OFG Bancorp (OFG) 2024 Q3 法說會逐字稿

Good morning. Thank you for joining the OFG Bancorp's conference call. My name is Connie, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors; Maritza Arizmendi Diaz, Chief Financial Officer; and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the home page of the OFG website under the Third Quarter 2024 section.

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. (Operator Instructions)

I would now like to turn the call over to Mr. Fernández. Please go ahead.

Good morning and thank you for joining us. We are pleased to report our third quarter 2024 results. It was another solid performance. Earnings per share were 5.3% year-over-year or up 5.3% year-over-year on a 1.1% increase in total core revenues. We continue to produce consistent core operating results, and digital adoption of our new and upgraded products, services, and self-service tools keeps steadily growing. Puerto Rico's economy continues to do well with high levels of business activity and employment.

In addition, today marks our 60th anniversary in business. While that is cause for celebration, it is a time to renew our commitment to bring progress to our customers, employees, shareholders, and the communities we serve. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow.

Before I go on, I would like also to comment on the recent hurricanes in the Southeast United States. As an island where people have suffered through many of them, our prayers and hearts go out to everybody who has been affected by Helene and Milton.

Please turn to page 3 for a summary of our second quarter results. Looking at the income statement, we reported earnings per share diluted of $1 on total core revenues of $174.1 million. Net interest margin was 5.43%. Provision was $21.4 million. Noninterest expenses were $91.6 million and pre-provision net revenues totaled $83.1 million.

Turning to the balance sheet. Total assets were $11.5 billion, up 12% from a year ago and up 2% from last quarter. Customer deposits were $9.5 billion, Loans held for investment totaled $7.8 billion and new loan production was $572 million. Investments were $2.6 billion, up 26% from a year ago and up 5% from last quarter. Cash at $681 million was up 28% from a year ago and down 8% from last quarter.

Looking at capital, the CET1 ratio was 14.37%. There were two corporate developments of note during the third quarter, Durbin took effect which reduced debit card interchange fees by $2.7 million, and we acquired servicing rights in late August to a $1.7 billion Puerto Rico residential mortgage loan portfolio.

Please turn to page 4 for an update on our digital-first strategy. As of the third quarter, 95% of all routine retail customer transactions, 97% of retail deposit transactions, and 67% of retail loan payments were made through our digital and self-service channels. This is being driven by year-over-year growth of 13% in digital enrollment, 53% in digital loan payments, 40% in virtual teller utilization, and 4.6% in customer growth.

In addition, customer reception to the oriental servicing portal continues to expand. By the end of September, 30% of all retail clients were using it to transact business with the bank, up from 24% at the end of June. All this frees up our branch bankers to grow business and provide valued advice to our customers.

As I mentioned on our last call, we launched the Elite deposit account for retail customers, a combined checking and savings account that rewards customers for expanding their relationship with Oriental. This represents a unique value proposition in our markets. Since then, we have further enhanced the account with the launch of the first-of-its-kind debit card in the Puerto Rico market, offering world Elite benefits exclusively for Elite account holders. In addition, we offer fully digital account opening with funding for all our retail checking and savings accounts.

Now, here is Maritza to go over the financials in more detail.

Thank you, José. Please turn to page 5 to review our financial highlights. Starting with the components of core revenues, total interest income was $189 million, up 1% or $1.4 million from the second quarter. This mainly reflects higher balances of investment securities and yields, higher balances of loans and the absence of a $2 million loan recovery in the second quarter. If you recall, since late last year, we have been growing the investment portfolio to help manage the anticipated lower rate environment going forward, adding higher yield in US guaranteed longer duration securities.

Total interest expense was $41 million, an increase of less than $1 million from the second quarter. This mainly reflects higher balances -- higher average balances of higher cost borrowings and brokered deposits as well as slightly reduced average cost deposits, core deposit balances and costs.

Total banking and financial service revenues were $26 million, a decrease of $5.8 million from the second quarter. This mainly reflects the $2.7 million in reduced interchange fees that José mentioned, $2.1 million in reduced MSR valuation due to lower long-term rates, $300,000 in one month revenue from the new mortgage servicing portfolio, and the absence of [$1.1 million] from the second quarter's loan prepayment fees and annual recognition of certain insurance commissions. If you exclude the reduced MSR valuation, total banking and financial services revenues were in line with our original expectations.

