OFG Bancorp (OFG) 2017 Q2 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 Jose Rafael Fernandez, 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 Investor Relations website on the homepage in the What's New Box or on the Webcast, Presentations and Other Files page.

Please note this call may feature certain 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 no 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 to all.

Today, Ganesh and I will review the quarter's results and Maritza will join us for the Q&A session.

Please turn to Slide 3. Before the market opened today, we reported another solid quarterly performance.

Net income available to shareholders of $13.6 million, was $3 million higher than the first quarter.

Earnings per share were $0.30 compared to $0.26.

Highlights for the quarter included 2 transactions that derisked and delevered the balance sheet.

We took advantage of an opportunity and sold a $38 million municipal loan.

This resulted in a $4.3 million loss, but more importantly, it reduced our exposure to the sector by 27% after July principal payments are taken into consideration.

We also unwound $100 million repurchase agreement, selling $166 million in related mortgage backed securities and generating a $6.9 million tax advantage gain.

Credit quality remained stable with a small decline in nonperforming loan and the total delinquency rates.

All key performance metrics improved versus the first -- the prior quarter with core net interest margin up 11 basis points, efficiency ratio up 34 basis points and return on average tangible common equity just over 8%, the highest level it's been in the last 5 quarters.

Capital continued to build.

Leverage ratio, tangible common equity were at the highest levels in the last 5 quarters, and our tangible book value per share of $15.51 was up almost 4% year-over-year.

Please turn to Slide 4. Our results continue to reflect the strategies we have implemented on a consistent basis in the face of Puerto Rico's fiscal and economic environment.

First, the focus on building our unique retail franchise, where we provide value-added service and develop close relationship with our customers.

This has resulted in higher customer satisfaction levels, a stronger brand and higher yields on retail loans, therefore expanding our NIM.

Second, an effort to optimize interest and noninterest expenses has also enhanced net interest margin and profitability.

For example, net interest margin this quarter benefited from the full quarter impact of a large repo we paid down in March.

Third, ever cognizant of risk, we have maintained our credit and pricing discipline even in the face of vigorous competition.

For example, this quarter's deposits declined largely due to a decision not to retain the accounts of two high cost corporate and government clients.

And fourth, the end result is that we have been able to steadily improve return on average assets, delivering a solid return on capital and strengthening our capital position.

Please turn to Slide 5. During the second quarter, we continued to lead the way in deploying customer facing banking technology in Puerto Rico.

We released a new and redesigned easier-to-employ version of our mobile banking app.

We also finished deploying deposit taking capabilities in all 47 on-premise ATMs.

We're very encouraged with the adoption levels and customer feedback.

This is part of our highly successful strategy of differentiating ourselves by delivering unparalleled customers' experience.

Our retail franchise continued to grow with increases in mortgage and consumer loan production and with a solid origination levels in auto loans.

The number of net retail clients continued to increase 5% year-over-year.

This was accompanied by a stellar quarter in the commercial segment, where our lending teams were successful in closing some key credits.

Now here is 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.

Let me start with Slide 6. For this section, I'll be pointing out just the quarter's highlights, as the slides are largely self-explanatory.

New loan generation at $254 million was one of the highest levels in the last 5 quarters.

We saw good increases in consumer and mortgage loan production.

Commercial loan production also increased significantly to more than $80 million.

This was due to new closings of small business and mid-market clients that we had been -- that had been part of our pipeline.

Auto loan volume was down after very strong first quarter, largely due to seasonality.

Deposits were in line with the last quarter, except for attrition of a high cost corporate and a government customer from the repricing efforts we have done earlier in the first quarter.

Please turn to Slide 7 for our loan book transition and NIM evolution.

In the second quarter, originated loan balances grew at more than 4% annualized rate to more than $3 billion.

This portfolio is growing with increases, particularly in higher yielding retail loans, the effect of which is reflected in the increased yields.

It's also important to point out that NII and NIM have significantly benefited from our active management of interest expenses.

To illustrate, you'll notice that average total borrowings has dropped more than 40% year-over-year to $614 million from more than $1 billion year ago.

At the same time, average cost of borrowings has fallen close to 100 basis points.

On Slide 8, you can see our credit quality has remained steady over past few quarters.

The sale of one municipal loan was an opportunistic move on our part to reduce reliance on this sector.

This loan was performing and was in good standing.

The loss on sale, as Jose pointed out, increased our net charge-offs by 39 basis points.

Please turn to Slide 9 to review our income statement.

The trends are very much in line with last few quarters, underlining our off-stated efforts towards achieving consistency.

