OFG Bancorp (OFG) 2017 Q1 法說會逐字稿

Good morning. My name is Maria, and I'll be your conference operator today. Thank you for joining us for this conference call for OFG Bancorp. 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. There is a presentation that accompanies today's remarks. It can be found on the Investors Relations website on the homepage in the What's New box or on the Webcast, Presentations and Other Files page.

Please note that this call may feature certain forward-looking statements about management's goals, plans and expectation, 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 afterward. (Operator Instructions).

I would now like to turn the call over to Mr. Fernández.

Good morning to all and thank you for joining in today. Please turn to Slide 3. Before the market opened today, we reported another solid quarterly performance. Earnings per share of $0.26 were in line with the prior quarters, which have ranged from $0.25 to $0.27. It was also $0.02 ahead of the year-ago quarter. The Oriental Bank retail franchise continued to grow. Auto and consumer loans performed very well, customer deposits were up quarter-over-quarter and year-over-year and the number of net retail clients increased 5% year-over-year. Credit quality remained solid. Metrics such as the net charge-off rate, the nonperforming loan rate, the total delinquency rate were all down from the fourth quarter continuing the downward trends of the past years. Performance ratios also looked good. Net interest margin, excluding cost recoveries increased 16 basis points and the efficiency ratio and return on average tangible common equity were all within our performance targets.

Capital continued to grow. Once again, all capital metrics, such as the leverage ratio, tangible common equity ratio and tangible book value per share increased and were at the highest levels they have been in years. I'd like to add that above and beyond these numbers, there was also a consistent level of quality in our performance, especially in light of our operating environment.

Before I go on, I want to welcome Maritza to her first conference call as CFO. We're so pleased to have her also join us as a new member of the Executive Committee. Maritza came to us with the BBV acquisition and has been a terrific asset to our business, instrumental in helping manage OFG for more than 4 years now.

Now please turn to Slide 4. Our results for this quarter are the product of the consistent strategy we have implemented in the face of Puerto Rico's uncertain fiscal and economic environment. First, we have been focusing on building our retail franchise, where we can provide value-added service to our customers and develop close relationships with them. A byproduct of this has been higher customer satisfaction levels and a stronger brand. In turn, the higher yields on retail loans have helped to expand net interest margin of our higher yielding acquired loans paydown.

Second, our efforts to optimize both interest and noninterest expenses have also helped net interest margin and maintain our profitability. We made 2 such moves in the first quarter. We paid down a repurchase agreement in March resulting in a significant reduction in our borrowing costs, and we also terminated our remaining loss share agreement with the FDIC. And third, ever cost cognizant of risk, we have also maintained our credit and pricing discipline even in the face of vigorous competition. The end result is that we have been able to steadily improve return on average assets, delivering a solid return on capital and further strengthening our capital position.

Please turn to Slide 5. During the first quarter, we continued to lead the way in deploying customer facing banking technology in Puerto Rico. This is part of our highly successful strategy of differentiating ourselves in delivering an unparalleled customer experience. Two recent innovations underscore this program. In the first quarter, we introduced an online mobile app for customers to apply for a personal loan and then tracking the process from origination to disbursement. We also added an online mobile app for scheduling appointments. Customers can walk into any of our branches or offices to meet with our product or service specialist, knowing there will be virtually no wait or standing in line. Both of these innovations are first in the Puerto Rico market. All this has resulted in an expansion of our retail customer base and growing or maintaining our market shares to 2, 3 or 4 in key areas. Now I'd like to pass the call to Ganesh for him to review the quarter in more detail, after which I will make some closing remarks.

Thank you, José. Good morning to all of you. Let me start on Slide 6. On this slide, you can see what José was talking about in the numbers on our dashboard. Total new production of loans fell from fourth quarter to $210 million, primarily due seasonal softness in our commercial business, which can be somewhat lumpy. However, looking at our retail category, we had a great quarter. Retail loan production totaled $172 million. We have reached this high watermark 3 times in the last 5 quarters. Our originated loan balances continued to grow close to $3 billion. Because of the increasing proportion of higher yielding retail loans in our originated portfolio, the yield levels continued to climb reaching almost 7%. We also expanded our customer base. Core deposits grew 1.3% from the fourth quarter, while the pricing remained almost flat. Fee revenues at $17.4 million were down from the fourth quarter, which benefited from cyclical factors. However, they were higher than the year-ago quarter, despite the drop in mortgage banking revenues. José also pointed out continued efforts to optimize our operation. In terms of the efficiency ratio, our outlook remains the same. We're comfortable to run the business with our target in the mid-50s range.

