José Rafael Fernández - President and Chief Executive Officer Ganesh Kumar - Executive Vice President and Chief Financial Officer.
Brian Klock - Keefe, Bruyette & Woods Emlen Harmon - Jefferies Brett Rabatin - Sterne Agee.
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 José Rafael Fernández, 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, under 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 any obligation to update information disclosed in this call as a result of developments which occur afterwards. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Mr. Fernández..
Thank you and good morning to all. I will cover the general overview and Ganesh will discuss key aspects of our financials. Please turn to slide three. We are pleased to report our 8th consecutive quarter of strong core performance since the acquisition of BBVA Puerto Rico operations.
We earned $0.36 per share for the fourth quarter and $1.50 per share for the year. Our results reflect what we believe is our sound strategy in a tough operating environment. We are prudently growing new loans and optimizing both loan yields and credit costs.
Concurrently, we are focused on managing our expense footprint and further refining our loan servicing capabilities. Looking at the fourth quarter, we saw originated loan balances and interest income, higher non-interest fee income and lower credit expenses FDIC amortization and recurring non-interest expense.
All this more than offset lower interest income and lack of significant cost recoveries from acquired loans. Fourth quarter 2014 also included a non-recurring accrual of 3.8 million for a cost savings initiatives planned for 2015 and a lower tax effective tax rate.
In other areas, loan production was good, demand and savings deposits cost continue to fall and performance metrics remain high. All this had a beneficial effect on capital. Tangible common equity ratio rose to 9.25% and tangible book value increased to $15.25.
As a result, as we previously announced in the fourth quarter, we repurchased $6.5 million in shares below tangible book the board increased the quarterly dividend per common share by 25% to $0.10 per quarter.
If you please turn to slide four, 2014 capped off another year of accomplishments for OFG and our oriental banking wealth management and insurance subsidiaries. Looking at our balance sheet, over the course of the year, acquired loans have declined to 42% of balances versus 52% a year ago.
We improved our funding portfolio as demand and savings balances grew to 67% deposits from 60% and we reduced our loan and security balances to the Puerto Rico government sector by 24% which accounted for a good portion of decline in acquired loans in 2014.
As for income statement provisions were higher excluding the impact of last year’s MPL’s sales. This primarily reflected increased balances of originated loans versus acquired as opposed to any major deterioration in credit quality.
In fee income, we saw some pressure in banking and mortgage but wealth management held up well and mortgage banking reboundaring the second half of the year. Including the fourth quarter accrual, non-interest expenses came down nicely. However, the real story is on the progress we have made on the business front.
We have been able to leverage our acquisitions to acquire great strides evidenced from the results above. Our new branding message Live the different bank the different is starting to pay off in terms of new customer acquisitions. One good example is our new checking account that added 10,000 plus net new customers in 2014.
In addition, we have led the market in product and technology innovations such as surcharge free ATM access, people pay and order all receiving great acceptance and growth in our markets. I will have some additional observations later but for now, I will turn the call over to Ganesh to get into the financial detail..
Thank you and good morning to all. I will cover the general overview and Ganesh will discuss key aspects of our financials. Please turn to slide three. We are pleased to report our 8th consecutive quarter of strong core performance since the acquisition of BBVA Puerto Rico operations.
We earned $0.36 per share for the fourth quarter and $1.50 per share for the year. Our results reflect what we believe is our sound strategy in a tough operating environment. We are prudently growing new loans and optimizing both loan yields and credit costs.
Concurrently, we are focused on managing our expense footprint and further refining our loan servicing capabilities. Looking at the fourth quarter, we saw originated loan balances and interest income, higher non-interest fee income and lower credit expenses FDIC amortization and recurring non-interest expense.
All this more than offset lower interest income and lack of significant cost recoveries from acquired loans. Fourth quarter 2014 also included a non-recurring accrual of 3.8 million for a cost savings initiatives planned for 2015 and a lower tax effective tax rate.