Jose had addressed a lot of this already, but let me focus on a few quarter-specific items.

Provision increased $8.9 million.

This reflects a 4.9 -- -- sorry, $4.3 million loss on the sale of the municipal loan, creation of a $6 million allowance for other loans to the municipality and a $2.3 million recovery from a previously charged-off auto and consumer loans.

Other noninterest income reflects the $6.9 million gain on the sale of mortgage backed securities, which was part of our -- part of the deleveraging, Jose had mentioned earlier.

Noninterest expenses also included $1.3 million from a contract termination in an effort to consolidate office space into our headquarters here in Hato Rey.

Income tax declined $5.2 million quarter-over-quarter as a result of increased tax exempt income and various efforts.

With this, we were able to reduce our forecast of our effective tax rate to be similar to 2016 rate of approximately 29% to 30% as opposed to previously stated 38%.

Consequently, the second quarter included a $2.1 million beneficial adjustment from a higher tax rate we had recorded in the first quarter.

The next 2 slides show continued momentum we have experienced in strengthening OFG's capital positions.

Skipping over to Slide 12.

You can see the stability of our core performance over the last 5 quarters.

The main point I want to highlight here is that we are consistently exploiting operating and financial levers to achieve the results discussed.

With this, I conclude my portion of the presentation and turn the call back to Jose.

Thank you, Ganesh.

Please turn to Slide 13 for our outlook.

With regard to Puerto Rico economic trends quarter-over-quarter are largely unchanged.

There is a great deal of uncertainty regarding the economic impact from fiscal restructuring.

The outcome is not clear yet as to PROMESA's Title III / bankruptcy proceedings since they just started a few weeks back.

If the speed of change and execution in the last 12 months since the enactment of PROMESA is any indication of the future, Puerto Rico has a long road ahead to recovery.

Much more concerted and bold efforts are required from all stakeholders, including the private sector leadership to resolve the debt crisis, and at the same time, rebuild the economy.

While hopeful, we continue to monitor local conditions closely.

With regards to OFG, we promised consistent results and we delivered again.

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

We're very pleased with our performance and how we're proactively managing our business.

As you can see, from this quarter and as Ganesh indicated, we're committed on delivering earnings over the next 2 quarters in the $0.25 to $0.27 per share range as we outlined at the beginning of this year.

We believe we need to be highly prudent operating in Puerto Rico rather than taking undue risk by chasing growth.

So with this, we end our formal presentation.

Operator, please open up the call to questions.

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

First half, I was just hoping you can maybe give us a little bit more color into the rationale for selling off that municipality loan.

It just seems a little bit inconsistent with previous commentary that, that segment is separate from the central government that, that it should be money good and that probably is relatively high yielding stuff.

So maybe just talk a little bit about sort of what drove that decision today and whether or not the other loans, the other $130-some-odd million loans are going to be sold in subsequent quarters?

So Alex, we're just being opportunistic.

We feel that, as I said on the prepared remarks, Puerto Rico's situation continues to be uncertain.

And we had an opportunity to sell one loan and we thought that it was the prudent thing to do, given the environment we operate in.

We continue to feel that the portfolio of municipal loans that we hold is a solid portfolio.

We don't have any intentions to sell.

And we feel that, again, the environment is uncertain and we need to be cautious.

And that's also why we also took a -- an additional provision for that portfolio.

But it's a solid portfolio that we don't have any concerns at this point in time.

Okay.

What was the yield on that loan, the one that you sold?

I don't recall.

Okay.

Do you recall what the risk weighting was of it?

It's 100%.

100%.

100%.

It's 100%.

It's a commercial loan.

Yes.

And then what -- did you sold that at about 11% on the discount and then you marked the other ones down significantly less than that or are there any markets that reserve significantly less.

Is there -- Was there other reserve already allocated to those loans or is it just -- is it discount on the one that was sold just reflective of what it would take to sell it today?

So the answer to that question, you need to wait for the 10-Q because it's -- first of all, some of the loans are purchased, some of the loans are originated.

And in general, it's a general provision that we did for that portfolio on the originated portfolio.

So you'll get more details on the 10-Q.

Okay.

And then just to switch gears a little bit towards the margin.

When in the quarter did you do that restructuring sell off the $100 million of -- or repaid $100 million of borrowings and sell off the securities?

Just so I can probably get a sense for whether or not it's fully incorporated already in the run rate to the margin going forward?

That was at the beginning of June.

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

Wanted to -- I guess, first just talk about the guidance.

You talked about the tax rate for the full year of 29% to 30% and kind of still expecting $0.25 to $0.27.

