OFG Bancorp's (OFG) CEO José Rafael Fernández on Q4 2015 Results - Earnings Call Transcript

| About: OFG Bancorp (OFG)

OFG Bancorp (NYSE:OFG)

Q4 2015 Earnings Conference Call

February 1, 2016 10:00 ET

Executives

José Rafael Fernández - President, Chief Executive Officer and Vice Chairman

Ganesh Kumar - Executive Vice President and Chief Financial Officer

Analysts

Brian Klock - Keefe Bruyette & Woods

Brett Rabatin - Piper Jaffray

Alex Twerdahl - Sandler O’Neill

Taylor Brodarick - Guggenheim

Joe Gladue - Merion Capital Group

Operator

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 on the homepage 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 expectations, which are subject to various risks and uncertainties outlined in the risk factor section of OFG’s Securities and Exchange Commission filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call, as a result of developments, which occur afterwards. [Operator Instructions]

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

José Rafael Fernández

Thank you for joining us this morning. Please turn to Slide 3. Our core business continues to perform very well and we continue to have a strong capital position. Overall, for the fourth quarter and the year, net interest margin held up well as did core fee income, expense management and loan production levels. We continue to expand Oriental’s retail franchise, producing significant new customer growth. Credit metrics over the course of the year improved with noticeable reductions in early delinquency and NPL ratios by the end of the year. Capital remains solid with tangible book value at $14.53 per share at year end.

In turn, our strength enabled us to take decisive de-risking actions in 2015 provisioning for an additional $30.4 million on our PREPA loan in the fourth quarter. This reduces the principal balance, net of allowances to 68% or $136 million. Other accomplishments for 2015, included a close to 50% reduction in our Puerto Rico government and public corporation loan balances, successful negotiation and termination of the FDIC commercial share loss agreement related to our 2010 acquisition of Eurobank, the successful bulk sale of $235 million of unpaid principal balances of acquired non-performing assets. While there has been some progress working out PREPA, we recognized that the political process is volatile and that there is still a high level of uncertainty in the operating environment in Puerto Rico.

On the one hand, lower fuel prices have greatly helped consumers’ disposable income and enabled many businesses to reduce operating cost. On the other hand, the Puerto Rico legislature delayed voting for the second time on the proposed PREPA Revitalization Act. This directly influenced our decision to increase the PREPA provision. In addition, the central government is still not fully executing on the fiscal and economic growth plan that it announced last summer. In the midst of all this, we remained steadfast with our discipline in underwriting, pricing, operations and cost management. We also have formally shifted our focus towards preserving and building capital. We believe our careful approach, while continuing to expand our presence and deepen customer relationships in our target market is the right thing to do until we can get a better read on the future in Puerto Rico.

Looking ahead to 2016, we expect positive trends in our core businesses. We will continue implementing our already successful innovative customer focus, fast, easy and done, in Spanish Rápido Fácil Hecho approach in each of our core businesses. And we will continue closely monitoring Puerto Rico’s economic and fiscal situation to proactively adapt to the circumstances. Certainly, the attention we are now receiving from Washington is good to see, but we need the government here to act now to comprehensively address the fiscal and economic situation.

Please turn to Slide 4. Our capital ratios are strong and exceed the requirements for a well-capitalized institution. In addition, our capital levels are up sequentially and are significantly above the levels at the end of 2012 when we acquired BBVA Puerto Rico operations.

Now, I would like to pass the call to Ganesh to review the quarter.

Ganesh Kumar

Thank you, José. Good morning, everyone. I will go over a few of the following slides, starting with Slide 5. For the fourth quarter, we reported a net loss of 4.4 million or $0.10 per share. There were three key items affecting the results: one, an additional provision of $30.4 million that José mentioned, more about that in a moment; two, a total of $9.2 million from a few other items such as an increased provision cost by impairment of an acquired loan pool, a reserve towards PREPA negotiating legal fees, a final settlement of claims with the FDIC on an expired commercial loss share agreement; and an OTTI towards Puerto Rico’s security position. Offsetting these to a large extent, a $19.9 million tax benefit primarily due to the losses taken at the bank level during the year. Excluding these factors on a non-GAAP basis, net income before tax was lower by $3.7 million. This can be attributed to lower yields on acquired loans and from additional provisions. However, we were able to improve fee revenues and operating expenses.