In other areas, loan production was good, demand and savings deposits cost continue to fall and performance metrics remain high. All this had a beneficial effect on capital. Tangible common equity ratio rose to 9.25% and tangible book value increased to $15.25.
As a result, as we previously announced in the fourth quarter, we repurchased $6.5 million in shares below tangible book the board increased the quarterly dividend per common share by 25% to $0.10 per quarter.
If you please turn to slide four, 2014 capped off another year of accomplishments for OFG and our oriental banking wealth management and insurance subsidiaries. Looking at our balance sheet, over the course of the year, acquired loans have declined to 42% of balances versus 52% a year ago.
We improved our funding portfolio as demand and savings balances grew to 67% deposits from 60% and we reduced our loan and security balances to the Puerto Rico government sector by 24% which accounted for a good portion of decline in acquired loans in 2014.
As for income statement provisions were higher excluding the impact of last year’s MPL’s sales. This primarily reflected increased balances of originated loans versus acquired as opposed to any major deterioration in credit quality.
In fee income, we saw some pressure in banking and mortgage but wealth management held up well and mortgage banking reboundaring the second half of the year. Including the fourth quarter accrual, non-interest expenses came down nicely. However, the real story is on the progress we have made on the business front.
We have been able to leverage our acquisitions to acquire great strides evidenced from the results above. Our new branding message Live the different bank the different is starting to pay off in terms of new customer acquisitions. One good example is our new checking account that added 10,000 plus net new customers in 2014.
In addition, we have led the market in product and technology innovations such as surcharge free ATM access, people pay and order all receiving great acceptance and growth in our markets. I will have some additional observations later but for now, I will turn the call over to Ganesh to get into the financial detail..
Thank you, José. Good morning to everyone on the call. As usual, we have few slides on the fourth quarter and then I will then I will go through a series of slides on key trends shaping on our business going forward. Please turn to slide five.
During the fourth quarter, you can see that we continue to perform close to the target ranges that we set ourselves for various. ROAA was up 1.09% compared to the third quarter. ROTCE was up by 10.16% and the efficiency ratio improved to 49.2% eliminating the effect of $3.8 million accrual that José mentioned.
NIM came in more than normalized around 5.65%. The key differences in the third quarter were lower interest income in particular due to lack of any significant cost recoveries in our acquired and the absence of premium amortization on acquired higher costs time deposit which we benefited from prior quarter. Please turn to slide six.
We continue to experience positive and stable trends in most of our businesses in most of our first quarter. Compared to the preceding quarter, total loan production at $239 million was slightly lower. The decrease in commercial category was partially offset by increases in retail categories.
Other loan production increased slightly as the overall market showed some stability this quarter. Mortgage production continued to grow although associated fee revenues were approximately leveled due to rising pressure and in the secondary market. Consumer loan production held steady.
For the year, we’ve originated $919 million in loans which compares to $1.5 million last year. The difference between this trend can be attributed to our strategy of continuous low reliance on garment sector. In the free income side, banking services revenue increased 7%.
This was primarily due to seasonal increases as well as high electronic banking models. Wealth management was also up nicely. This was due to $1 million recognition of our insurance commission revenue. 2013 was a good year for our insurance business. On slide seven, we will show you the number of dynamics in our income statement.
As compared to the third quarter, interest income from originated loans as we continued to carefully expand volumes. Interest income from acquired loans declined due to normal paydowns as well as no significant cost recoveries as José mentioned previously.
Interest income from securities also declined a little more than $1 million primarily due to higher premium amortization at the interest rate fill. In turn, the following rates had a beneficial effect on other than comprehensive income in the shareholders’ equity.
Total interest income increased as compared to the third quarter which benefitted from some premium organization on the hire. Provision for non-acquired loan increased about $1.2 million while the net charge off decreased quarter over quarter this increase in provision and was driven primarily by higher volumes in the originated segment.
Meanwhile provision for acquired loans declined even more as there were no significant deviations and cash flow on current focus. We already discussed the increase and banking and wealth management revenues let me skip to the next point regarding the FDIC indemnification and amortization. This was down close to $5 million quarter over quarter.