Please turn to Slide 7 that covers our loan and fee generation for the quarter. I highlighted earlier the results in our retail business, which continues to be our area of emphasis. The trend demonstrates the success of our efforts in the -- in growing the segment. Auto loan production was stellar, up close to 12%, similar to last quarter. This continues to reflect the industry sales and as well as our momentum we have with our floor plan dealers. Consumer lending was nearly even with the fourth quarter, but up 23% year-over-year. Residential mortgage production was down 15% from the prior quarter. As you may recall, our focus remains solely on the conforming mortgages and that we sell most of our originations in the secondary market. Beginning the first quarter of 2016, we have seen a steep contraction in demand levels for this product. Commercial loan production was $38 million compared to $87 million in the fourth quarter, in which we had some new loans to the hospitality sector that we discussed in our call last time.

Looking at our fee revenues. Banking and wealth management was level with the fourth quarter, once you set aside the year-end and cyclical revenues. Mortgage banking revenue, as I said earlier, declined $1 million due to lower secondary market activity and servicing asset valuation.

On Slide 8, we show our loan book transition and NIM evolution. As you can see, we're experiencing the changing mix of a growing originated loan balances and the slow decline of the portfolios we acquired from Eurobank in 2010 and from BBVA Puerto Rico in 2012. Earlier, I pointed out that originated loans are now back up to the $3 billion mark. In 2016, we saw a dip in the balances due to the sale of the PREPA loan, which was approximately $200 million. With the higher yields on originated loans, increased customer deposits and lowering the cost of borrowing, we have maintained our net interest income in the mid- $70 million range.

Please turn to Slide 9 for a 5-quarter trend of the metrics. During this period, we've continually improved our credit performance, especially considering the prevailing market condition. This has largely been made possible due to timely derisking of our balance sheet, and mostly because of our proactive efforts in augmenting our loan servicing capabilities. As a result, we were able to adapt to the evolving market changes. The net charge-off declined 40 basis points from the prior quarter in which we charged off an isolated commercial loan to a client in the education sector. Nonperforming loan rate fell 29 basis points with declines in mortgage, auto and consumer loan categories, while the total delinquency rate fell 15 basis points.

On Slide 10, you can see the trends in this quarter's income statement again are in very much in line with these last few quarters underlie our oft stated efforts towards achieving consistency with our results. The commentary in this slide is self-explanatory, but let me highlight a few points that may be of interest. First, the interest expense declined $1 million from the prior quarter. In March, we paid a 4.78%, $232 million repurchase agreement. Second, the provision for acquired loans increased $3.2 million. This was due to periodic assessment of the remaining BBVA auto loans and the remaining Eurobank single and multi-family residential mortgages. Lastly, in the FDIC loss share expense, there was a onetime net gain of $1.4 million. This reflects the outcome of the February 2017 termination of the FDIC loss share agreement covering the former Eurobank mortgages I just mentioned.

The next 2 slides show the momentum OFG has experienced in strengthening its capital position. Our capital continues to build nicely. Regulatory capital continues to substantially exceed requirements for a well-capitalized institution. You can see this positive trajectory year-over-year since 2012, putting us in a very strong position today.

Please turn to Slide 13. The main point we're trying to convey here is the stability of our core performance over the last 5 quarters. With this, I conclude my portion of the presentation and turn the call back to José.

Thank you, Ganesh. Please turn to Slide 14 for our outlook. Puerto Rico has taken another major step forward in resolving its fiscal problems. In mid-March, the financial oversight and management board approved Puerto Rico's Government 10-year fiscal plan. As I have said before, Puerto Rico's economy remains under a lot of pressure due to significant levels of political and fiscal uncertainty. The reality is that a clear path towards sustainable economic growth is imperative and cannot be further delayed. Continued steps in this direction, focusing on approving a budget for fiscal 2018, executing the fiscal plan and improving Puerto Rico's competitiveness by first truly and once and for all transforming PREPA into an efficient open market low-cost energy provider will help restore confidence and certainty among people and businesses in Puerto Rico. And finally, allow much-needed capital to flow back into the island.

