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OFG Bancorp
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Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Samantha. I will be your conference operator today. Our speakers are Jose Rafael Fernandez, President, Chief Executive Officer and Vice Chairman 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 & 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 factor 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 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. Fernandez.
Good morning. Thank you for joining us. Please turn to slide 3. After the rebound we saw in 2018, our first quarter of 2019 reflected strong steady growth. This was achieved due to a continued effectiveness of our retail and commercial strategies in meeting the economic shift that has occurred in Puerto Rico as a more positive outlook among both businesses and consumers has taken hold.
Financially, we generated higher net revenues on stable non-interest expenses. This resulted in expanded profitability with 40% year-over-year increase in earnings per share. All key performance metrics showed strong positive increases. Return on assets, return on equity and net interest margin came in at levels similar to top-performing mainland banks of our size.
Strategically, we continue to advance our retail and commercial channel differentiation. We are achieving this through superior service convenience and technology as part of our ongoing rapido, facil, hecho delivery promise. The results are encouraging.
During the first quarter, we generated a noticeable increase in small business loan production and another quarter of more than 3% year-over-year net customer growth. Our thanks goes to the entire OFG Oriental team for their commitment and dedication and to our retail and commercial customers for their continued support and loyalty.
Let's turn to slide 4 to review our financial highlights. Net revenues increased 7.7% year-over-year to $99 million. The key driver here was a 10.5% increase in net interest income. This more than offset the seasonal decline in non-interest income. On a sequential quarterly basis, please keep in mind the first quarter had two less banking days than the fourth quarter. This had the effect of reducing net interest income by about $1.2 million as compared to the fourth quarter of 2018.
The efficiency ratio was 52.5%, a 400 basis point improvement year-over-year. We're increasing our productivity and this is enabling us to continue to invest in our operations without affecting our overall non-interest expense levels. As a result, EPS or earnings per share came in at $0.42 fully diluted, significantly ahead over year-ago.
Tangible book value per share increased 5.4% to $16.56. This increase, more than makes up for the dilution from the fourth quarter Series C preferred share conversion that we did. Return on average assets increased 33 basis points to 1.42% and return on average tangible common equity expanded 259 basis points to 10.32%.
Please turn to slide 5 to review our operational highlights. Total net loans increased 6.5% to $4.4 billion as growth of originated loans at 13.1% more than offset the continued pay-down of acquired loans. Compared to December 31, originated loans remained level, reflecting seasonal pay-downs of some large commercial lines of credit. We had a good start to the year with $276 million in new loan production.
Auto and consumer lending remained high at $120 million and $41 million respectively. Commercial lending at $61 million was 41% higher year-over-year. This was due to our strategic success targeting small business customers in Puerto Rico. OFG USA loan participations totaled $32 million and residential mortgage lending at $23 million, remained at relatively modest levels.
Core deposit average balances increased 2% to $4.45 billion, which reflects growth in both commercial loans and customers. The loan yield increased 31 basis points, also reflecting higher yields on originated commercial loans. This stemmed in part from the effect of Federal Reserve rate hikes that we had last year, but also a larger proportion of higher yield in commercial and auto loans in the originated portfolio.
Core deposit costs continued to remain relatively low, up only six basis points year-over-year, reflecting minimal beta. The end result was a net interest margin of 5.37%, 15 basis points higher year-over-year. This was aided by higher balances of investment securities and cash and higher accompanying yields.
Let's turn to slide 6 and review our credit and capital numbers. Credit quality generally improved year-over-year and from the fourth quarter. The net charge-off rate at 1.32% was the lowest in six quarters, if we exclude the $1.8 million in recoveries from the sale of previously charged-off loans in the fourth quarter. Nonperforming loan and delinquency rates showed generally steady or declining trends. As a result of these and other factors, provision at $12.2 million declined 21% year-over-year.
Capital continued to build. Our ratios increased across the board to new multiyear highs, continuing to be significantly above regulatory requirements for well-capitalized institutions. The CET1 capital ratio is now at 17.09%, 257 basis points higher year-over-year. Total stockholders' equity increased 7.8% year-over-year and 2.1% sequentially to $1.02 billion. The tangible common equity ratio at 13.05% expanded 183 basis points year-over-year and 29 basis points from the fourth quarter.