Please turn to page 4 for -- looking at noninterest expenses, they totaled $91.6 million, down $1.4 million from the second quarter. This mainly reflects a $2.3 million onetime credit and debit card processing business contracts and more rebates in general and administrative expenses and $1.3 million in expenses related to lower gains on real estate owned shares. The second quarter efficiency ratio was 52.6% or 79 basis points higher than the second quarter. This was generally in line with trends we have seen over the last five quarters.

Other performance metrics remained high. Return on average assets was 1.66%. Return on tangible common equity was 15.94%, and tangible book value per share was $26.15, that's up 8% from the second quarter due to our earnings performance and increased value of our investment securities portfolio.

Please turn to page 6 to review our operational highlights. Average loan balances were $7.6 billion, up slightly from the second quarter. End-of-period balances of loans held for investments increased 1.5% or $111 million from the second quarter. This mainly reflects growth in Puerto Rico and US commercial and Puerto Rico auto and consumer loans, also regular phasedowns and securitization of residential mortgages.

Year-over-year, third quarter loans held for investment increased almost 7%. Loan yield was 8.05%, down 10 basis points from the second quarter. Third quarter new loan origination mainly reflects a high amount of US commercial loans and Puerto Rico consumer loans and a lower level of Puerto Rico commercial and auto loans. In Puerto Rico, we continue to have a strong commercial pipeline. And as we have said, we had anticipated overall lending will moderate at some point from record levels.

Now, that interest rates are falling down and inflation has come down, in the US, we expect our US lending pipeline to strengthen. Average core deposits were $9.6 billion, down slightly from the second quarter. End-of-period balances decreased $72 million or 0.7%. This mainly reflects increases in time and saving deposits and reduced demand deposits.

Core deposit cost was 153 basis points, down 1 basis point from the second quarter. Excluding public funds, cost of deposits was 91 basis points compared to 87 basis points last quarter. Average borrowings and brokered deposits were $262 million compared to $221 million in the second quarter. The average rate base was 4.6%, down 2 basis points. End of period balances were $346 million compared to $201 million in the second quarter. Net interest margin was 5.43%. Excluding the previously mentioned loan recovery in the second quarter, NIM was basically flat from the previous quarter.

Please turn to page 7 to review our credit quality and capital strength. Credit quality continues to be stable. Net charge-offs totaled $17 million, up $2 million from the second quarter. Sequentially, overall net charge-offs were higher at 1.64% but lower than the high point last year.

Consumer net charge-offs now at 4.70% appear to be resuming the traditional level for this business, which typically runs in the high 4% range. At the same time, there were continued recoveries in mortgage and in both Puerto Rico and US commercial loans. As a result, the net charge-off rate was 90 basis points, up 11 basis points sequentially, but below 1.05% in the year ago quarter.

Provision for credit losses totaled $21.4 million, up $5.8 million from the second quarter. This mainly reflects $11.7 million from increased loan volume, $5.2 million related to the annual update of auto lease drivers, consumer loan loss factors, and the extension of cash flows of a Puerto Rico commercial loan up for renewal in the fourth quarter. And at $2.7 million reserve, mainly due to an improved US macroeconomic perspective.

Looking at other credit metrics, the early and total delinquency rates were 2.78% and 4.10%, respectively. The nonperforming loan rate was 1.11%. The total delinquency rate increased from the second quarter. This was due to booking of the Ginnie Mae buyback option programs related to the mortgage servicing portfolio acquisition.

To sum up, during the third quarter, net interest income grew driven by the investment portfolio and loans. The core deposit balances have held pretty steady since the beginning of the year with a shift from demand in savings and time deposits as we continue to grow and deepening customer relationships with recent value-added products and services. Loan growth continues to be strong, credit qualities were maintained, and the trends are mostly positive, reflecting the good economic environment in Puerto Rico.

Our fourth quarter NIM outlook is now between 5.3% and 5.4% given the size of the first Fed rate cut. We continue to expect two additional 25 basis point Federal Reserve rate cuts by the end of the year. Noninterest expense should range from $91 million to $93 million going forward with an efficiency ratio in line with the trends we have seen during the last several quarters. We will update you more precision on the fourth quarter call about our interest rates, net interest margin, and credit outlook for 2025. Regarding capital allocation, we continue to remain opportunistic, focusing on Puerto Rico and US loan growth and always looking at dividends and share buybacks.

Now, here's José.