This is primarily due to lack of cost recoveries as mentioned earlier but also because of higher in flows from last share plane this quarter. And recurring non- interest expenses declined primarily due to reduced general and administrative expenses.
On slide eight, you can see Puerto Rico related loan and security balances continues to decline in fourth quarter. Contractual balances of these government loans dropped about $9 million largely due to full repayments of the loan in the central government slowly. Regarding we continue to maintain our credit in the same as the quarter.
The decision to leave the status unchanged based on our latest duration of associated cash flow and credit analysis. Now on slide nine, for you to better understand OFG income generation capabilities, it is important to recognize underlying trends. On this slide, we are using average loan balances as we reported day before on our financial supplement.
Top half of our slides shows our originated - our non-acquired loan portfolio. This has gone around 15% or $369 million year-over-year. Knowledge represents 57% of our total loans as compared to 47% in Europe. The yield has generally been increasing. It was 6.6 in the fourth quarter and 6.2 in the year ago quarter.
The growth rate of the portfolio reflects our prudent approach to the prevailing Puerto Rico economy while overcoming the novel pay down in our mortgage portfolio. For several years now, we have been replenishing our originator residential mortgage as we have shifted to originated --.
On the bottom half of the slide, we show our acquired loan portfolio. This portfolio consists of acquisitions of BBVA Puerto Rico operations in 2012 namely the non-covered loans and the Euro bank FDIC deal in 2010 has covered loans as we record it. This portfolio at the total has declined 23% or $631 million year over year.
It represents 43% of our loans comprised to 53% a year ago. But because of the purchase accounting the blended yield is in the 11% range much higher than our originated portfolio. This portfolio has been declining due to normal pay downs.
In terms of accreteable yield, the non-covered loans have $446 million of accretable yield while the covered loans still have $110 million. with the a weighted average life of four to five years on the non-covered side and 2.5 years on the cover side.
In terms of income interest trends I want to highlight that as the higher yielding acquired loans were paying down, we are replacing them with less amount of loans with a more normalized rate. This is the reason you see NIM trending down. Last week, we already harvested the cost recovery opportunities in 2013 we don’t expect major wind falls in 2015.
Please turn to slide 10, there are several trends that we believe will result in generally reduced cost to offset some of the decline in the interest income from the acquired loans. First is that credit quality shows some encouraging science of stabilization.
With a refinement of our servicing capability, we continue to keep an eye on security levels on auto portfolios while monitoring the delinquency levels in a residential mortgage loans associated with certain maintenance.
As a result of improvement in our collection efforts, we saw a decline in the net charge-offs this quarter, with NPLs although there were remnants of last quarter issues with mortgage delinquencies, we saw improvements in auto and as well as commercial loan categories. The total delinquency was lower as well.
On slide 11, you can see the next trend which we have previously discussed as the more favorable deposit funding mix. Our proportion of demand and savings account loans as the share of total deposits continues to grow.
Due to ongoing product enhancement, the leadership locally not mobile banking offering, favorable market perceptions as José mentioned are evidence from the balances that we have reported. Such changes have enabled us to reduce our reliance in higher cost CDs over the last two years and reduce our deposit costs continuously.
We continue to harness our franchise strength in this area. Please turn to slide 12. We always operated in a cost efficient manner. Although, we see the need for investment and grinding customer facing capabilities and service innovation further, we are aggressive in managing other categories.
For 2015, therefore we expect a modest improvement only in our non-interest expenses. We are evaluating further branch consolidation opportunities but at the same time we would like to grow our deposit base.
However, we see the necessity to continue to invest in our capabilities in order to lead the market in terms of service delivery while continuing our strong financial performance. Now let us move to slide 13. As many of you know in the second quarter of 2015, most of the FDIC indemnification asset would have been amortized.
The amortization charge totaled $66 million in 2014 and should be approximately $25 million in the first half of 2015. After that, it should continue at approximately $3 million in the second half. The reduction in FDIC amortization will help offset the reduction in interest income as well as contribute to the bottom line growth.