Now let's turn to slide 7 for our outlook. We look forward to continued steady growth and progress. While there are always challenges and competition in banking remains particularly strong, our strategies and our team are working together very well producing results and enabling us to continue to invest for the future. We will continue to capitalize on our differentiation efforts, focusing on areas of targeted growth, where we can make a difference for our customers.
In doing this, we will continue to pursue our program of ongoing internal and external improvements, while we strengthen OFG's culture of excellence, agility, teamwork and performance, all this with one goal in mind providing more value add to our customers. And with our capital build, while we continue to need capital to fund our organic growth we will consider all other options to increase shareholder value.
With this we end our formal presentation. I like – I want to thank you for listening. Operator, please start the question-and-answer.
[Operator Instructions] Your first question comes from the line of Brett Rabatin from Piper Jaffray.
Hey, good morning.
Good morning, Brett. How are you?
Good. I wanted to just first start on maybe Puerto Rico and it – I've seen the funds coming a little slower still than maybe people are hoping for. Can you talk about the backdrop of Puerto Rico maybe just an update in terms of what you're seeing? And then, I guess, I also saw that the revenues have been pretty strong relative to expectations so maybe there's some continued hope for debt restructuring as well?
I don't have much to add regarding Puerto Rico from what I said on the fourth quarter conference call, Brett. Really, the news out there are pretty telling. So what I would say about Puerto Rico is that things continue to move in the right direction, maybe not at the right speed, but at the right direction. We're seeing private capital also starting to look beyond distressed assets and starting to look at other, let's call it performing assets not from the banks, but from the economy in general.
But I would say that, the Puerto Rico economy is performing as expected given all the dynamics that we have to deal with, or have been dealing with for the last several years.
Okay. And then I wanted to talk – you mentioned capital and 17% CET1. Any update on plans for using some of that excess capital? And then maybe you could talk a little bit about OFG USA this quarter?
Yes. So when we look at capital, I mentioned in the prepared remarks that, we want to use our capital to grow organically. We see an opportunity for us with our strategies being put in place to deploy that capital in some specific areas that we've done already like auto, commercial, particularly small and midsized companies and on the consumer side. So, we are certainly very cognizant of the use of that capital to grow and grow our franchise, which we think it's the first time in many, many years that we have that opportunity.
At the same time, we always take a look at our capital actions for the future. The Board and management discuss this twice a year. So we look at this on an ongoing basis. And certainly, both potential capital actions dividends and repurchase are part of the discussion, as we look at organic growth.
And just to update you a little bit, we're also looking at a few small interesting strategic opportunities in the U.S. And I can't comment on them at this point, but I think its part of our opportunity to also diversify geographically and take advantage of some opportunities.
So again, that's a little bit of the way we look at capital at OFG, and trying to make sure that we put in place everything needed to add the best results for our shareholders.
Okay. And then just lastly delinquencies. The total delinquency number was down a few basis points, but the early delinquency was up a little bit. Anything you're seeing on early delinquencies that we should be thinking about in term…
I mean, I think the trends are really positive. We only have one hiccup here with one commercial loan that it's in early delinquency. That's what drives the numbers a little bit higher. But otherwise, when you look at mortgage and you look at auto and consumer, it's all pretty, pretty steady. And so we don't see any deterioration in credit trends at this point.
Okay. Fair enough. I’ll step back in the queue.
Okay. Thank you.
Your next question comes from the line of Alex Twerdahl with Sandler O'Neill.
Hey, good morning.
Hi Alex. Good morning.
First I was wondering if you can give us a little bit more commentary around what you're seeing on deposit flows this quarter. It looks like you had some pretty nice demand in savings account growth after a couple quarters of kind of mixed trends there.
We're seeing a little bit of a continuation of what we saw last year particularly on the retail side and some mid-sized and larger commercial clients. So recall that in the last quarter of last year, there were some exits in terms of deposits, and again, it's part of the seasonality.
So we feel that although, deposit growth is not going to be as it was last year. We feel confident that we can steadily grow our core customer deposits going forward.
So really driven by one seasonality; and two new customers?
Yes. We keep on bringing new customers and at the same time we continue to expand relationships with existing commercial clients. And that's helpful too for our deposit base.
Okay. And then you alluded to the small business production a couple of times, and I assume that's in the commercial origination bucket. Can you just break that out specifically for us this quarter as well as in past quarters?