Looking at our core business, we continued to generate high levels of pre-provisioned net revenues, new loans, banking and wealth management fee revenues, while optimizing our expense base. In addition, our asset quality trends continue to be fairly encouraging. Early delinquency levels fell noticeably from a year ago level and NPAs, excluding the PREPA hit its lowest in trailing five quarters.

Please turn to Slide 6. This slide gives you a dashboard of many of our key business trends. Interest-earning assets have gradually declined, reflecting lower balances in a higher yielding, tax exempt government loans and in covered loan categories. We were able to otherwise offset these earn-offs in the acquired loans with stable level of new loan originations, albeit priced to the market. In terms of deposits though there is a reduction in total deposits portfolio, checking and savings account balances are maintaining levels. And so the NIM is normalizing down to 4.5 range along with the combination of lower cost recoveries and a smaller loan book, this has had a consequent effect on the net interest income levels. Fee revenues have been stable all through the year. The efficiency ratio spiked into 2015 solely due to a loss of income from Puerto Rico government loans. But we have been working steadily on rightsizing and have begun to bend the efficiency ratio curve down.

Please turn to Slide 7. This is a new slide to highlight the extent of our PREPA exposure as it stands now. This has been a recurrent topic in all our conversations. We had our initial provisions in the first quarter, when the loan was classified non-accrual. We have applied the interest payments, which PREPA continues to make to the principal since then. With the provision this quarter, our exposure net of allowances and the principal reduction is $135.9 million or roughly 68% of the total credit line as José pointed out.

As you can see, even with the reinstatement of the restructuring agreement, there are still a few critical milestones ahead. In 2016, we look forward to resolving this credit one way or the other. Puerto Rico government loan and securities balances on this aspect, we have made significant progress in the last two years, reducing our direct exposure to Puerto Rico government credits, with minimal losses to the capital. Balances have declined 49% since 2013 and 32% since 2014. On a linked quarter basis, the difference in balances is primarily from an OTTI of $1.2 million on the PRIDCO security position and the PREPA payments received during the quarter.

On Slide 9, this is a reproduction from our earnings release, so let’s skip to the Slide 10. Here we present some of the key differences in our adjusted results between third and fourth quarter. Interest income declined $4 million, a few aspects contributed to this reduction. First, the acquired loan balances are low by $140 million, subsequent to the third quarter portfolio sale. Second, as part of our annual recasting exercise, the acquired loans were recasted with lower yield, resulting from extending durations. Also on a reported basis, cost recoveries in third quarter were higher by $10.3 million from the sale and due to an early repayment of a commercial loan.

Looking at the provisions, besides the $30.4 million provision for PREPA, the provision for our originated loans increased $4.2 million this quarter. This is primarily to replenish charge-offs from an isolated commercial loan and to a smaller extent from mortgage and auto loans. Although flat on an adjusted basis, acquired loan provision differences from an impairment of a commercial loan pool as determined during the recasting exercise. Moving further down, you can see total banking and financial services revenues increased $1.4 million. About $900,000 of this came from year end annual insurance commission payments, the rest is from increased mortgage banking activities. Non-interest expenses declined $2 million, primarily due to proactive rightsizing efforts that we took in the later part of the year.

On Slide 11, we covered some of these already and that nothing jumps out, let us skip to the next one. On Slide 12, here you can see we continued to do well with deposits. This is so especially in our retail franchise. The reduction in DDA balances is mostly due to loss of one government entity account and savings reduction is also primarily from loss of a second government account and some from the normal flux in the business money account balances. Lower CD balances are mainly due to re-pricing changes in the first half of a year and subsequent loss of some price sensitive deposits.