Thank you, Maritza. Please turn to page 8. Our outlook for both Puerto Rico and OFG continues to be positive. The island economy is steadily growing, wages unemployment are at high levels in Puerto Rico, and the start of a lower interest rate cycle by the Federal Reserve supports the continued strong financial condition for both businesses and consumers. Altogether, the business environment here remains optimistic. As always, we remain vigilant regarding the big macro uncertainties, changes in interest rates and inflation, the impact of unfortunate weather events, and ongoing geopolitical conflicts.

Turning to OFG. We continue to be well positioned for growth of loans, deposits, and our customer base. Consumer credit trends should remain at current levels. Our digital-first strategy will continue to evolve. Now, that we have established a strong platform for fast, easy-to-use convenient customer self-service, we plan to further enhance experience through increased personalization. And that means we will continue to invest in and deploy new customer innovations with the twin goals of further differentiating our business model while at the same time, increasing efficiencies. Altogether, we look forward to a strong finish to our 60th year more than ready to make progress possible for our customers, employees, shareholders, and the communities we serve.

Our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and excited for what's to come.

With this, we end our formal presentation. Operator, please start the Q&A.

(Operator Instructions) Kelly Motta, KBW.

Hi. Good morning. Thanks for the question. I thought I would kick it off with the loan growth that you've had. It's been very strong in the past two quarters, kind of broad-based, but continued strength in auto. And on the commercial side, you mentioned, José, in your prepared remarks about the US pipeline. So I was hoping to get a sense of what you're seeing on the island as well. What pipelines look like there? And how we should be thinking about the loan growth that you're -- it sounds like you're continuing to expect as we look ahead here.

Yes. So Kelly, thank you for your question. It hasn't changed. I mean, we feel that there is quite a bit of economic activity here in Puerto Rico that supports strong growth in terms of our commercial as well as our auto and consumer. So we feel that the forecast hasn't changed. So what we have seen this quarter is kind of steady originations, steady loan production. We had some delays on the commercial in Puerto Rico, the loan originations that are going to be pushed into the fourth quarter. But all in all, we are -- we have a pretty strong pipeline on the commercial side.

And then as to your question on the US, we have been quite cautious in the last, let's say, four to six quarters with regards to our US business. simply because we felt that the US economy was still kind of figuring out if it was a soft landing or a hard landing or a no landing. Frankly, I don't have the crystal ball. I don't think anybody does, but we feel more encouraged with what's going on in the US economy in terms of inflation coming down. And economic growth remaining steady with low unemployment.

It's similar to what we have seen in Puerto Rico for the last couple of years where we kind of called it out and said, look, Puerto Rico is going to do well, and we're going to have a good economy. And what we're seeing now going forward here in Puerto Rico -- and I'm not trying to compare here. We continue to see Puerto Rico having a pretty steady growth in economy. It's a different paradigm that we have been living in the last couple of years, and I think it will continue for the next several years given the low employment levels, high wages, higher wages that we have as well as the support from the reconstruction funds continue to flow down to Puerto Rico. So really optimistic about Puerto Rico, more constructive on the US side.

All in all, we're excited to finish the year, a record year this year and looking forward to start 2025 with strong momentum.

Okay. That's super helpful. And then on the other side of the balance sheet, on the deposit side, your demand deposits fell. It looks like that was in government deposits. It was more retail and commercial, but it looks like there was some migration among accounts. And in your slides, you highlight the optimism about the ability to grow deposits. I was hoping we could spend a moment talking about with rates cut, is this -- do you see the leveling off of migration? Or is there a continuation of that as well as with the growth you're expecting, how much of that is market share gains versus continued growth in deposits on the island?

Yeah. So there are some variables that we can't control, as you clearly point out in terms of how interest rates move and how demand and flow of liquidity into the island flows, right? But we can control some things internally, and that is our business model. And I think the way we're seeing our business model evolve and how we have invested in technology and bringing in the new products and services with digital account opening and funding is something that is unique in the Puerto Rico market. It's giving us a competitive advantage in a slight way so that we feel into 2025, as we see interest rates starting to trickle down, we see deposits starting to level off, and we potentially see core deposits growing into 2025.

What we have seen so far in this quarter, you have seen ups and downs on the government deposit balances. If you look at it from average balances or as end of the period because we do have a pretty big deposit from the government that it's still on the books. But all in all, what we're seeing is a transition from checking towards slightly savings and mostly time deposits. We think that that is going to start shifting into 2025, and we continue to build our core franchise on the retail side.