As you can see in slide 14, we continue to build our tangible common equity, while we with a higher than normal level of TCE because of the economy in Puerto Rico our strong capital levels is four dozen capital management flexibility.
As we have demonstrated in the past, I believe we are unique in employing dividend increases, share buybacks and timely acquisitions strategies to maximize longer term shareholder return. That concludes my part of the presentation. Let me turn it to José for wrap up..
Thank you, Ganesh. Please turn to slide 15 for current outlook. With regard to Puerto Rico it is a mix picture. On the one hand, the GDB economic activity index has seen consistent declines in the last few months.
Treasury in flows for the first half of the current fiscal year that is July to December are behind the year ago period in the current physical year estimates. And GDB is planning to raise debt again to solve some challenging liquidity conditions.
On the other hand, a sustained drop in all prices could provide an additional lever as in managing current conditions as many of us have noted. We have seen some beneficial effects in certain industries such as tourism and local manufacturing and consumers are very happy in the significant drop in the price of gap.
But we have not yet seen any impact in the official statistics. With regard to the local banking industry, balance sheet continues to shrink. Every idea[ph] acquires exploration of commercial loss agreement next quarter and credit quality continues to be a concern.
However, consolidation opportunities can play meaningful role in boosting bank performances in these environment.
Within this challenging environment, we continue to adapt while adhering to our time tested approach all during this eight year recession this has enabled us to generate performance metrics that compares favorably to top tier peers in mainland. We plan to continue managing the situation prudently and build capital further as Ganesh just outlined.
And we plan to be flexible in our capital management approach, increasing dividend and share buyback or exploring strategic growth opportunities.
As we look ahead, we are confident that our growing market positions, strong capital and liquidity levels along with the momentum we have built in our franchise should enable us to deliver best in market financial results.
We strongly feel Puerto Rico deserves financially strong players like us, to deliver on parallel level of service catering to the needs of the market. It has always been our goal to be that institution in that Puerto Rico. That ends our formal presentation. Operator, let’s open the call for questions..
The floor is now open for questions. [Operator Instructions]. Your first question comes from Brian Klock of Keefe, Bruyette & Woods..
Good morning gentlemen..
Hi, Brian.
How are you?.
Good, god. So, just a quick question on the expense side, I know you guys have had some success with the promotions you’re talking with solid growth and your net new deposits customers in the quarter was pretty good on core expenses.
So, I guess can you talk about the impact going forward I guess may be on the personnel side of the early retirement program might actually need to downward momentum on the personnel expenses.
And I guess is there any thought of maybe you would reinvest that into other programs for growth so may be just kind of talk about the expense outlook?.
I’ll let Ganesh get into the details, let me just take the opportunity to show you a little bit of a big picture on what we’re doing with our franchise and the success we’ve had, because I think that’s what is making the difference all along.
We mentioned that we have grown our [indiscernible] 10,000 new customers in a whole year and that’s great success for us.
But bringing to market new technologies like FOTOdepósito, People Pay which nobody else has put Oriental in a different position where we have had significant growth on mobile banking, we’ve grown it in the year 254%, penetration on bill pay significantly. We’ve done all kinds of great news regarding our banking franchise.
When you look at OFG and our banking franchise here at Puerto Rico, we aspire to be the best bank, not necessarily the largest or the best and we are on our way to get to that level.
And we will continue to invest on our infrastructure just to make sure we are leading the market in bringing innovation but also focusing on our people and making sure that service differentiation at every touch points that we have.
So given that overall kind of look at where we are strategy and how we are being very methodical on executing on our strategy from a banking perspective, I think we also need to be very efficient. And that balance is what has made the difference for us to go many, many years.
So the early retirement plan is something that we announced late last year, and I think it’s going to allow us to be more efficient in 2015 from the payroll side..
Sure. José covered everything. I just wanted to add that unfortunately it’s not so static for me to say that we would definitely see a $3.8 million reduction in compensation expenses but what we’re trying to do is we’re also bringing some of the servicing aspects inside.