For the near-term, the economy should remain the same and we do not expect to see the full impact of the government's austerity measures until 2018. Having said that, our underlying business, credit metrics and capital position are all strong and solid. All in all, we're very pleased with our performance and how we proactively manage our business. While optimistic, we will continue to monitor local economic conditions closely.

With this, I end my commentary -- we end our commentaries and open it up for questions. Operator?

(Operator Instructions) Our first question comes from the line of Alex Twerdahl of Sandler O'Neill.

Couple of questions from me. I think most of us listening to this call are really focused on the implications for this new fiscal plan on the banks, and you guys particularly. So I have just a couple of questions I want to drill in on here. The first one is on commercial -- the commercial loan originations. And you sighted in the release some seasonality kind of causing those origination numbers to go down, but if you compare to the first quarter of last year, the first quarter of '15, we're still seeing the origination numbers much lower than those 2 quarters. So is there really seasonality or is there kind of a change in the mindset of commercial customers or is there something else that we should be reading into here or could read into here that would potentially cause that number to be lite for a few quarters going forward?

Let me just kind of put this in perspective. When we say seasonality on the first quarter commercial production, it's because throughout the year’s first quarter given tax returns and financial statements and all that stuff, it kind of slows down. Now having said that. Certainly, there is a kind of a holding pattern by the businesses given the uncertainty in Puerto Rico and that it has been increasing as the years go by. So that certainly is affecting us. But what I think more importantly is the competition. I think larger banks are being very aggressive on the commercial lending side and we're very disciplined. And we refuse to enter into transactions that don't fit our ROE modeling. So we rather sacrifice volume for continuing our strategy and staying the course with our plans, Alex. So that's kind of what's behind it. Having said that though, we do have a very strong pipeline. And we continue to say and see a very strong pipeline of midsize, commercial type of companies that are knocking on our doors to provide to them some level of financing. So it's a matter of how we close them in the next couple of quarters, and you'll see the results as we move forward. We're still very confident that we will meet our goals on the commercial origination side for this year.

Okay. And then I just wanted to ask you to talk a little bit more about your final comment and that was that you don't expect to see the full impact of the austerity measures until 2018? Is that the impact referring to credit impacts, growth impacts? What kind of -- would you expect to see in 2018 based on -- obviously we don't know the budget for next year, but we know that there is going to be something like $6 billion over the next 10 years of government cost reductions from the workforce. Is that -- is the impact of that is that you're referring to?

So what we're referring to with that is, Alex, that given the fiscal plan that was approved and given the fact that, that fiscal plan kind of pushes the austerity measures 6 months into kind of the end of this year with the real effects of -- or the potential effects of either slow down further in the economy, deterioration or potential deterioration in credits is being pushed down also 6 or 7 more months into 2018. That's what we're trying to convey there.

In terms of deposit market or the loan generation, Alex, it depends on the categories. We already talked about how it is already -- the market's already affected the conforming mortgages, right. But on the other hand, if you look at the consumer market and auto market, it has actually grown in 2016. So in spite of all the uncertainty that we have, there's pockets of opportunities and that's what we're going after.

Our next question comes from the line of Brian Klock of Keefe, Bruyettes.

So José Rafael and -- I wanted to, I guess, first say congratulations to you and your team. I mean it's been a hard environment, a tough environment, and you guys keep putting up some more consistent results. So congratulations on the hard work.

Thank you.

And I guess, I should say congratulations to Ganesh and Maritza as well on your promotions.

Thank you.

Thank you.

So thinking about everything around the conditions, like Alex just asked about with the protocol and fiscal situation. You guys are still investing pretty much in the business. So I guess, it's a twofold question. Some of the innovation are somewhat new, right, so you've rolled out some of the innovation, but you got some good traction in customer growth. So maybe talk about the potential for more growth and is that 5% year-over-year is that in line with your expectations and maybe what is the future expectation of that growth. And then, secondly, expenses were pretty well controlled this year. Actually, they were lower than we thought. So are there other investments that you're sort of self-funding from some other sort of cost saves? So maybe talk about the expense base in that context.