Moving on to Slide 13, we present here new loan originations, excluding the renewals during the course of the year. In 2015, we originated a bit more than $1 million loan – in loans or approximately 10% over last year. This is despite the difficult operating environment and by maintaining our discipline in credit underwriting and pricing. On our retail side, we were successful in growing consumer and mortgage originations. Mortgage was up, as we grow share with Doral exiting the market. However, auto loan originations were affected by large decline in the new car market in Puerto Rico. We were able to offset that somewhat with expanded share among the dealers we do business with. Commercial lending was also up strongly. We continued to make inroads with small and mid-size businesses. In this segment, the competition is fierce and we are being highly selective with our compromising our underwriting standards.

Let us skip to Slide 15. We wanted to give you some better insight into levels of credit exposure. This slide shows all originated, acquired and covered laws that are 90 days or more delinquent. Please keep in mind, these are ledger balances, as such they exclude all allowances, purchase accounting and FDIC loss share. There are a few salient points I want to communicate. First, our outflows have exceeded inflows in 9 of the 12 trailing quarters. This shows our favorable trend in credit quality. Second, excluding PREPA, the total drops to roughly $296 million. Of this $55 million loans are from acquired Eurobank portfolio and $120 million are from acquired BBVA PR portfolio. As you know, these loans are covered and are under purchase accounting.

Third, originated loan delinquencies of $120 million approximately have an allowance of $59 million, excluding PREPA, which we discussed earlier. Additionally, as you see in table three of our earnings release, we have worked hard during the year to reduce the OREO and REPO balances. They are now at $64 million, half of what we had at the end of the last year. These achievements should leave you with no doubt as to our proactive management approach regarding our credit exposure and our ability to navigate the prolonged difficult environment over here.

Moving on to Slide 17, to sum up my part of the presentation, here is the data on our capital level and tangible common – including our tangible common equity. We extended the year with TCE – we ended the year with TCE of $637 million or $14.03 per share. And our TCE ratio was 9.1%, only 15 basis points lesser than a year ago, despite all the de-risking moves during the year.

Now, I would like to turn the call back to José.

José Rafael Fernández

Thank you, Ganesh. Please turn to Slide 18. I would like to summarize what we are doing to preserve and grow value. One, we are focused on growing our Oriental franchise. We believe we have done an excellent job as evident by our loan production and net new retail customer growth. Two, we are focused on enhancing the customer experience. A great example of this is MyStatus app, an industry-first that enables consumers to track their residential mortgage application every step of the way in the palm of their hand. And as I said earlier fast, easy and done. Third, in our underwriting, we have maintained our pricing and discipline. The result is that our originated loan yield has held up well over the past year, while net charge-offs have remained low. Fourth, net interest margin has come down, primarily as a result of our significant reduction in high yielding tax free government loans. Fifth, with net interest income lower, we will also continue to work on costs. As you saw this quarter, we have begun to improve our efficiency ratio again. Six, ultimately our goal is to preserve and grow capital in a challenging operating environment. We believe we are well-positioned to do that.

Before I open up the lines for the Q&A, I would like to say a few words about the PREPA situation. PREPA must complete its vital transformation, so it can continue providing the people of Puerto Rico with electricity in an economical, safe, reliable and cleaner manner. It is imperative that the Puerto Rico legislature passed the PREPA Revitalization Act. The bill was filed nearly three months ago. The members of the house and the Senate of Puerto Rico have had the opportunity to review it closely and engage PREPA and other experts in a meaningful dialogue. The PREPA Revitalization Act is good for the people and the businesses of Puerto Rico as well as the overall economic stability of the island. Over the long-term, it will reduce energy costs, by reducing debt service and modernize PREPA’s generation, transmission and distribution infrastructure through private investments.

Importantly, the PREPA Revitalization Act will also improve PREPA’s governance and decision making, so that it is less political, less focused on the short-term and more focused on industry best practices. This is a tremendous opportunity for Puerto Rico to show investors and the world that we can negotiate in good faith that we can be responsible and that we have a plan longer term vision for our future. Puerto Rico businesses and its people can no longer tolerate this prolonged uncertainty, primarily by political in – caused primarily by political inaction. The time for waiting, the time for patience, the time for talking is really over, we need actions.

