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