So from a customer perspective, we're very happy with the trends that we have. Certainly, our strategy is gaining a lot of traction and we're seeing it in all the metrics that we discussed in the formal comments that we made. So we're encouraged with that, and we're happy with the 5% year-over-year customer growth -- net customer growth. Certainly, we're ambitious and we want to reach for more and we're working hard to bring to market a technology, but more importantly, the level of service and value add to our customers so that they really engage with us at the branch level for more value add than transactionality and use technology for that. So all in all, our retail business is doing well and we're encouraged. We have to do better and competition is hard and ferocious, but we feel that we have a good strategy and we're executing well on it.

Great. I don't know if Ganesh or Maritza can follow up on just the thought process around the expense base and this is a good run rate and I guess talked about the investments and sort of cost saves along with investing in another sort of innovation.

Brian, I think if one thing that has differentiated us over the periods, we've been -- sorry, you've covering OFG, I think it's the expense and the cost management capabilities or discipline that we've had. And I think we feel strongly that we are in the right place in terms of our target efficiency ratio, which would include operating expenses and as well as investments that we make into our capabilities. So that's what we're going to be shooting after and at this point in time, this is not the market for us to kind of increase our investments, neither decrease our investments by a step primarily because we still have the business to run. So the mid-50s efficiency ratio is -- continues to be our target as I mentioned. And that's what we're going to be operating on.

Okay. And, I guess, last question and then I'll get back in the queue. From the BSA, any amount perspective, can you update us on that process and whether or not the expense run rate could come down from here or anything like that related to that expense level?

BSA, we're in the yearly review exam process as every bank goes through in terms of the overall FDIC examination. So we'll wait for that. Regarding expenses from the regulatory requirements, we're not different than any other bank. We have to manage that and the pressure is strong and the pressure is real in terms of adding more resources to all -- to cover all the regulatory angles. And certainly, we add ourselves to the crowd of bankers asking for more standardization in the regulatory regime for banks.

(Operator Instructions) Our next question comes from the line of Brett Rabatin of Piper Jaffray.

And congrats from me as well on the executive promotions. Wanted to first just ask, you talked a little -- you talked some about the austerity, in and out, playing out until the next year, but you're also continuing that improvement in the delinquency numbers. And so, I guess, I'm hoping you can frame for us maybe your thoughts on, can those continue to be flat to down and maybe have some positive implications for credit despite what's going on or maybe give us some thoughts on how you see credit playing out. I know it's tough on a credit by credit basis, but just how you see the general trends given the environment?

Let me give a big picture, and I'll let Ganesh go into the details. Because I think part of our success has to do with the decision we made in 2015 to get focus on credit and collection for the retail side, and we put it all within 1 team and the same thing with commercial. Instead of having auto loans doing their own thing and mortgage doing their own thing on credit and collections, we all put it under 1 roof and 1 leadership. And that I think was a very successful and good strategic decision. And that has allowed us to one, use resources for multiple efforts on the retail collection side, and be more efficient. And two, be more focused. So -- and all of that is done as we look into the future and feel that there is a potential deterioration in the economy and the implications on that on credit. So we are -- that's where we're right now and we're continuing to fine-tune all our efforts on the retail -- credit and collections team to make sure that we manage a potential deterioration on credit. The same thing with -- on the commercial side, where we have a unit dedicated to that too. And that is a different approach, but we do have a very focused and successful approach at getting rid of REOs and reducing the NPLs on the commercial side, as you could tell also on the early delinquency that on the commercial side it's very insignificant given the size of our portfolio. So that's kind of a big picture, Brett. From a more specific -- I'll let Ganesh, because I think specifically on the retail side and the credit and collection the efforts have been superb.

Thank you, José. Just to add to what was said, the capabilities that we've put in place have been sort of very helpful for us in the past few quarters. In fact, if you look at the overall economic activity index, which has shown continued, sort of, softness and decrease, but if you look at our current metrics, we sort of bellied those trends as well. So if -- going back to your original question, if the austerity is going to result in similar economic trends without a shock, we expect the trends to continue. So what we have done basically is our ability to absorb little bit of reduction and as well as just kind of face the economic challenges that we may face at the current level, but if there's going to be a 10% to 15% drop, all bets are off. So I'm not able to project to you what exactly would be the sensitivity over there. But all we are saying at this point in time is, according to the plan, we see the austerity measures and all the things to continue having the similar impact that we have seen. And if that is the case and if that's the base sort of scenario, then we should show our results to be the same.

