OFG Bancorp (NYSE:OFG) Q1 2024 Earnings Call Transcript

OFG Bancorp (NYSE:OFG) Q1 2024 Earnings Call Transcript April 18, 2024

OFG Bancorp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for joining OFG Bancorp’s Conference Call. My name is Jamie, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Vice Chair of the Board of Directors; Maritza, Chief — I’m sorry, apologies. Maritza Arizmendi, Chief Financial Officer; and César Ortiz, Chief Risk Officer. A presentation accompanies today’s remarks. It can be found on the homepage of the OFG website under the First 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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. Please go ahead.

José Rafael Fernández: Thank you for joining us. We are pleased to report our first quarter 2024 results, which reflected good solid performances across all our businesses. Growth was in line with both our short and long-term strategies and plans. Our Digital First strategy continues to drive customer acquisition and engagement. Business activity, consumer liquidity and employment levels in Puerto Rico continued to do well in a strong economy. And our balance [Technical Difficulty] interest rate environment. Thanks to the entire team for their hard work and commitment helping our customers reach their goals and our communities to achieve progress. Please turn to Page 3 for a summary of our first quarter results. Looking at the income statement.

Earnings per share diluted increased more than 9% year-over-year to $1.05 on close to a 6% increase in total core revenues to $174.2 million. Net interest margin was in line at 5.4%. Provision was $15.1 million. Non-interest expenses were in line at $91.4 million, pre-provision net revenues totaled $83 million. Turning to the balance sheet. Total assets were $11.2 billion, 2% less than last quarter and 11% higher than a year ago. Customer deposits were $9.5 billion reflecting the $1.2 billion public funds deposited in mid-December. Loans held for investment totaled $7.5 billion approximately level with last quarter and up 10% from a year ago. New loan production was $536.6 million [Technical Difficulty] totaled $2.5 billion down from the fourth quarter mainly due to the sale of a Treasury bill position.

Cash increased to $754 million from last quarter. Looking at capital. The CET1 ratio was 14.45%, up from 14.12% in the fourth quarter. We increased the quarterly cash dividend 14% to $0.25 per share [Technical Difficulty] approved a new $50 million stock repurchase authorization. Please turn to Page 4 for an update on our Digital First strategy. As of the first quarter, 94% of all routine retail customer transactions, 96% of retail deposits and 64% of retail loan payments are being made through our digital and self-service channels. This is being driven, by year-over-year growth of 12% in digital enrollment, 68% in digital loan payments and 32% in virtual teller utilization and 3% in customer growth. Another factor is the continued success of our Oriental Servicing Portal, which was introduced in mid-2023.

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Q&A Session

The portal as you know is a cornerstone of our self-service strategy. Customers can manage all loan and deposit accounts. It enables digital account opening for checking and savings and CDs, applying for and accessing loans, managing automatic loan payments and downloading bank letters and tax documents, among other things. Every quarter, we add new features and this quarter was not an exception. [Technical Difficulty] the addition — additional functionality to manage IRA accounts and IRA funds. All of this continues to validate our Digital First strategy and investments. Our goal is to use technology, to provide more value-added service, increase our efficiency and have more staff dedicated to new business development activities. Now, I’d like to turn on the call to Maritza, to go over the financials in more detail.

Maritza Arizmendi: Thank you, Jose. Please turn to Page 5, to review our financial highlights. And starting with the components of core revenues, total interest income was $183 million, up 4% from the fourth quarter. Key factors were increases of $5 million from investment, $1 million from cash and $800,000 from loans. Investment securities benefited from an 18% higher average balance and a 24 basis point higher yield. Cash reflected a 16% higher average balance and a six basis point higher yield, and loans had a 2% higher average balance and two basis points higher yield. There was one less day in this first quarter compared to the fourth quarter. This reduced income by $1.4 million. Total interest expense was $39 million, an increase of $6.7 million from the fourth quarter [Technical Difficulty] This reflected the full effect of the $1.2 billion in government funds, deposited this past December.