Some of the expenses might shift from other categories into personal categories and enhance our own capabilities in addition to expanded volume but all they were starting about.
So at the end of the day Brian, I would still ask you to keep efficiency ratio that’s what we should shoot for and set what the targets are and we want to operate close to that..
Okay, that’s perfect. That’s good color and thank you for that. And may be just a follow up question, the strong ROAA, strong ROTC, internal capital generation keeps growing, I know you talked about the flexibility with the buyback hit a nice increase in December.
So maybe you can talk about the capital deployment thought process for ‘15? It seems like you still have 16 million or 17 million in the authorization and the buyback may be talk about the priority on the buyback and the potential for their assets and other things that you can buy in Puerto Rico that could help deploy some of that capital?.
The short answer to all those questions is, yes to all. So we will continue to look at the dividend and the repurchase we discuss this on the monthly basis at the board of directors and we’re all on the same page on where we stand.
They are also as I mentioned on my remarks earlier, there is some potential consolidation opportunities in Puerto Rico and those things will continue to exist for the next couple of years and Puerto Rico I believe continues to be our bank. We’re shrinking economy that we have.
So when we look at capital Brian, we recognize that we have a very strong capital position, dividend and repurchase our part of the equation and it’s a primary part of that decision making process. And if there’s any potential for us to look at some assets --.
We will also look at those assets in a very efficient way meaning that we have some ROE and ROA targets that we want to continue to meet. So we’re very disciplined on both the opportunities..
Great. Thank you. I’ll get back in the queue but I think you guys have done a good job positioning yourself for opportunities in ‘15. So thank you for your time..
Thank you, Brian..
Your next question comes from Emlen Harmon at Jefferies..
Hey, good morning guys..
Good morning, Emlen.
Just wanted to hit on the PREPA credits quickly, seems just like a couple of things in the market lately, competitive mood their PREPA to non-accrual this quarter. And then seen some articles in the past couple of days about the restructuring getting pushed out another three months or so.
Could you give us a little bit of color just on your PREPA exposure may be relative to peers and why you feel a little bit more comfortable there but also just interested to know if there’s any additional, any provision guy shifted to that he reserved to that this quarter?.
I can’t speak for our competitors I can only speak for us and we have our methodology and we have our analysis, great analysis and how we evaluate the cash flows from PREPA.
I think when you compare September quarter to December quarter, in terms of PREPA exposure, we feel slightly more optimistic at the end of the fourth quarter and then third quarter I mean primarily because there are additional levers that have come to the table meaning reduction in the cost of few PREPA that gives them the ability to act in a way that our credit is in a better position.
So we have as of today that we have this information if things continued as planned and there is a covariance agreement that has some timeline that has some toll gates that need to go through.
And we will wait for PREPA to leave those timelines and those toll gates and as I said, we feel slightly more optimistic about the credit and in the September quarter seems to be analogy shows better service and everything. So that’s where we are with regards to PREPA. Regarding to what others have done, I can’t speak for it..
Got it. Thanks. Just yield on originated loans kind of topping out here over the last couple of quarters. I know at one point auto had been additive I don’t know if may be that is kind of reaching a point where the mix is such that you don’t see the loan yields increase any more.
Can you just talk just a little bit about what you’re expecting in terms of direction there and kind of what’s happening with market rates more broadly?.
There’s been no more deterioration in auto pricing so far we do face some pricing pressure but look at the volume has come down 20%. So, the upside that it adds to the overall is not that much susceptible or tangible.
Having said that, I think the composition is stays the same quarter over quarter you said the upside as you point out the auto is not that much..
Got it..
In addition to that Emlen, there’s certainly a lot of competition on the commercial bank on the pricing side, there pressure there too. So that’s also what plays out on the interest..
Got it. Okay. I’ll step back now. Thanks..
All right. Thank you..
[Operator Instructions]. Your next question comes from Brett Rabatin from Sterne Agee.
Hi. Good morning..
Hi, how are you?.