With this, I end or we end our formal presentation. I would like the operator to open up the call for questions.

Question-And-Answer Session

Operator

The floor is now open for your questions. [Operator Instructions] Your first question comes from Brian Klock of Keefe Bruyette & Woods.

Brian Klock

Good morning gentlemen.

José Rafael Fernández

Hi, Brian. How are you?

Brian Klock

So, I think we are as frustrated as you are with PREPA and the government situation and like you said I think that your comments I think to kind of sum that up, when I look at the quarter, obviously there was some noise in there related to PREPA, but on a reported basis, you saw 182 basis point pre-ROA without some of the non-recurring adjustments and their exposure to 2%. So, you still have pretty solid capital levels. So, I guess when I look at this and that core earnings power being pretty strong, maybe you can kind of talk to us about where you see the provision going? I know there is some sort of levels, some adjustments and they are related to the auto etcetera, the things in the quarter. But looking at Slide 15, with the inflows, it seems like besides the bad headline, it seems like credit isn’t as bad as you would read in the papers. So maybe you can talk about where you kind of see things kind of heading ex-PREPA just on your core asset quality and where you are seeing inflows and the resolutions in your core portfolio?

José Rafael Fernández

Okay, Brian. Let me give you some high level comments on credits, excluding the PREPA loan and I will let Ganesh go into more detail. But we are very happy with the way we have been working on our credit exposures. I mean, I think our team has done a great job reducing consistently as Ganesh mentioned for the last 12 quarters we have reduced our non-performing loans in a very good way. We are not seeing on the commercial side any early delinquency trends that OREOs. We basically have $4 million of early delinquent loans in a portfolio that is $1 billion or $2 billion. So in general, when we look at credit at Oriental, we feel that the originated loans have the provision that we are – the levels of provision that we are doing right now are consistent with the type of businesses we are in meaning auto and consumer. And this quarter we had a special one isolated loan, commercial loan that we took a charge of, but it’s really something that we had already provisioned for in a significant way. So, we are not seeing any trends that confirm to us deterioration in credit in our portfolios. So, that’s how we view that from a high level, if Ganesh wanted to add anything more specific, but....

Ganesh Kumar

No, I think as José pointed out, our target provisioning, our allowance reserve ratio happens to be around 2.3% to 2.5%, excluding the PREPA. So, we would continue provisioning. And one thing that I want to point out, Brian, is we do provision replenishing the charge-offs and adding something more for the environmental factors. Primarily, we do believe that there is a lot of uncertainty still exists in front of us. So, we are no means doing any reserve release at this point in time, we are still in a reserve buildup mode.

Brian Klock

Right. So I mean, appreciate the color, but obviously, take PREPA’s provision out of this and that’s something more normalized we should be expecting going forward is like you said the underlying credit trends and inflows actually look pretty good, but like you said, there is a more sort of normalized level we should be thinking about going forward from a provision and charge-off level? That sounds fair.

José Rafael Fernández

We agree with you, Brian.

Brian Klock

Okay. And then my other question just thinking about again it’s a tough environment, I mean on the expense side, you guys did a decent job controlling expenses with the business to business tax that was included in there. So, I guess maybe talk about the outlook going forward for the expense base. Is this something that you think you can keep somewhat flat going into ‘16 from this level?

José Rafael Fernández

Well Brian, you correctly pointed out throughout 2015 we have worked on reducing our expenses and is starting to show. But from a strategic perspective into 2016, we also have to make a decision also in terms of the investments we need to make to continue the momentum we have on growing our franchise here in Puerto Rico. And so I think we will as we have done in the past and we have been recognized by you guys in the past as being very efficient managers. We will continue to work like that. But we also would like to use some of those savings to invest in our business and continue to make a difference on the way we do business and banking with consumers and with commercial clients and that requires a little bit of an investment. So instead of adding to expenses, we are basically reducing expenses and using a little bit of those savings to invest for the longer term, because at the end of the day, we are very confident that the strategies we are executing on, on the consumer side, auto, mortgage, personal loans and the deposit side as well as on the small, midsize commercial businesses are paying off and they will continue to payoff as we continue to gain market share from some of our competitors.

