OFG Bancorp (NYSE:OFG) Q2 2023 Earnings Call Transcript
OFG Bancorp (NYSE:OFG) Q2 2023 Earnings Call Transcript July 20, 2023
OFG Bancorp beats earnings expectations. Reported EPS is $0.93, expectations were $0.88.
Operator: Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Chelsea, and I will be your operator today. Our speakers are Jose Rafael Fernández, 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 in 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. All line have been placed on mute to prevent 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. Fernandez.
Jose Rafael Fernandez: Good morning, and thank you for joining us. We are pleased to report our second quarter results. All our businesses performed well and contributed to another strong quarterly performance. Highlights included excellent loan production, stable core deposits with low cumulative beta, increased operating leverage and capital continues to build. Our digital-first strategy continues to show excellent progress with higher sales service actions and lower branch visits. The result has been an overall increase in customer transaction activity. Key performance metrics continue at strong levels. On the people front, we announced several executive leadership promotions and recruited a new executive to lead our retail channel business development efforts.
For Puerto Rico, consumer liquidity is good and the economy continues to do well. Thanks to our team for their commitment to helping customers and the communities we serve to achieve their financial goals. Please let's turn to Page 3 of our conference call presentation. Looking at the income statement, earnings per share diluted was $0.93, up 11% year-over-year. Core revenues increased 17% to $170.5 million. Net interest margin was 5.9%. Provision was $15 million. Non-interest expenses were $89 million and pre-provision net revenues totaled $80.8 million, up 22% year-over-year. Looking at our balance sheet. Total assets remained steady at approximately $10 billion. Customer deposits were approximately $8.5 billion. Loans held for investment totaled $7.1 billion, up 3.8% from the first quarter.
New loan production increased 23% from the first quarter to approximately $692 million. Investments totaled $1.7 billion and cash was $799 million. Looking at capital, the CET1 ratio was 14.0%. During the second quarter, we bought back about 565,000 OFG shares. This leaves us with a remaining authorization of about $19 million. Please turn to Page 4 to look at our progress so far on our digital first strategy. Looking at data from June this year compared to last year, digital enrollment is up 10%. Self-service transactions increased 6%. That includes 14% growth in kiosk usage and 17% growth in digital loan payments. Overall, transactions increased 5%. And to provide additional detail on our customer adoption levels, 78% of our customers are registered on our retail digital banking platform.
Photo by Towfiqu barbhuiya on Unsplash
80% of total customer transactions are now being made using digital and self-service channels, and 90% of our customer deposit transactions are through digital and self-service channels. All this continues to validate that our investments in technology are key to our operating businesses, ultimately providing more value-added quality service to our customers, increased opportunities for business development and higher efficiency. As part of our continued improvement to our retail digital banking platform, in April, we launched the Oriental servicing portal. This portal allows customers to easily manage all their deposits and loan accounts in one place, including full digital deposit account opening capabilities. So far, the early adoption levels are well above our initial expectations.
Looking ahead, we will continue to enhance this portal with additional products and services to drive higher customer engagement and adoption while producing operating leverage. Now I would like to pass 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. Let me start with total core revenues. Net interest income was $140 million. That is a 2.8% increase over the first quarter. This mainly reflected the full effect of the first 50 basis point increase in the first quarter, partial effect of the 25 basis point increase in the second quarter, higher yields on higher average balances of auto, commercial and consumer loans, higher yields on higher average balances of cash and one additional day. This increased net interest income by $1.1 million. Banking and wealth management revenues were $31 million. That's up $2 million from the first quarter. This mainly reflected higher wealth management and mortgage servicing revenues.
Looking at non-interest income that included a loss of $1.1 million from the sale of a $205 million treasury note. Looking at the efficiency ratio, it was 52.13%. That's an improvement of 274 basis points from the first quarter and more than 600 basis points from a year ago. This reflects increased operating leverage. Non-interest expenses totaled $89 million. This compares to $90 million in the first quarter. Operating expenses increased $1.8 million. These were more than offset by $3 million from lower credit expenses and higher gain on the sales of foreclosed real estate. Non-interest expenses should continue to average about $90 million to $92 million per quarter for the rest of the year. Our efficiency ratio should continue in the low to mid-50 percentage range.
