Good morning. Thank you for joining OFG Bancorp Conference Call. My name is Samantha. I will be your conference operator today. Our speakers are José Rafael Fernández, 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 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 any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mr. Fernández.
Good morning. Thank you for joining us. Please turn to slide three. After the rebound we saw in 2018, our first quarter of 2019 reflected strong, steady growth. This was achieved due to the 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 have 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 Rápido, Fácil, 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 four 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. 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 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 five 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 remained 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 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-yielding commercial and auto loans in the originated portfolio. Core deposit costs continue 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 six 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 132 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. 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 continued to build. Our ratios increased across the board to new multi-year 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. Let's turn to slide seven 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. 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 want to thank you for listening. Operator, please start the question and answer.
Ladies and gentlemen, if you would like to ask an audio question, please press star followed by the number one on your telephone keypad. 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 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.
Yeah. 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. 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. 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. Wanted to talk, you mentioned capital and 17% CET1. Any update on plans for using some of that excess capital? Maybe you could talk a little bit about OFG USA this quarter.
Yeah. 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. 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.
We look at this on an ongoing basis, certainly both potential capital actions, dividends, and repurchase are part of the discussion as we look at organic growth. Just to update you a little bit, we're also looking at a few small, interesting strategic opportunities in the U.S. 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 opportunities. 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. 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-
Yeah
we should be thinking about in term?
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. Otherwise, when you look at mortgage and you look at auto and consumer, it's all pretty steady. 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.
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 of 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. Some mid-size and larger commercial clients. Recall that in the last quarter of last year, there were some exits in terms of deposits. Again, it's part of the seasonality. 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.
Really driven by one, seasonality, and two new customers.
Yeah. We keep on bringing new customers. At the same time, we continue to expand relationships with existing commercial clients. That's helpful too for our deposit base.
Okay. Then you alluded to the small business production a couple of times.
I assume that's in the commercial origination bucket. Could you just break that out specifically, was this quarter as well as in past quarters?
Yeah, I don't have that information off the top of my head. I need to kind of look at it. We can provide that later. Again, we're 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. I think there's an opportunity for us being a more agile and more proactive bank to approach these clients and be able to service them. 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 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?
Hard to tell. I don't have data to be able to give you a specific answer to that, Alex. 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. 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. 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. Again, it's an ongoing conversation. 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. We're just going to be very methodical about it.
Understood. Thanks for taking my questions.
Yeah. Thank you, Alex. Have a good weekend.
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Joe Gladue with Alden Securities.
Good morning.
Hi. Good morning, Joe.
I wanted to ask a little bit more about some of the segments of the loan portfolio. Just start with the auto segment. That segment has performed very strongly since the hurricanes. I was wondering, just overall outlook, do you see demand sort of settling down at all, or what's the outlook for that segment?
Yep. I think auto continues to show strong demand. I think it's 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. That affects a little bit the dynamics. 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. 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. Thank you.
Yep.
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.
market share.
Yep. The mortgage business is a little bit of a tricky business. There are two large players here in terms of originations. As you know, it's a business that is highly regulated and requires all kinds of constant changes in terms of regulation and how we service those mortgages. We don't see that business as a high ROE business from our perspective. We don't necessarily emphasize that. 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 the residential mortgage business in Puerto Rico is still also a difficult asset. There's still a lot of demand for low-income housing. The middle and higher end, there's still an oversupply, in our opinion.
We just want to make sure that we don't bulk up in residential assets longer term. At the end of the day, it's about pricing, Joe, we feel that it's a discounted market.
Okay. All right. Thank you.
You're welcome.
Again, if you would like to ask a question, please press star, then one on your telephone keypad. 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.
Yep
that would not lead that to being stronger a little bit going forward. Go ahead.
No, good catch. I think what you see is really we do have a significant 401(k) and retirement planning business on the trust side, and it's pretty much managed assets. 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. 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. The other thing What was that?
Does that make sense?
Yeah. No, that helps.
Great.
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. I know everyone kind of said at some point you'll see
deposit rates. It would seem like with the Fed on hold, maybe Puerto Rico doesn't ever catch up. I guess I'm just curious for your thought on that. 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.
Yeah. The Fed not raising rates the rest of the year helps on the deposit side, maybe. Doesn't help on the asset side. I'll let Maritza add a little bit of color to that.
Yes. Hi, Brett. How are you?
Hey, good morning.
What we're seeing, margin, I think that José 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. If we add the fact that we have other borrowings being replaced at current market rates with probably a better scenario than we were expecting, we can contain the lack of the high 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. One just last quick follow-up. José Rafael, you said some strategic things about the U.S., you didn't want to go into a lot of additional color. If you're thinking about the U.S. and you've already got OFG USA, are you talking about both sides of the balance sheet, or is it more on the asset and origination side?
Brett, you don't follow instructions. I said I can't. It's some small few opportunities. Nothing to act on in the short term, like immediately. It's something that we're looking at, those are part of the process that we started three years ago, we continue to evolve, that's kind of where we're seeing. Again, can't comment any further.
Okay. Fair enough. Thanks for all the color.
Yep.
You have a follow-up question from the line of Alex Twerdahl with Sandler O'Neill.
Hey, 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 haven't really hit on over the next really two years. I think a lot of mainland banks are focusing a lot on reinvesting in their system and improving cyber. It seems like the expense bill never really ends. Where are you kind of in that process in terms of what your capabilities are? I know you've always been a little bit forward-thinking on the technological side. 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?
Far, Alex, we have been transforming our base of expenses. As you know, last year we reduced our occupancy expenses in the real estate, and we have keep investing that savings into technology and capabilities within the system. We will continue to do that going forward. Growing the revenues will require us to keep investing in the technology.
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. 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're here to challenge the establishment and to push things. Sometimes we do it right, sometimes we might not.
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. That's really a little bit of where our heart is on all this. I think as Maritza points out, we're 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.
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. Inefficiencies abound in every single business and in banking, too. A part of our challenge is to look for them on a constant basis. Certainly, that's our call to action as part of who we are. We need to kind of make sure we get to them. We do have a couple of further opportunities going forward.
Okay, great. Thanks for taking my follow-up.
Yep, you're 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 listened in 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.