Brian Klock

Okay. I mean, that’s fair. I mean, looking at the stats you have provided, I mean, you are still growing the business, so that reinvestment is something that you need to keep doing. So, we appreciate that and thank you for your time and answering my questions.

José Rafael Fernández

Thank you, Brian.

Operator

Your next question comes from Brett Rabatin of Piper Jaffray.

Brett Rabatin

Hi, guys. Good morning.

José Rafael Fernández

Hi, good morning.

Brett Rabatin

Want to just go back to capital for a second and it sounds like the plan is to kind of grow capital throughout this year if you could maybe talk a little bit about how you think about the capital and if you might use any other for buybacks or how you kind of think about the capital at this point?

José Rafael Fernández

Yes. So, we are looking at our capital situation as prudent as we can at this point in time. Ganesh mentioned earlier that there are still some uncertainties ahead of us for the Puerto Rico economy and what are the next steps that the government is going to take, etcetera. So, that’s why we reduced our dividend last quarter or in November we announced it. And in terms of repurchase, I wish we could go in and buy as many shares as we can, but really we need to make sure that we keep capital for the future where we think there is going to be good opportunities for us to deploy it. But at this point in time, I think the uncertainties require us to be prudent in our capital management strategies and not execute any repurchase right now.

Brett Rabatin

Okay, that might be the answer, but wanted to make sure. And then just thinking about originations and kind of what you have coming off the balance sheet. Would it be fair to assume you guys can grow the portfolio a couple of percent this year, how do you think about your loan trends given the origination rates?

José Rafael Fernández

I think we are going to do the same levels of origination this year as we did last year. And we are not going to see the exits from the government that we did last year, because we basically brought it down significantly already. But having said that, we still will have pretty much the acquired portfolios will continue to run down and that’s going to continue to put pressure on our balances. So, I think a flat to negative balance, it’s slightly negative balance should be the right answer.

Ganesh Kumar

Excluding any major de-risking or covered portfolio.

Brett Rabatin

Okay, thanks. Appreciate the color.

José Rafael Fernández

You are welcome.

Operator

[Operator Instructions] Your next question comes from Alex Twerdahl of Sandler O’Neill.

Alex Twerdahl

Hey, good morning guys.

José Rafael Fernández

Hi, Alex.

Alex Twerdahl

Hey, wanted to just to drill in on your government exposure a little bit more on Slide 8. We just got this restructuring proposal out this morning from your government down there, haven’t had much of a chance to read through all the details. But it looks like they are asking for 45% haircut on all of the outstanding debt, excluding the public corporation debt. So, can you just walk through some of your exposures and given what you know the proposal so far, where – is there actually some risk remaining? PREPA, we hopefully are fully reserved for at this point, but with the other exposures, with the housing authority bond or the loan and some of the other securities, what really is outstanding that could be affected by that?

José Rafael Fernández

So, let me just step back for the second here. PREPA, you know what’s going on there and don’t forget that we will be applying interest to principal throughout the entire year. So, we will continue to reduce that exposure throughout the year as we have done in the past year. Regarding the municipalities, the municipal loans that we have, we have talked about it in the past, we feel very comfortable with those loans. We feel that those loans have significant debt service coverage. They have their incomes or their revenues are pretty much protected and segregated. And we feel that we have good relationships with those municipalities, which are the largest municipalities in Puerto Rico. So that’s how I feel about the municipal loans. Regarding the securities portfolio, we have pretty much three exposures. One is a $6.7 million highway bond, but that highway bond is really a public private partnership is that they are [indiscernible] bridge. And it’s really a...

Ganesh Kumar

Their revenues are identified outside of the – any claw back or anything...