Borrowings and brokered deposits declined [Technical Difficulty] due to the reduced need for wholesale funding. The day factor reduced interest expenses by $300,000. Total banking and financial service revenues were $30 million compared to $32 million in the fourth quarter, which included annual insurance commission recognition of $2.5 million. First quarter, mortgage banking revenues increased $400,000 due to higher MSR valuation. Year-over-year total fee revenue was up $1.5 million, reflecting increased wealth management and mortgage banking revenues. There was a minor amount of other non-interest income compared to the fourth quarter, which included $6 million in gains on sales of non-performing Puerto Rico small business loans. Looking at non-interest expenses.

They totaled $91 million, down $3 million from the fourth quarter, which included $3.2 million due to the cost of workforce, early retirements and facilities rightsizing. We continue to expect to average about $90 million to $92 million of non-interest expenses per quarter over the rest of 2024. The first quarter efficiency ratio was 52.49%, 10 basis point improvement from the fourth quarter. The efficiency ratio should continue in the low to mid-50 percentage range this year. Our performance metrics remain high. Return on average assets was 1.77%. Return on average tangible common equity was 17.92% and tangible book value per share was $23.50 [Technical Difficulty] $0.42 from the fourth quarter, mainly due to the increased retained earnings.

Please turn to Page 6 to review our operational highlights. Average loan balances were $7.5 billion, end-of-period balances were approximately leveled. March 31 balances reflected sequential growth in auto and consumer loans, offset by decreases in commercial and residential mortgages. Commercial reflected seasonal paydowns of lines of credit, residential mortgage reflected regular paydowns and securitization and sale of conforming loans. Loan yield was 7.98%, up 2 basis points from the first quarter. This reflected variable rate commercial loans higher entry yields on new loans and a smaller propulsion of residential mortgages in the loan book. Average core deposits were $9.5 billion, up 10% from the fourth quarter due to the large deposit of public funds in December.

End-of-period balances declined 1% from December 31. This reflected a $48 million decline in commercial deposits related to the line of [Technical Difficulty], partially offset by a $20 million increase in retail deposits. Core deposit cost was 147 basis points compared to 107 in the fourth quarter. This increase reflects the full impact of the new government deposits. Non-government deposit cost was 82 basis points. As of the first quarter our cumulative deposit data [Technical Difficulty] deposits and 23.24% for total deposits including interest bearing deposits. Excluding government deposits, it was about 16%. Average borrowings and brokerage deposits were $280 million compared to $602 million in the fourth quarter. The March 31 balance was $203.3 million, the rates paid on wholesale funding decreased 41 basis points to 4.80% in the first quarter.

Looking at non-interest expenses, they totaled $91 million. Excuse — net interest margin was 5.30% as anticipated. With the prospect of higher for longer, we now anticipate three fed cuts versus five — cuts as a result for this year we have guided a net interest margin range of 5.45% to 5.55%. Please turn to page 7 to review our credit quality and capital strength. Net charge-offs totaled $20 million up $4 million from the fourth quarter. The net charge off rate was 105 basis points up 17 basis points [Technical Difficulty] two factors. One was lower $3.5 million from previously and fully reserved non-performing PPP loans. The second was $1.7 million as a result of the strategic sale of our performing US commercial loan. The auto net charge-off rate declined sequentially, while the consumer rate increased.

Looking at provision for credit losses, which totaled $15 million related to volume factors including net charge-offs. The first quarter included $1.7 million related to the US loan sales which was offset by a separate $1.7 million reduction in a specific reserve for payments received on substantially reserved US commercial loans. Looking at other credit metrics. First quarter early and total delinquency rates were lower than the fourth quarter at 2.41% and 3.30%, respectively. The non-performing loan rate of 1.10% was the lowest over the last five quarters. Overall credit continues to be good with COVID cash stimulus fading away we expect increased NCO — net charge-offs in auto and consumer, but lower than [Technical Difficulty]. However, net charge-offs and delinquencies performed fairly well in the first quarter due to a strong employment and Puerto Rico’s economy as well as the federal tax charge credit.