No. I don't have that information off the top of my head. I need to kind of look at it, so we can provide that later. But again, we are focusing on trying to be agile and be proactive with all the commercial clients that are actually working pretty constructively in the rebuilding of Puerto Rico. And I think there's an opportunity for us being a more agile and a more proactive bank to approach these clients and be able to service them. So we've been doing this for many years now, but now we're seeing the opportunity at hand, given the improvements in the economy and the credit profile.
Would that be -- I mean, would these be opportunities that kind of are driven by just the timing of money flowing to the island from FEMA or from some of these other programs where maybe there's a little bit of a lag between when projects are actually to be completed and when FEMA would be actually reimbursing people?
I mean, hard to tell. I don't have data to be able to give you a specific answer to that, Alex. But there was a shift last year when -- after Hurricane Maria, there's really an economic shift here that is still taking hold and that is going to continue to play out for the next couple of years.
Noisy process, but I think commercial clients and individuals are going to incrementally benefit from the rebuilding of the island and that is going to translate into opportunities for us at OFG to service those clients in a more thoughtful and in a more proactive way.
Understood. And then just final question, just to circle back on the capital discussion. You said that management and the Board discusses twice a year capital actions. Can you give us more detail on when during the year that gets discussed?
I think it's sometime late in the summer and at the end of the year. And again, it's an ongoing conversation and we just want to make sure that we don't do things that at the -- later we'll regret in terms of opportunities for us to grow shareholder value. And we're just going to be very methodical about it.
Understood. Thanks for taking my questions.
Yes. Thank you, Alex. Have a good weekend.
[Operator Instructions] Your next question comes from the line of Joe Gladue with Alden Securities.
Hi. Good morning.
Hi. Good morning, Joe.
I wanted to ask a little bit more about the -- some of the segments of the loan portfolio. Let's just start with the auto segment. That segment has performed very strong since the hurricanes. Wondering just overall outlook, do you see demand sort of settling down at all? Or what's the outlook for that segment?
Yes. Auto is -- I think auto continues to show strong demand, I think, is kind of plateauing that demand right now, after a whole full year of very impressive growth. There's also been a consolidation in that segment so that affects a little bit the dynamics. And there's certainly been other players who were more passive in this sector and have become more aggressive as of the second half of last year.
So from our perspective we continue to look at this line of business as a very important line of business for us. We also recognize that we will probably go in a more steady production levels going forward, similar to the levels that we've seen in the last couple of quarters.
Okay. Also I'd just like to ask about the mortgage segment sort of overall outlook for that and OFG's place within the market competitive position and market share.
So, the mortgage business is a little bit of a tricky business. There are two large players here in terms of originations. And as you know it's a business that is highly regulated and requires all kinds of changes in -- constant changes in terms of regulation and how we service those mortgages. So, we don't see that business as a high ROE business from our perspective. So, we don't necessarily emphasize that, but we do service our existing clients and non-clients who knock at our door and kind of request our services.
From a bigger picture though, I also think that residential mortgage business in Puerto Rico is still also a difficult asset. There's still a lot of demand for low-income housing but the middle and higher end its still -- there's still an oversupply in our opinion and we just want to make sure that we don't bulk up in residential assets longer term.
So, at the end of the day it's about pricing Joe and we feel that it's a discounted market.
Okay, all right. Thank you.
You’re welcome.
[Operator Instructions] You do have a follow-up question from the line of Brett Rabatin with Piper Jaffray.
Hey. I just wanted to follow-up on two things. One Wealth Management, that is usually seasonally soft in the first quarter, but I was just curious if there was anything that would not lead that to being stronger a little bit going forward. And then -- go ahead.
No, good catch. I think what you see is really the -- we do have a significant 401(k) and a retirement planning business on the trust side and it's pretty much managed assets. So, in the fourth quarter you had the market correction and the fees that we generate from a lower balance that was created after the market correction reflects on this first quarter. We expect that to normalize back again given the rebound in the U.S. stock market in this past first quarter.
So, that's why you're seeing there -- that deviation from the norm from previous first quarter years it's all primarily driven by that stock market correction in December that kind of trickled down into the first quarter of 2019 for fees.
Okay. And then the other thing I wanted--
Does that make sense?
What was that?
Does that make sense?