I’m well. Thanks. Wanted to I guess go back to the commentary around consumer and you mentioned that you weren’t really seeing the benefit yet of lower energy prices, oil and gas prices consumer I guess we kind of continue to here consumer activity being weak or consumer being weak.
Do you guys think it’s a timing issue that the benefit of lower gas prices will eventually kind of move through consumer trends both credit and their spending way in a material way.
Can you give us any color on what you guys are specifically seeing with some of those trends?.
When I mentioned that we haven’t seen the effects of the lower fuel costs statistics, the statistics certainly the consumers are seen their reduction in fuel prices when they go to the gas pump. I’m sure there is a underlying positive effect an additional disposable income for individuals and also for visitors.
Energy prices have also trended down last couple of months and they have been passing some of the benefits to consumer so. So there has been some positive trends there and again as I said additional disposable income for consumers.
But the truth of the matter is that there is still a lot of measures coming on Puerto Rico that are also contracted and that is any effect of that is what will happen.
In my estimation, economists in Puerto Rico are basically saying that the lower fuel prices should pushing 1% GDP growth so they would be expecting 2% contraction now they are expecting 1% contraction. So that’s kind of the expectation.
Also, remember the estimation is around 25% to 30% of underground economy in Puerto Rico that is something that does not translate into statistics and something is very challenging for us to measure. When we don’t see those benefits for those who numbers trickling into the statistics it’s also due to the effect that is inherent in our economy..
And you touched on it some but just thinking about the capital ratios hoping to see potential opportunities, over time in Puerto Rico can you guys give us a refresh on may be your optimism on doing something specifically in the U.S. in terms of potential deployment of capital either of the Genovo[ph] branching or actually buying a bank in --.
Part of our discussions at the board has to do with realizing that Puerto Rica economy is a challenging operating environment. So one of the strategies we have to look at is diversification. So it’s in the table to look outside of Puerto Rico to look outside to diversify.
Having said that, we are not looking from noble perspective we are more looking at it from a striking some of it and we are in that process right now. We do have as part of other strategies that we operate with during the year and throughout the years.
And that’s kind of how we’re looking at diversification strategy but it’s still hard to look to see we can diversify Puerto Rica potentially opportunities outside you want to explore..
And then just lastly, there was some noise in the corner about the tax rate, securities portfolio yields, can you give us a little color on differences linked quarter?.
Okay, the securities portfolio, the primary difference is even though the yield levels are almost the same, we have a higher amortization because of the interest rate movement. So, if you eliminate the effect of $1 million in that, it’s very much flat quarter over quarter as it’s been for the last few quarters.
In terms of taxes, so we ended the tax with close to 32% and basically being the end of the year quarter we had to give our tax exercised and we came to that calculation what the effective tax rate would be based on that and that’s what gave us a little bit of lower tax approval for the last quarter.
So it’s not noise per se but it’s part of what we do and last part of every year to find out what exactly the tax rate would be..
Okay.
So you try to assume the full year tax rate for ‘14 somewhere in ‘15?.
I would ask you to look at the 32 at the entire year effective tax rate 32, 33 in that range..
Okay. Thanks for the color..
You’re welcome..
At this time, there are no further questions. I will now turn the call back over to Mr. José Fernández for any closing remarks..
Thank you, operator. Thank you all for joining us today and listening in. We’ll be at some Investor Conference at February and March. February 12, we’ll be at Sterne Agee in conference Boca Raton and March 12, we’ll be at Deutsche Bank Mid-Cap Banks Summit New York.
And of course we look forward to talking to you in April, when we hold our first quarter. Have a great day and great weekend..
Thank you, operator. Thank you all for joining us today and listening in. We’ll be at some Investor Conference at February and March. February 12, we’ll be at Sterne Agee in conference Boca Raton and March 12, we’ll be at Deutsche Bank Mid-Cap Banks Summit New York.
And of course we look forward to talking to you in April, when we hold our first quarter. Have a great day and great weekend..
Thank you. This concludes your conference call. You may now disconnect your lines and have a wonderful day..