Looking at our other performance metrics. Return on average asset was 1.76%, and return on average tangible common equity was 17.67%. We continue to raise capital. Tangible book value per share was $21.06. That's up 2.4% from the first quarter and up 12% year-over-year. Total tangible common equity was $991 million. That's up 1.2% from the first quarter and 10.5% year-over-year. Please turn to Page 6 to review our operational highlights. Looking at average loan balances, they increased $136 million from the first quarter. End-of-period loans were up $263 million. Sequential growth reflected increased balances of commercial, auto and consumer loans. Looking at loan yields, it was 7.76%, up 18 basis points from the first quarter. That reflects increases from variable rate commercial loans and a larger proportion of higher yielding auto, consumer and commercial loans.
Looking at new loan originations, they were up 23% from the first quarter with increases in all lending categories in Puerto Rico. This was partially offset by a small decline in commercial U.S. loan production. Looking at core deposits. Average balances declined $63 million from the first quarter. End-of-period deposits declined $27 million. Retail deposits declined $136 million, commercial declined $21 million and government deposits increased $130 million. We continue to see a shift to time deposits and wealth management. Looking at core deposit costs, that was 69 basis points, up 16 basis points from the first quarter. As of the second quarter, our cumulative deposit beta has been 16%. Excluding government deposits, it was 12%. Through this cycle, we continue to expect cumulative deposit beta of about 25%.
Looking at borrowings. Average balances were $226 million compared to $64 million in the first quarter. The rate increased to 4.30% from 3.74%. This quarter reflects the full effect of the March advance from the Federal Home Loan Bank. Looking at cash, average balance was $693 million, up $140 million from the first quarter. Yield was 5.22% compared to 4.73%. End-of-period cash declined $49 million. Looking at net interest margin that was 5.90% flat from the first quarter and up 110 basis points year-over-year. We now expect NIM to remain level with the second quarter for the rest of the year. Looking at our effective tax rate, it was 33% for the quarter. We anticipate it to be that level for the year. Please turn to Page 7 to review our credit quality and capital strength.
Looking at net charge-offs, they totaled $6.6 million. That compares to $10.1 million in the first quarter. The second quarter included a recovery of $3.7 million. Delinquency rates rose slightly from reduced level in the first quarter. Looking at provision for credit losses that totaled $15 million. That reflects two major items, $9.1 million from a specific reserve for 3 U.S. commercial loans with aggregate balance of $18 million and $6.3 million due to increased loan volume. Looking at non-performing loans, the rate was 1.45%, up 13 basis points from the first quarter and down 36 basis points year-over-year. We anticipate delinquency and NPL rates to generally continue to around the second quarter level for the rest of the year. Overall, credit continued to be strong.
Looking at some of our other capital metrics. Total stockholders' equity was $1.1 billion, up slightly from the first quarter and TCE ratio increased to 10%. Now here is Jose.
Jose Rafael Fernandez: Thank you, Maritza. Please turn to Page 8 for our outlook. Turning first to Puerto Rico, the economy continues to demonstrate resiliency and growth and the private sector continues to expand. The economic activity index in May increased 1.8% year-over-year. Retail sales in April increased 2.6% compared to last year. Wages are rising, labor participation is increasing and the flow of federal funds to rebuild infrastructure continues. Having said that, we're keeping our eye on the potential impact of interest rate changes, inflation and a possible mainland recession. Nonetheless, we remain optimistic about Puerto Rico's strength and its continued decoupling from mainland economic uncertainties. As to OFG, as I mentioned earlier, loan production was excellent, core deposit balances are stable with a low cumulative beta, operating leverage increased and capital continues to build.
Retail customers are spending down some of their excess liquidity for home improvement, auto purchases, seasonal tax payments and higher-yielding products. Commercial customers are investing in expanding their businesses. High levels of liquidity and capital provide OFG with a strong position in today's banking environment. We're encouraged by the increasing adoption levels of our self-service channels as it validates our investments in technology. And I want to thank all our dedicated team members for their commitment to the customers and the communities we serve. With this, we end our formal presentation. Operator, please start the question-and-answer session.
See also 20 Countries With Highest Rate Of Down Syndrome and 25 Poorest States in America.
To continue reading the Q&A session, please click here.