Yes. No that helps. And then the other thing I wanted to ask was just around the margin continues to be pretty strong and moved up again after being a little softer in 4Q. Obviously, funding cost pressure hasn't been a function in Puerto Rico and everyone kind of said at some point you'll see higher deposit rates, but it would seem like with the Fed on hold maybe Puerto Rico doesn't ever catch up. I guess I'm just curious on your thoughts on that and then what the margin -- can the margin kind of hang in here at these levels? I guess it depends somewhat on auto relative to the portfolio but maybe just some quick thoughts on the margin.
Yeah. So the Fed not raising rates the rest of the year helps on the deposit side maybe, doesn't help on the asset side. So I'll let Maritza add a little bit of color to that.
Yes. Hi, Brett. How are you?
Hi, good morning.
What we see in margin, I think that Jose gave the high-level view is that, we benefited last year because of the rate hikes. This year the scenario has changed and the mix in loans will continue to provide a positive trend in the loan yield. And if we add the fact that we have other borrowings being replaced at current market rates with probably a better scenario than we’re expecting, we can contain the lack of the hike rates and have a normalized or a neutral level of NIM for the rest of the year.
I'm sorry Maritza what level of margin for the year?
Level at this point, we don't see much decrease, not either much upside in the next few quarters because of the lack of the interest hikes.
Okay. And then one just last quick follow-up. Jose, I think you said some strategic things about the U.S. but you didn't want to go into a lot of additional color. Would you -- if you're thinking about the U.S. and you've already got OFG USA, are you talking about the both sides of the balance sheet? Or is it more on the asset origination side?
Brett, you don't follow instructions. I said I can't. It's some small a few opportunities that -- nothing to act on in the short-term like immediately, but it's something that we're looking at. And those are part of the process that we started three years ago, and we continue to evolve and that's where we're seeing. Again can't comment any further.
Okay. Fair enough. Thanks for the color.
You have a follow-up question from the line of Alex Twerdahl with Sandler O'Neill.
Hi, thanks for taking my follow-up. I just wanted to ask also about just how to think about expenses overall, kind of, the one thing we haven't really hit on over the next really two years. I mean, I think a lot of mainland banks are focusing a lot on reinvesting in their system and improving cyber and improving -- it seems like the expense build never really ends. Where are you in that process in terms of what your capabilities are? And I know you've always been a little bit forward thinking on the technological side, but how much expense leverage could we realistically see? Or do we really need to keep investing in the business over the next couple of years?
So far Alex, we have been transforming our base of expenses. Last year we reviewed our occupancy expenses in the real estate, and we have to keep investing that savings into technology and in capabilities within the system. And we will continue to do that going forward. Growing the revenues will require us to keep investing in the technology.
And I think big picture, Alex, I think, being a community bank and being a bank that is trying to help communities here in Puerto Rico we need to kind of be the catalyst to provide the technology for customers to kind of do things differently and think differently. That's part of the challenge that I see here in the island is that everybody goes steady as they go and nobody challenges each other to improve.
And I think in a small way and as much as we can contribute I think we need to from our culture perspective and from our investment in technology and our strategy we need to send that message through our customers that we are here to challenge the establishment and to push things. Sometimes we do it right, sometimes we might not. But at the end of the day, the future of our island is pretty much predicated on the small commercial guy and the residents in Puerto Rico to have a change in mentality. And that's really a little bit of our -- where our heart is on all this.
And I think as Maritza points out, we are managing expenses neutral, because our savings we're reinvesting in our platforms and in our delivery channels and in our people to make sure that we can make a difference in our communities.
And are there still places -- I know you've done some things over the last couple of years to find savings on the expense side. Are there still places to recognize savings?
There are always places. There are always places. Efficiencies abound in every single business and in banking too. So part of our challenge is to look for them on a constant basis. And certainly that's our call to action as part of who we are, and we need to kind of make sure we get to them. So, we do have a couple of further opportunities going forward.
Okay. Great. Thanks for taking my follow-up.
Yeah. You welcome.
At this time, there are no further questions. I will now turn the call back over to management for closing remarks.
Thank you, operator. Thank you also to all our stakeholders who are listening today. Looking ahead, we'll be participating in several Investor Meetings over the next several months. In late July, we'll be reporting our second quarter results. Until then, thank you again. Have a nice day and have a happy holiday weekend.
This does conclude today's conference call. You may now disconnect your lines.