OFG Bancorp (NYSE:OFG) Q4 2022 Earnings Call Transcript

OFG Bancorp (NYSE:OFG) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good morning. Thank you for joining OFG Bancorp Conference Call. My name is Shelby. I will be your operator today. Our speakers are Jose Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors and Maritza Arizmendi, Chief Financial Officer. A presentation accompanies today’s remarks. It can be found on our Investor Relations website on the homepage in the What’s New box, or on the quarterly results 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. I would now like to turn the call over to Mr. Fernandez.

Jose Fernandez: Good morning and thank you for joining us. We are pleased to report our fourth quarter and fiscal year 2022 results. We are extremely proud of the work we did last year and our performance reflects that. We achieved great progress executing our strategies for the benefit of our customers, deploying technology, expanding and improving our network and investing in people and talent. We took major steps forward in our digital first business transformation, solidifying our position as a challenger bank, differentiating us from our competitors. In addition to ATMs, we now have seven self service banking kiosks and 23 interactive teller machines as part of our enhanced sales and service banking network. All this has contributed to our strong financial results.

Our performance metrics are at the highest they’ve ever been to-date. The Puerto Rico economy is also doing well. Businesses and consumers remain in good financial shape. We look forward to another good year with a cautious eye as always on economic and financial uncertainties. Now please turn to page 3 of our conference call presentation. This was our strongest quarter this year. It was driven by total core revenue growth of more than 7% quarter-over-quarter and more than 19% year-over-year. Looking at the income statement, earnings per share diluted was $0.97. Core revenues totaled $168.3 million. Net interest margin was 5.69%. Provision was $8.8 million. Non-interest expenses was $91.6 million and pre-provision net revenues totaled $76.9 million.

When we look at our balance sheet, customer deposits were $8.6 billion. Loans held for investment totaled $6.8 billion and new loan origination remains strong at $616.4 million. Investments totaled $2 billion and cash was $550 million. Capital remain strong with CET1 ratio at 13.64%. Please turn to page 4. When we look at our results for the year, earnings per share was $3.44 up 22%. This was driven primarily by total core revenue of $607.8 million. Net interest margin of 5.05%. Provision of $24.1 million and net interest expenses of $345.5 million. We ended the year with total assets of $9.8 billion. As a result, we remain under the Durbin threshold. As part of our ongoing strategic reviews at the end of the year, we decided to take advantage of an opportunity to sell our retirement plan administration business.

The rationale behind this decision is to focus our efforts on 401K business development while leveraging the service and scale of a larger U.S. player in this segment. There was minimal financial impact from this transaction. And, as we’ve previously reported other capital actions in 2022 included completing $64.1 million of our $100 million buyback authorization plan, and increasing our common stock dividend to $0.20 per share from $0.12 an increase of 66.7%. Then yesterday, we increased the quarterly dividend 10% to $0.22 per share. Now, here’s Maritza to go over the financials in more detail.

Maritza Arizmendi: Thank you Jose. Please turn to page 5 to review our financial highlights. Let me start with total core revenues, they increased $11 million quarter-over-quarter and $27 million year-over-year. Looking at the key components of that interest income was $11 million higher than the third quarter. That reflects the benefit of higher yields on increased average balances of loans and of investment securities. Net interest income for the quarter was $9 million higher compared to the third quarter and $31 million higher compared to the year ago quarter. Of the $9 million, about $11 million came from higher rates on interest earning assets, partially offset by $2.5 million in higher costs of funds. Looking at banking and wealth management revenues.

They increased $3 million from the third quarter. This reflected higher electronic banking activity and gain on sale of mortgages compared to the third quarter when Hurricane Fiona interrupted business. The annual recommendation of insurance commission was $1 million. This was $1.2 million lower than a year ago due to financial aided claims. Year-over-year banking and wealth management revenue declined $4 million. This reflected lower wealth management revenues due to lower equity market valuation. It also reflected the lower annual insurance commissions. Looking at the efficiency ratio. It was 54.45% in the fourth quarter. That’s another nice improvement from the third and year ago quarters. Similar to the last few periods, it reflects our positive operating leverage.

As per net interest expenses totaled $92 million, that’s $4 million higher than in the third quarter. That reflects higher compensation expenses due to hourly salary increases implemented in the third quarter increases in yearend performance bonuses, and other technology staffing. It also reflects increased amortization related to new digital projects and the Hurricane Fiona related expenses. Non-interest expense should average about $90 million to $92 million per quarter in 2023. As we previously mentioned, our efficiency ratio target range is in the mid 50s. As Jose mentioned we sold our retirement and plan administration business in the fourth quarter. This will reduce our wealth management revenues by about $2 million, which will be fully offset by an equal amount of savings in non-interest expenses.

Looking at our performance metrics. They improved nicely quarter-over-quarter and year-over-year. They also continue to exceed our target ranges. Return on average assets was 1.86% that is up 21 basis points from the third quarter. Return on tangible common equity was 20.36%. This is up 231 basis points from the third quarter. Looking at tangible book value per share. That was $19.56, an increase of $1.10 compared to the third quarter. This reflects increase retained earnings and other comprehensive income. Please turn to page 6 to review our operational highlights. Looking at average loan balances. They increased $72 million from the third quarter. End of period loans held for investment increased $150 million. Compared to the third quarter 2022 loan growth reflected increased balances of commercial, auto and consumer loans.