On the commercial side, we're very excited given what we're seeing in terms of the liquidity levels in Puerto Rico in terms of the businesses. And we see our small base accounts, which is a small and midsized type of checking accounts, getting good momentum on the market. So again, we look at 2025 as a year where we see deposits stabilizing and starting to grow back steadily.

That's super helpful. And can you remind us -- my notes on the government deposits, I think you were projecting at least at the last quarter that they would be paying through September. Any updated thoughts about flows on those?

Yeah. So we have a large deposit that was supposed to exit the balance sheet in September. It did not, and it extended until November. So right now, what we're seeing is a tentative exit in November of this year. Reminding everyone on the call that this is an index government deposit fund, index government deposits, which is indexed to the three-month treasury bill at a discount to that rate. So as interest rates have gone down, that is helping us also on the cost of funds as the deposit remains in the books. So again, it's going to stay until November, and we will update the market accordingly.

Okay. That's helpful. And then turning to your margin guidance, the 5.3% to 5.4% margin, it seems like it's trending lower than what we expected this time last quarter. But your balance sheet is also bigger. It looks like you purchased more MBS securities. Just wondering how much of that kind of reduction in the outlook is a function of rates versus potentially -- if you could discuss the reason, perhaps securities purchases and kind of the outlook for -- an appetite for additional ones to the size of the balance sheet?

Yeah. I'll let Maritza give you the answer.

Yeah. Kelly, the -- it's not related to rates. When we shared with you last quarter, the estimate and the expectation was based on three 25-basis-point Fed cuts. And the actual one in September was 50 basis points. So given the size of that cut, we adjust the estimate for the fourth quarter, okay?

Okay. And then again, the securities, it looks like EOP was about $2.6 billion. It was higher than what I was modeling, just any appetite around securities purchases from here and kind of managing the size of the balance sheet?

Yes. And that's part of what I mentioned also in the prepared remarks about we have been, since last year, extending the duration of the assets, prepare the balance sheet for the new low-rate environment in the long term. So that's what we did this quarter also.

And again, adding to that, we will continue to look into the investment portfolio as we use it as a way to reduce our asset sensitivity. We used to be 5% asset sensitive. We're now in the two-handle asset sensitive. And extending the duration at 5% of mortgage-backed securities from the US government kind of makes sense for us. So we are going to be constructive about the investment portfolio going forward as we manage the lower interest rate environment, as Maritza mentioned.

Got it. I guess kind of tying into that is capital return. You guys -- even with Durbin kicking in, you make -- you're super profitable and even growing the loan book from here in kind of the low mid-single-digit range, you're going to accrete capital. Any updated thoughts on dividends, buybacks, and how you're managing that?

We will review dividends and buybacks in the -- with the Board in our off-site strategic session coming up, and we'll also look at it in the January Board.

But if you ask me, Kelly, if we kind of were a little behind the ball in the third quarter, from our -- from a management perspective is that we could have been a little bit more intentional about the buyback, and we did some repurchases, but not significant. And with the level of capital that we're accumulating and the earnings that we're generating and the loan growth prospects that we're seeing, we again look at loan growth, we look at dividends, we look at buybacks. But I view -- we'll put a fault into us. It's probably that we are kind of a little bit slow on the capital return.

Great. Thanks for the color. Maybe the last one for me is on the servicing portfolio you purchased this quarter. Hoping you can provide some insight as to the strategic -- the decision around that? And any thoughts on how that contributes to the servicing income from here?

Yes. So first, we -- it's a portfolio that we had a subservicing agreement with. So in the end, it's just us owning the whole servicing rights and having the ability to own the customer relationship from a servicing perspective. And it's part of us building our servicing book, which, as you know, requires a critical mass. And here in Puerto Rico, it has these opportunities, but it also has its limitation.

So that's kind of the logic behind it. I think it was just complementary to what we have been doing. It was part of our operating model already, except that now we own it versus subservicing it. And we're going to be generating approximately $900,000 if you use the balance today a quarter in terms of mortgage banking fees. And we felt that it was the right thing to do.

Great. Thank you so much for the time and all the color. I will step back.

Thank you, Kelly. Have a great day.

(Operator Instructions) And at this time, with no questions in the queue, I'll turn the call back over to José.

Thank you, operator. Thanks again to all our team members and thanks to all our stakeholders that have listened. Have a great day.

And this concludes today's conference. We appreciate you joining us. Have a great day.