Quarterly, I guess, I'm curious to hear what aspect of the income statement changes because it'd seem like you'll be a little higher than $0.27 with that lower tax rate unless you're going to have mortgage banking income atrophy or the margin is actually going to reverse.

Can you talk maybe a little bit more about the trends in 3Q that you're expecting to have changed?

Brett, I think more than going into the income statement, the reason why we are maintaining the same levels of performance is primarily to give us the flexibility to operate in this economy where it is uncertain.

So rather than telling you any income statement line item would change, it gives us the flexibility to take through appropriate risk on to the balance sheet and grow the -- or grow or maintain the originated loan portfolio.

So that's where we are, trying to -- when we alluded to the operating levers, operating in this market, that's what we mean by that.

Okay.

And then just thinking about the credit trends, they were pretty benign, but there was a pickup in auto.

Are you seeing anything specifically in the auto segment?

And just curious on your -- you mentioned austerities.

Difficult to see if that's going to have a material impact yet.

But what you're seeing generally from business comfort with what's going on?

None very -- none that stands out.

You could see that from our early delinquency trends and things like that in the past.

It's -- what we're seeing, it's a gradual decrease over the last few quarters.

(Operator Instructions) Our next question comes from line of Joe Gladue of Merion Capital Group.

I'd just ask if you could just give us a little color on just trends in the auto market sort of island wide where sales trends and competitive pressures?

Yes.

So on the auto market, Joe, what we're seeing is relatively a flat new sales, slightly higher than last year, but nothing to write home about.

Used car sales are also a little higher, but again nothing too significant.

We continue to focus on our market, which is the medium kind of a -- medium price -- kind of price level autos.

And we do have a pretty solid production going on with our -- with the dealers that we have and also doing some retail credit at other dealers.

So from a competitive perspective, we feel that we are operating in a segment of the market that we cover very well, and we're happy with that.

So we are not seeing yet any repercussions from the uncertainty that we operate in on the consumer side, at least, on the auto market.

Okay.

And on the commercial side, I just want to make sure I understood your comments correctly.

You brought in some, I guess, good bit of originations, yes, I take it that probably depleted the pipeline a little bit.

We shouldn't expect similar levels of originations necessarily?

Yes.

So from the commercial market, I agree exactly what you said, Joe.

We do have still some pipeline.

We don't want to overstate the fact that the commercial lending business here in Puerto Rico is very competitive.

It's also -- we're starting to see a little bit of stronger companies buying or trying to buy weaker companies.

And we're also seeing some financing, where manufacturing -- small manufacturing companies are kind of unplugging themselves from the Electric Power Authority, and we do the financing for that.

And a -- so we've done some of those things.

But moving forward, we have a, I would say, an average pipeline on the commercial side.

And I think it's starting to be a little bit of a reflection on the austerity measures that are going to start to come to play here in Puerto Rico.

Okay.

All right.

And last question, I guess.

The office consolidation that you took a charge for, there is going to be some noticeable cost savings going forward from that?

We expect that.

But I think it baked into the next year, primarily because what we're doing is we're paying ahead the contract at this point in time and it will take few months for us to consolidate the office space.

(Operator Instructions) Our next question comes from the line of Glen Manna of KBW.

I just wanted to ask a question on credit.

If I look at the net charge off ratio of 179, if you normalize for the $4.3 million and then the auto credits, you get down to an NCO run rate of like 140 basis points, which is kind of in line with last quarter.

So is that kind of still what you're seeing?

Is credit kind of holding in there flat?

Yes.

I think we also, if you look at the total portfolio as a whole, not just the originated portfolio, which is a bigger portfolio, and we're seeing stable credit trends.

Okay.

And in the BBVA portfolio, it looks like there was a transfer to nonaccretable difference on the commercial side.

Is that specific to that portfolio or is there anything going on there?

It's a specific to the commercial portfolio that we have an extension of the accretable cash flow and that reflects that adjustment.

Okay.

And on the mortgage side, it looked like there was a transfer out, and we've heard some anecdotal evidence of some interested buyers, maybe all filing, coming on and buying mortgages.

What are you seeing in the mortgage market there?

There are interested buyers, but the question is what price.

I do not think there are acceptable exit points at this point in time unless one is faced with other pressures.

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

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

Thank you, operator, and thank you to everyone for listening in today.

Looking ahead, we'll be on August 1 at the KBW Community Bank Conference in New York City.

And we're preliminarily scheduling our third conference call -- third quarter conference call for Friday, October 20.

Until then, thank you, again, and have a great day.

Have a good weekend.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may now disconnect.