As we have mentioned several times previously, one of our main goals in 2016 was to achieve stability in our core financial performance.

We are happy to conclude the year in a similar fashion and turn ourselves towards the new year challenges.

With these remarks, I conclude my portion and turn the call back to Jose.

Thank you, Ganesh.

Please turn to slide 14 for our outlook.

We view Puerto Rico's macroeconomic situation as similar to last quarter.

We are encouraged that the fiscal oversight board created by PROMESA has commenced to function in earnest.

We look forward to seeing the board gaining momentum in the exercise of their legal mandate of instilling fiscal discipline, while providing a path towards a consensual resolution of Puerto Rico's economic and fiscal challenges.

Puerto Rico's economy remains under pressure due to significant levels of political and fiscal uncertainty.

The reality is that a clear path toward sustainable economic growth is imperative and cannot be further delayed.

For that to occur, we need strong leadership.

We are confident that such leadership will be provided by the new administration with the firm guidance of the Board.

Regarding OFG, we promised consistency in 2016 and we delivered.

Our underlying businesses, credit metrics, and capital position are solid.

Looking forward, we believe that our quarterly performance should continue through the first half of 2017 in the range we demonstrated the last four quarters.

In closing, we at OFG have, for more than 10 years, successfully navigated through an extremely challenging economic environment.

Who we are today is clear evidence of a job well done.

Our focus remains the same as in the past: be excellent stewards of capital, proactively manage evolving risks, and most importantly, continue to provide service leadership, innovation, and continuous improvement with only one goal in mind: our customers' increased loyalty and satisfaction.

Whatever lies ahead, we fully expect to continue to adapt and prosper.

With this, we end our formal presentation.

Operator, please open up the call to questions.

(Operator Instructions) Alex Twerdahl, Sandler O'Neill.

Good morning.

Just to clarify, Jose, you said you expect EPS for the next couple quarters to be in the range of the last four quarters.

You're talking $0.24 to $0.27 on a reported basis; is that correct?

Yes.

Our quarterly performance during the first half of 2017 should remain level with what we provided in 2016, the results we showed you in 2016.

We are very confident on our franchise, how it has developed and how it continues to grow.

We are encouraged with the momentum we have in all our businesses and customer retention, attraction, and expansion strategies.

We are also very cognizant of the environment we operate in, so we remain cautious on our outlook for the second half of 2017.

Rest assured, guys, that as things continue to progress in Puerto Rico we will update you accordingly.

Great.

Then I just wanted to ask a little bit more on the margin.

I guess the loan yields jumped from 6.35% in the third quarter to 6.82%.

I imagine there is a little bit of noise in there from interest recoveries, etc., but how much of that was due to higher consumer balances versus how much of it was due to the rate hike that we saw in December?

And should we see some additional lift from that rate hike in the first quarter?

Alex, good morning.

I wouldn't factor in this quarter's performance any impact due to the rate hike.

It's too early to see any impact over there.

As I mentioned in my remarks, it's because of the higher proportion of the higher-yielding consumer and auto loans in the mix, in the originated loans.

And also there's the elimination of the PREPA, which was a non-accruing loan that affected the NIM in the prior quarters.

Great.

Then just one final question on mortgage production and balances.

It seems like origination activity, really in all the categories, has been somewhat within a range for the last several quarters and we've seen mostly categories kind of, at least for the non-acquired loans, trend a little bit higher.

But mortgage continues to trend lower.

Is that -- is there a point that you can see in the near future where we see some crossover, where the origination activity is enough to sustain mortgages at their level?

Keep in mind that we still continue to say a hybrid originate-to-sell model or originate-to-securitize at least.

And a part of the Ginnie Maes we retain; that part goes into the securities balance, so you will not see that in the loan balance.

The rest of them we securitized and sold.

So this is a model that is not going to result in a net increase of the mortgage loans on our loan book.

Therefore, you would see continuing decrease as long as we hold that model.

I also think that the mortgage business here in Puerto Rico is a little complicated, simply because of home values and loan-to-value levels.

We don't do much of nonperforming -- I mean, nonconforming, so our origination levels will remain around the levels we have right now because the market is what it is.

Right now we don't have a legacy kind of commercial residential projects that we finance permanently.

And that also is part of the reason for our volumes, too.

And primarily we see the mortgage business as a fee-generation activity at this point in time.

Origination side.

Okay, great.

Thanks for taking my questions, guys.

Brett Rabatin, Piper Jaffray.

Wanted just to first ask about the expense run rate going forward.

Obviously, really strong management of expenses, other line especially, in the fourth quarter.

Can you just maybe give us some thoughts on -- obviously 1Q has FICA, but just a core run rate and were there anything else that might affect expense run rate going forward?

The quarter -- you need to sort of take a look at the whole year and see what's in store for 2017, because the quarter has got some variations.