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End of period loans increased 2.3% from the previous quarter and 6.8% year-over-year. We’re extremely pleased with our performance this year. Looking at loan yield. It was 7.32%. That is 43 basis points increase from the third quarter. That’s largely the effect of Fed rate increases on new and variable rate loans in our commercial loan portfolio. It is also due to a higher proportion of auto, consumer and commercial loans versus residential mortgages. Looking at average core deposits. They decreased $165 million from the third quarter. End of period deposits declined $287 million. That reflects commercial withdrawals of $172 million which included $59 million in government funds. It also reflects retail withdrawal of $150 million which included $37 million transferred to Oriental wealth management operation.

Looking at core deposit costs. It was 39 basis points. That is an increase of 11 basis points from the third quarter. That was mainly due to government accounts with a specified deal parameters and migration from savings accounts into time deposits. Of the 11 basis point increase, 6 basis points came from government deposits. So far in this rate cycle, our deposit has been 7%. We expect deposits cost to increase given the magnitude and the speed of Fed from the recent and expected increases. But we believe that through this interest cycle, they will continue to be below mainland level. Looking at new loan origination. They totaled $660 million compared to $511 million in the third quarter. This reflected the strong production of commercial loans in Puerto Rico and the mainland.

It also reflected continued high levels of auto loans at a record of $221 million. Looking at net interest margin. That was 5.69% an increase of 46 basis points from the last quarter and 151 basis points year-over-year. This higher net interest margin reflected growth of the loan portfolio at the higher yield, growth of the investment portfolio also at a higher yield and higher yield on cash. This was partially offset by the increasing cost of funds. Please turn to page 7 to review our credit quality and capital strength. Looking at net charges off. They totaled $11 million in the fourth quarter. That’s reflected $5 million for auto loans, $4 million for consumer loans, and $3 million for a commercial loan previously we served. Looking at provision for credit losses.

So that provision was $8.8 million that reflected $9.2 million in higher provision due to the increased loan volume. It also includes a net release of $400,000 mainly related to reduction in the qualitative adjustments due to improved macroeconomic environment in Puerto Rico, as well as a stable delinquency trends. Fourth quarter allowance coverage ex-PPP was 2.24%. That’s down 9 basis points from the third quarter. Looking at non-performing loans. The total non-performing loan rate was 1.61%. That’s down 10 basis points from the third quarter and 37 basis points from a year ago. Overall, credit was a stable without rebound from the last quarter effects of Fiona. Looking at some of our other metrics. The CET1 ratio was 13.64%. That’s up 13.38% in the third quarter.

Total stockholders’ equity was $1 billion up $49 million from the third quarter. The tangible common equity ratio increased to 9.59%. Now here is Jose.

Jose Fernandez: Thank you, Maritza. Please turn to page 8 for our outlook. When we entered 2023, we entered 2023 with strong momentum in loan growth, customer acquisition and market penetration; all of which are helping to transform our company. While we need to keep a watchful eye towards uncertainties from Fed rate hikes, inflation, and a possible mainland recession we should benefit from a full year of higher loan balances and rates combined with a relatively low deposit data as compared to our mainland peers. We should also start to benefit from a full year of the investments in technology and people that we made in 2022. On a macro basis, the Puerto Rico economy should continue to grow, perhaps at a slower pace, but better than the mainland, given the level of continued federal spending here.

All this should enable us to continue to invest in people and technology as part of our digital first strategy. Thanks again to our dedicated team members for their commitment to the customers and the communities we serve. This ends our formal presentation. Operator we can start the Q&A.

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Q&A Session

Operator: We’ll take our first question from Alex Twerdahl with Piper Sandler.

Unidentified Analyst: Good morning. This is I’m filling in for Alex Twerdahl today. Today, how are you guys doing?

Jose Fernandez: Good, how you doing?

Unidentified Analyst: Good. Thanks. I just wanted to start off. I know you guys mentioned that you expect the deposit rate to be lower than the last year cycle. But given the rising deposit costs, do you see increased pressure in any specific segment of deposits in the island.

Jose Fernandez: So when we look at betas, we kind of look at the past to use it as a reference. And when we look at our origins, deposit betas in the last cycle, it was somewhere around 16%. So we expect given the speed and the size of the increases that we’ve seen in 2022 we see our betas to be higher than that 16% that we had in the last rate cycle hikes. Now, where do we see that? We definitely have an adjustment with a lag from the Puerto Rico government. We have very little but whatever it is, is going to have some impact on that. And then when we look at the core, I think the ones that will have a higher beta will be in commercial deposits across the board, but in particularly the higher balances accounts.

Unidentified Analyst: Got it. Thanks. And I know you guys had another great quarter of asset yield growth. I’m just curious to know what rates are coming on the books from new loan production right now or moving forward?

Jose Fernandez: So on the commercial book, we’re seeing rates on the 6% handle, more or less, north of 6.5, I’m talking about larger type of loans. And then on the small commercial closer more to the 7%, 7.25.

Unidentified Analyst: Okay, and lastly, I know you’ve had your efficiency ratio target around 54%. Also curious to know where you see going moving forward throughout the year.

Jose Fernandez: So in terms of the efficiency ratio?

Unidentified Analyst: Yes.

Jose Fernandez: Yes. We are targeting mid 50s. So you should expect our efficiency ratio around those levels. And this is the way we think about this and take this opportunity to give you a little bit of our thought process here for 2023. We see loan growth around 3% to 4% for the year as interest rates start to slow down loan growth in the island. I mentioned the beta is slightly higher than what we had in the last cycle of 16%. So given the current yield curve, our net interest margin should start to stabilize at these levels. There’s a slight positive trend during 2023. Remember that in 2023 we also, we will realize the full effect of higher loan balances and interest rates, as Maritzamentioned. So net interest expenses are $90 million to $92 million per quarter.

We keep on investing on our network optimization, self service and process improvement technology, and people on talent and recruitment of additional team members. So that puts it around the mid 50s range for the efficiency ratio.