Okay. And then the other thing is, the margin expansion was more pronounced this quarter, but you've done a good job lowering the cost of funds. Are you planning any additional changes to the borrowing costs in the next few quarters? Can give us some thoughts maybe on the core margin as you see it given your higher consumer originations?

What we saw with the mere reduction in borrowings is one of the last major repo agreements that we've had. From this point in time they're shorter-term agreements and we do need them in place for our funding and as part of our asset liability management practices. So we don't see any stepwise reduction in the borrowing cost going forward.

Okay. And then just last on this technology, this personal loans platform. Can you give us any thoughts on how big you think that could be in terms of generating new loans, new relationships? How you think about that platform?

Yes, we just launched it one week ago. I'll let Ganesh go.

Well, I just want to, like José mentioned, I want to make sure that we clearly communicate our strategy to differentiate is based on customer experience first. Yes, nevertheless, we've invested in innovative technologies, but that's not the only thing that we do over here, right. So I'm not -- this is not like launching another direct-to-consumer sort of website, it is an addition technology, just makes the current origination process little bit more accessible and customer friendly. So what we're trying to do is, obviously grow, at the end of the day, our efficiency and we need to try it out and see. We don't have hard and specific targets for us to tell you, Brett, at this point in time. But we do want to maximize out of the business and the infrastructure we have and this is our strategy to go after it.

Our next question comes from the line of Joe Gladue of Merion Capital Group.

Let me go back to the net interest margin for a second. Could you just remind us what's the split between fixed versus variable rate loans in the portfolio?

On the commercial side, it's around 50%. 50-50.

Okay. And I guess on the deposit side. Clearly, it doesn't look like you've seen much pricing pressure on the deposit side so far, at least through March. You seeing any more? Do you have any expectations that that will start to change as we -- as the Fed increases?

No, not at this point. I mean, we've been running, as you know, 30 to 50 basis points higher in Puerto Rico versus U.S. in terms of deposit costs. So there is a little bit there of a lag and certainly, there is a, how should I say this, there is a leader in the market that will basically establish what those rates would be in the future. So let's just leave it at that.

On the auto lending side, you've had pretty good growth in originations for several quarters. I assume that, that indicates some market share gains. Just wondering if you could touch on where that market share might be coming from and what's driving your gains versus their losses?

Part of it has to do with the recent increase in new cars sales is in the market. So that's one. But we've been originating at a higher percentage by growth than the market. And the reason is I think, how close of a relationship we have with our dealers. And the dealers we have floor plans with and the dealers that we don’t, we also try to, as Ganesh alluded earlier, what we do with the -- on the retail side, we also do it on the dealer side, just be close to the client and present to them a differentiating customer service experience and that means a lot of handholding, a lot of face-to-face and involvement from the top leadership all the way down. So that to me makes the difference and that's why we work hard every day to achieve the difference and the differentiation versus our competitors.

(Operator Instructions) We have a followup question from the line of Alex Twerdahl of Sandler O'Neill.

Just one quick followup, I'm not sure if you mentioned this and I missed it, but in the last quarter I think you expected EPS to run kind of $0.24 to $0.27 or kind of within the range for the first couple of quarters of 2017. Is there anything that would cause you to change that outlook?

Not at this point.

No.

(Operator Instructions) At this time, there are no further questions. I'll now turn the call back over to CEO, Mr. Fernández, for any closing remarks.

Thank you, operator, and thank you to all our stakeholders who have listened in today. Just a reminder, looking ahead, next Wednesday is our annual meeting -- shareholders meeting at our headquarters here in Hato Rey, Puerto Rico on May 16th. Ganesh will be participating at the Piper Jaffray Financial Institutions conference in Palm Beach and on June 13th, we will be participating at the Piper Jaffray's Puerto Rico Bank Day in New York City. So we originally schedule our second quarter conference call for July 21st. So until then, we look forward to engage with you throughout the quarter. And I hope you have a good day, and a wonderful weekend.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.