José Rafael Fernández

Correct. And it has in-house debt service to continue to pay down and we feel that, that is a good investment. We have $1.5 million on the public building authority, which we have already taken $240,000 OTTI. And then we have $11.3 million on PRIDCO which is basically bonds that are trusted properties and we received trusted income from those rental incomes that the government has rented out. And we have taken $1.5 million in OTTI, so the balance there is down to $9.8 million. So when you look at our exposure in terms of the investment portfolio for Puerto Rico, we are down to basically $11.5 million of exposure, because we feel the highway to [indiscernible] is a private public partnership type of bond and the government has no exposure there. We don’t have a government exposure there. So at the end of the day, that’s the exposure we have, which is really insignificant. And that’s where we are Alex I mean I just don’t see any other government exposure. I think we have done very good job for the last 2 years, bringing down the acquired government exposures from BBVA. We brought it down to $433 million and out of which $200 million are pretty much – $203 million are the municipalities and the remaining $130 million – I am sorry, $200 million are – $230 million are basically what I just explained PREPA plus the investment portfolio and there is a $21 million Puerto Rico housing loan that we feel that it’s also well collateralized with the unclaimed deposits from bank clients in Puerto Rico. So and it’s something that we are actively working with the government on it. So again I think we have narrowed it down to PREPA in terms of what exposure we have to the government and we are taking the provision – additional provision this last quarter to kind of start pushing this issue out of the equation for us.

Alex Twerdahl

That’s really helpful. And can you just walk through again how you came up with the provision this quarter for PREPA and how you thought – you figured out the 60.5% was the right level to write it down to?

Ganesh Kumar

It’s basically based in our model that we explained during the last conference call. We take different probabilities of different outcomes and we adjusted the probability based on the information that we had. And the model basically indicated the need for further provisioning and that’s exactly how we came up with.

Alex Twerdahl

Okay. When do you intend to update that stress test slide that you have had in the past with respect to all your exposures and how it will affect capital levels in sort of a severely worst scenario?

Ganesh Kumar

We are working on it Alex and hopefully in another few months, we should be able to do it. If you know, we did that last – second quarter last year and then that’s our annual sort of cycle. So if not, in the first – along with the first quarter release, we should be able to provide that in the second quarter.

Alex Twerdahl

Okay. And then the commercial net charge-offs that you had due to one loan, can you give us a little more color on that, was that loan – I mean was it in anyway related to the government contract or the government or reliant on the government for revenues, etcetera?

José Rafael Fernández

Not at all.

Ganesh Kumar

Not at all.

José Rafael Fernández

Not at all, it’s just the one loan that we had been working on and we had provision for it, and its just – that’s why we highlighted the charge-offs – little spike that we see in charge-off is not a trend, it’s just simply one loan that we had provision for and we charged it off this quarter.

Alex Twerdahl

Okay. And then final question, with all of those sort of non-core items that maybe could have been expected this quarter due to some of the re-casting of previous acquisitions, etcetera, what kind of non-core items could be or should we be expecting for the first quarter or is that going to be back more to sort of a normalized earnings?

José Rafael Fernández

I hope so and we – it’s not our intent to show non-core adjustments and increase noise during the course of the year. But I think the annual re-casting exercise, it happens once a year. We do continuously every quarter take a look at the Puerto Rico securities and examine for OTTI situations. So these are all exercises that we do throughout the year, whether anything comes out of it depends on further deteriorations and things like that. So I do not expect a whole lot, but keep in mind that these are coming out of the normal periodic valuations are in reviews that we do.

Ganesh Kumar

And really Alex, we are operating under the premise that things in Puerto Rico are going to slowly stabilize and eventually improve, so that our results continued to show more coreness, be more core and less a non-recurring items as we have discussed. But that’s kind of our premise. I think at the end of the day, things need to be done and get done here in the island from the fiscal side. And I think between now and June 30, something has to happen. And I am encouraged to and I am hopeful that what happens is something that builds towards the future stability of the economy in Puerto Rico and the government.

Alex Twerdahl

Thank you very much for taking my questions.

José Rafael Fernández

You are welcome.

Operator

Your next question comes from Taylor Brodarick of Guggenheim.

Taylor Brodarick

Hi, I think everybody else hit most of mine, but one last one for me. On the auto growth, I have been reading kind of plenty of media reports talking about structure and sort of the terms of these loans stretching out, how much of that growth have you feel like you would had to give up on structure and pricing over the last two quarters?