We might have -- like, for instance, second half of the year there might not be some Social Security taxes and everything in the employment-related expenses.

Therefore, I can only answer to you as a whole for the year.

What we project internally for there's going to be at least 2% to 3% increase year over year for 2017.

Okay.

Then it was nice to see delinquencies continue to be worked down, and I know charge-offs included that one $3 million commercial loan, but can you give us any other color on the charge-offs in the quarter.

And, if you have any visibility, that maybe that run rate might decline a little bit or thoughts there.

On the commercial side, as Ganesh mentioned in his remarks earlier, it's a loan that we had provision for in prior quarter.

You look at our early delinquency in commercial and it's negligible basically.

So we, right now, are not seeing any reason to believe that we're going to have a significant level of charge-offs on the commercial side.

You saw the mortgage numbers in terms of charge-offs.

December is always a -- the fourth quarter is always a year where the assessments on all the properties come due and then there's usually a spike, given the markets that we operate in.

But, in general, we feel that we have pretty good grip on how the losses are coming in.

Certainly, it's going to be very much dependent on how the second half of the year, 2017, in terms of the economy and the issues that need to be addressed, play out.

And that's why we kind of are focusing this year in a two-tier way: let's look at first half and then let's see how everything develops afterwards.

If you look at our total equity and nonperforming rate in the commercial category, it's been reducing.

Obviously with PREPA rolling off it's a big drop, but even with our post-PREPA phase we have been reducing the delinquencies over there.

Okay.

Then just lastly, your capital ratios continue to climb.

If we get any kind of positive momentum with PROMESA or the budget comes out and it looks like things are going to be stable, would there be any possibility for some capital actions this year?

How do you guys think about that?

We look at our capital levels.

Not only that we are way ahead of or way above the requirements; we are also way above our peers in the US, so we understand that.

We also have a different landscape to operate in, as we've continuously mentioned, so we are being prudent here.

I think when you look at the macro, things are moving in the right direction, but there's still some high level of uncertainty and we need to just be cautious.

So we will certainly update -- as things progress, we will certainly update everyone on that side.

Okay, thanks for the color.

(Operator Instructions) Joe Gladue, Merion Capital Group.

Good morning.

I guess, first off, just wondering on -- I guess since the Fed rate hike, are you seeing any pressure on deposit rates?

No, no, we have not.

We typically have in Puerto Rico a higher level of cost of funds for deposits in Puerto Rico and we're not seeing that.

We hope that the local banks, friendly competitors, also address the issue constructively because certainly it's going to have an impact if one of the competitors in the island (technical difficulty) increased deposit costs for customers.

But we are relatively encouraged that we will not be forced to raise interest rates on our deposits in the near future, given the fact that we have a spread versus the US rates right now and been carrying that for several years now.

All right.

Also, just I guess in light of the potential for austerity measures to be necessary as part of the government debt situation, how would you expect that to impact I guess the consumer lending side, since I guess that's been an increased emphasis lately?

It's too early to tell, Joe, but the numbers that they are showing and the timeline and the time span that they're -- when I say they meaning the fiscal board -- that they are looking at is a relatively large number and a relatively short period.

So we expect to have some pressure on the consumer, definitely.

The consumer should feel the stress, given the magnitude of the reductions that they are talking about.

Having said that, when you look at ourselves, we really don't have that big of an exposure to the consumer.

When you look at our consumer portfolio, it's only $200 million or $300 million portfolio of $4.2 billion in loans.

So we look at this very closely, as you can imagine, and that's why also you look at our yields in both the consumer and auto portfolios.

Certainly are higher than our peers and that's because we are very sensitive to risk pricing, too.

All right.

I guess lastly on income tax expense.

Looking forward, you expect it to be closer to the full-year effective tax rate or closer to the fourth quarter?

We are shooting for 35%, as usual.

There might be some changes over the quarters, but 35% will be our target ETR for the year.

All right.

Okay, thank you.

Brian Klock, Keefe, Bruyette & Woods.

Good morning, guys.

I apologize; I dialed in late so I'm not sure if you already addressed this, but I guess maybe a two-pronged question.

One, the commercial quarterly loan production was up significantly.

It's 14% over a year ago fourth quarter.

I'm not sure if talked about it already, but is that anything that you are seeing that is maybe a sign of confidence on the commercial side?

Or maybe you can talk about that?

Then I guess the second part, Jose, is with everything you guys have done this year with derisking the balance sheet and bringing expenses down, it seems like the margin is a little cleaner, more straightforward from the accretable yield part.

Can you talk about the other things you are doing that we don't see in the numbers that are helping to grow new consumer accounts and some of the other digital and other things you guys have invested in that are actually starting to pay some dividends this year?

Yes, sure.

Let me address the commercial question first.

