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OFG Bancorp (OFG) Q1 2019 Earnings Call Transcript

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OFG Bancorp  (NYSE: OFG)
Q1 2019 Earnings Call
April 18, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Samantha. I'll 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 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 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.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

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 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 in 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 are 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 cents fully diluted, significantly ahead of a 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 paydown of acquired loans. Compared to December 31st, originated loans remain level reflecting seasonal paydowns 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 remain 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 remain 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 stem impart from the effect of Federal Reserve rate hikes that we had last year, but also a larger proportion of higher yielding commercial and auto loans in the originated portfolio.

Core deposit costs continue to remain relatively low, up only 6 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 charge-off loans in the fourth quarter. Non-performing 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 continue to build. Our ratios increased across the board to new multi-year high, 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 let's turn to Slide 7 for our outlook. We look forward to continue 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'd like -- I want to thank you for listening. Operator, please start the question-and-answer.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Brett Rabatin from Piper Jaffray.

Brett Rabatin -- Piper Jaffray -- Analyst

Hi, good morning.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Good morning, Brett. How are you?

Brett Rabatin -- Piper Jaffray -- Analyst

Good. Wanted to just first start on maybe Puerto Rico and you know, 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.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes. 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 what 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.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then wanted to talk -- you mentioned capital and 17%, CET 1. Any update on on plans for using some of that excess capital and then maybe you could talk a little bit about OFG USA this quarter ?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

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 mid-size 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 US, and I can't comment on them at this point, but I think it's part of our opportunity to also diversify geographically and take advantage of some opportunity. 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 to the best results for our shareholders.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay, And then just lastly, delinquencies, you know 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?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

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 steady. And so, we don't see any deterioration in credit trends at this point.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Fair enough. I'll step back in the queue.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Okay, thank you.

Operator

Your next question comes from the line of Alex Twerdahl with Sandler O'Neill.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Hi, good morning.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Hi, Alex. Good morning.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

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?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

We're seeing a little bit of a continuation of what we saw last year particularly on the retail side and some mid-size 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.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

They're really driven by one, seasonality and two, new customers?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

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 to for our deposit base.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Okay. And then, you alluded to the small business production a couple of times and I assume that's been the commercial origination bucket. Could you just break that out specifically for this quarter as well as in past quarters?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes, 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 more proactive bank to approach this 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.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

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 actually need to be completed and when FEMA would be actually reimbursing people?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

I mean, hard to tell. I don't have the data to be able to give you a specific answer to that, Alex. But there was a shift last 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.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Understood. And then just final question, just to circle back on the capital discussion, you said that management and Board discusses twice a year capital actions. Can you give us more detail on when during the year that gets discussed?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

You know, 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 -- 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.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Understood. Thanks for taking my questions.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes. Thank you, Alex. Have a good weekend.

Operator

(Operator Instructions) Your next question comes from the line of Joe Gladue with Alden Securities.

Joe Gladue -- Alden Securities -- Analyst

Good morning.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Hi. Good morning, Joe.

Joe Gladue -- Alden Securities -- Analyst

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. I am wondering just overall outlook, do you see demand sort of settling down at all or what's the outlook for that segment?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes. Auto is -- I think auto continues to show strong demand. I think it 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.

Joe Gladue -- Alden Securities -- Analyst

Okay. Thank you. Also, I would just like to ask about the mortgage segment. So, your overall outlook for that and OFG's place within the market competitive position and market share?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes. So, mortgage -- 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 -- 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 will knock at our door and kind of request our services.

From a bigger picture though, I also see 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, it's 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 though and we feel that it's a discounted market.

Joe Gladue -- Alden Securities -- Analyst

Okay. All right. Thank you.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

You are welcome.

Operator

(Operator Instructions) We do have a follow-up question from the line of Brett Rabatin with Piper Jaffrey.

Brett Rabatin -- Piper Jaffray -- Analyst

Hi. 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 leave that to being stronger a little bit going forward and then -- go ahead.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

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 manage 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 the rebound in the US stock market in this past first quarter. So that's what 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 '19 for fees.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then the other thing I wanted -- what was that.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Does that make sense?

Brett Rabatin -- Piper Jaffray -- Analyst

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 costs pressure hasn't been a function in Puerto Rico. I know, 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. So I'm just curious for your thought on that and with 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.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes. So the Fed not raising rates the rest of the year helps on the deposit side maybe; it doesn't help on the asset side. So, I let Maritza add a little bit of color to that.

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Yes. Hi, Brett. How are you?

Brett Rabatin -- Piper Jaffray -- Analyst

Hi, good morning.

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

What we're seeing is that-I think that Jose given the high level view, is that we benefited last year because of the rate hikes. This year the scenario has changed and mix in loans will continue to provide positive trends in the long view, and if we add the fact that we have borrowings being replaced (inaudible) rates would probably a better scenario than we were expecting. We can contain the lack of the high rates and have normalize or a neutral level of mean for the rest of the year.

Brett Rabatin -- Piper Jaffray -- Analyst

I'm sorry, Maritza, what level of margin for year?

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

You know, 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.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then, one just last quick follow-up, Jose Rafel, you said some strategic things about the US, but you didn't want to go into a lot of additional color. Would you kind of -- if you're thinking about the US and you've already got OFG USA, are you talking about both sides of the balance sheet or is it more on the asset origination side?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Brett, you don't follow instructions. I said I can't -- it's some small few opportunities that are 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 kind of what we're seeing. Again, can't comment any further.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay, fair enough. Thanks for the color.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes.

Operator

You have a follow-up question from the line of Alex Twerdahl with Sandler O'Neill.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Hi. Thanks for taking my follow-up. I just wanted to ask also about, just kind of how to think about expenses overall kind of the one thing we hadn'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 don't -- never really ends. Where are you kind of 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?

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

So far, Alex, we have been transforming our base of expenses. Last year, we reduced our property (ph) expenses in the real estate and have kept investing that savings into technology and capabilities within the system and we will continue to that going forward. Growing the revenues will require us to keep investing in the technology.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

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, you know, 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 cultural perspective and from our investment in technology and our strategy, we need to send a message through our customers that we're 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're managing expenses neutral because our savings were 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.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

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?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

There are always places, there are always places, and efficiencies are bound 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.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Okay, great. Thanks for taking my follow-up.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yes. You are welcome.

Operator

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

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Thank you, operator. Thank you also to all our stakeholders who -- 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.

Operator

This does conclude today's conference call. You may now disconnect your lines.

Duration: 34 minutes

Call participants:

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Brett Rabatin -- Piper Jaffray -- Analyst

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Joe Gladue -- Alden Securities -- Analyst

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

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