José Rafael Fernández

Really not much, actually we feel that we are kind of constraining somewhat our credit parameters and making sure that our loans are – that we book are healthy in a – from a risk pricing perspective. And so we are not seeing any growth on the portfolio or any increase in production from the portfolio, due to us relaxing credit. On the contrary, I think is us penetrating more the dealer relationships that we have and some retail relationships that we have catered in the past that are basically reacting to our fast and easy and don approach that we are applying towards everything we do here in Oriental.

Ganesh Kumar

Taylor, I also want to add that while the pricing has not changed or reduced as you asked, we are also increasing the overall credit scores as weighted average. So I think our proportion of loan originations have much better weighting towards the prime at this point in time. I wouldn’t say slightly better rating towards the prime, primarily considering the issues of the environment basically.

Taylor Brodarick

Right. And then also on the retail customer growth, any interesting detail behind that, is that sort of across the competitive landscape you require customers or is that weighted more towards the non-locally based banks?

Ganesh Kumar

You mean, where are they coming from?

Taylor Brodarick

Yes.

Ganesh Kumar

Well, I think it comes from different places. Certainly, there is trying to move towards – the way we are presenting ourselves, the way we do business and the branding and everything that we evaluate shows that our brand is gaining good traction here in the island. So when you see the local banks closing down some businesses or considering exiting the market, I think top of mind awareness in the consumer in Puerto Rico, Oriental is one of those. So we are encouraged with that. I also think especially in the commercial side, even though we are not the lowest in pricing, we do have a very proactive and customer focused approach. And we kind of have a good relationship with those clients on the commercial side that join Oriental and become client. So, I think it’s a little bit of both. I think it has to do also from a younger generation coming in into the market that we are also catering to. They have not been necessarily a banking client for long and they feel an appeal to our brand and the expanded network that we have with the technology. When you look at the things that we have implemented and nobody else in the industry in Puerto Rico have been able to implement here in Puerto Rico. That certainly differentiates and complements the focus on customer service and customer adaptability. So, it’s a gamut of factors that are helping us out on the retail side and on the commercial side.

Taylor Brodarick

Alright. Thank you, both. Appreciate it.

José Rafael Fernández

You are welcome.

Operator

[Operator Instructions] Your next question comes from Joe Gladue of Merion Capital Group.

Joe Gladue

Good morning.

José Rafael Fernández

Hi, Joe.

Joe Gladue

Hi. I think I just have one question remaining. Just wanted to touch on deposits, I know you said there were some government accounts that went away, just a) wondering if there is possibility of any more of those going away and b) just what there is outlook for growing deposits, core deposits, while the loan portfolio remains flat that would enable you to lower the cost of deposits anymore?

José Rafael Fernández

Yes, from a deposit side, Joe, those two accounts that Ganesh mentioned, the reason of why they left is pricing. Other local competitors are willing to pay higher for those deposits. That’s why they left. We do not have much government deposits as a percentage of the share of potential government deposits. So, we are not much – we are not exposed to much losses there in terms of government deposits. Other large banks in the island have a significant share on those. So, when we look into the future, we are not expecting those type of deposits to affect our balances. On the contrary, we feel that some of those deposits that left, the balances that we are showing is a net effect after the growth on retail that we have had throughout 2015.

Ganesh Kumar

I know if you are asking is there much – are there much opportunities for reducing the cost of deposits, Joe, I think we would like to maintain it at this level.

José Rafael Fernández

Yes, I mean, yes.

Joe Gladue

Okay. Alright, I think all my other questions have been answered. Thank you.

José Rafael Fernández

You are welcome.

Operator

At this time, there are no further questions. I will now turn the call back over to Mr. José Rafael Fernández for closing remarks.

José Rafael Fernández

So, thank you operator. Thank you to all our stakeholders who have listened and we will be hosting our part of Sandler O'Neill Puerto Rico Bank Tour on February 23 and we will be announcing our first quarter results at the end of April. So until then, thank you again and have a nice day.

Operator

Thank you. This concludes your conference. You may now disconnect.

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