Ganesh mentioned in his remarks our commercial production in the quarter was higher.

We had a particularly larger loan, a commercial loan in the hospitality business that we originated in the quarter and that's kind of what brought it higher, the origination levels versus other quarters.

We are not seeing that as a trend.

We think that the business sector in Puerto Rico they are somewhat more confident.

I don't think they are still confident, but they are recognizing the challenges that the economy presents today and that there is still some execution risk from a political perspective, as well as from a fiscal perspective.

So I think everyone is holding kind of a holding pattern from a commercial business perspective.

We are not seeing the same levels of pipeline that we used to have at the beginning of last year, so we look at that.

And we also -- some of the pipeline that we have is a little bit less attractive from a credit perspective than it used to be.

So we are seeing a little bit of a deterioration there.

Nothing big.

It's just simply how we are looking at potential commercial originations.

I think there are several industries that are showing some interesting opportunities.

The food and beverage franchises and distributions, distribution companies are ones that are pretty solid and they are looking to consolidation.

Hospitality and entertainment, I mentioned and I also highlight the nonhospital healthcare businesses.

We see that in the small and midsized type of commercial loan where we see those opportunities, too.

But, Brian, it's still a little bit of a holding pattern from a commercial perspective, unless you look at the $100-million-plus type of loans where we really don't go there.

So that's on the commercial side.

Really the exciting part of what we are doing and we accomplish and continue to move forward on in 2016 and now 2017 is our consumer business and our retail business.

And you saw it on our presentation, I think it's on chart 5 or slide 5, we continued to build our consumers and our clients.

We have grown net 5% in 2016.

That comes from another 5% net from 2015.

Deposits continue to go up.

And we have done this two ways.

One is the easy part, which is providing the technology and the market-leading innovations that we talked about, but the other part is the harder one and that is training our people.

Making sure that we deliver a differentiating -- a different proposal to our customers at the branch level and on every touchpoint.

And as technology continues to evolve, we are converting and trying to make sure that our branches are less transactional and more value-add for all our customers.

And, lastly, I think our brand has good momentum.

I think we are a challenger brand and that has its positives, and we feel that we should continue to benefit from that in 2017.

So that part is really exciting for us.

We have a great team and are training on making sure that they have the skills and all the -- deliver values is very important for us.

We will plan to continue to invest in that because that's the only way you can attain leadership in our business.

Yes, that's a great point.

I couldn't agree with you more on that.

Thanks for the color and thanks for your time.

Brett Rabatin, Piper Jaffray.

I just wanted to follow up on deposits.

I know you had some seasonality there with some commercial deposits.

Can you talk about just your thoughts on this year?

You have obviously been growing your overall client base, but just what you are planning this year to grow deposits.

And does 1Q already look like it's got the commercial side back up?

I think from a deposit side, I think it's a reflection of the retention strategies that we're putting in place with our clients and our expansion strategies of businesses cross-selling.

I think our team is doing an incrementally better job at that and we want to continue to move that further.

And we are bringing in new clients, too.

So that's kind of from the retail side.

On the commercial side, I think on the middle-market business we have done a better job at bringing clients with deposits and that is looking positively.

I hope you understand, too, that we -- or notice, too, that our noninterest-bearing deposits continue to grow and we are encouraged by that.

And that is because of the small and midsized type of clients that are coming in that continue to help us out on building our deposits.

So I think it all comes in a whole package.

It's not just one single specific strategy that we have on the deposit side, Brett.

It's more of a complete package, where we are focusing on the customers and we're trying to establish strategies that penetrate the services that we offer to them and they become deeper in the relationship with Oriental than the past.

That is very exciting for us.

Okay.

The other thing I just wanted to cover was the securities portfolio.

The yield was up 5 basis points linked quarter.

What did you guys do in the securities book this quarter and maybe outlook an outlook on just where that yield might go given premium am and what you are investing in?

We didn't do anything; the market did it for us.

But to recap, Brett, the premium amortization was lower this quarter, so basically because of the CPR space and underlying factors.

But also we did increase the securities book.

We purchased about $125 million, $130 million more this quarter, mainly treasury securities and as well as the MBS paper.

Okay, great.

Thank you.

(Operator Instructions) At this time, there are no further questions.

I will now turn the floor back over to Mr. Jose Rafael Fernandez for any additional or closing remarks.

Thank you, operator, and thank you all for listening in today.

Looking ahead, we will be hosting a visit from Merion Capital and investors on February 16 here at our corporate headquarters.

A week later we will be hosting a visit from Sandler O'Neill and investors, also here in our headquarters.

And we have preliminarily scheduled our first-quarter conference call for April 21.

We look forward to talk to you throughout the quarter and looking forward to our results at the end of April.

Have a great day to all.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect and have a wonderful day.