Q4 2022 OFG Bancorp Earnings Call
Yes.
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Good morning, Thank you for joining O F. G. Bancorp's Conference call. My name is Shelby I will be your operator today.
Seekers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the board of directors at Maritza, Air's, Mindy 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 managements goals plans and expectations.
These statements are subject to risks and uncertainties outlined in the risk factors section of I O F. G. S E. 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 background noise.
After the Speakers' remarks, there will be a question and answer session and instructions will be given at that time.
I would now like to turn the call over to Mr. 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.
Addition to Atms, we now have seven self service banking kiosks, and twenty-three 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 bid.
Businesses and consumers remain in good financial shape.
We look forward to another good year with a cautious eye is always on economic and financial uncertainty.
Now please turn to page three 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, a more than 19% year over year.
Looking at the income statement earnings per share diluted was 97 cents core revenues totaled $168 $3 million.
Net interest margin was 569% provision.
Provision was $8 $8 million.
Noninterest expenses.
$91 $6 million on 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 of new loan origination remains strong at $616 $4 million.
Investments totaled $2 billion in cash was $550 million.
Capital remained strong with CET, one ratio at $13 64 per cent.
Please turn to page four.
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.
Net interest margin of 5.05% provision of $24 $1 million and noninterest expenses of $345 million.
We ended the year with total assets of $9 $8 billion as a result, we remain under the Durbin threshold.
That's part of our ongoing strategic reviews at the end of the year, we've decided to take advantage of an opportunity to sell our retirement plan administration business the.
The rationale behind this decision is to focus our efforts on four one K 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.
Previously reported or their capital actions in 2022 included completing $64 $1 million of our $100 million buyback authorization plan.
And increasing our common stock dividend to <unk> 20 per share from 12 cents, an increase of 66, 7%.
Then yesterday, we increased our quarterly dividend, 10% to 22 cents per share.
Now heres muddied start to go over the financials in more detail.
Okay.
Thank you Hudson.
Please turn to page five to review our financial highlights let me start with total core revenue.
The 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 investment securities.
Net interest income for the quarter was $9 million higher compared to a third quarter and $31 million higher compared to the year ago quarter.
Of the $90 million about $11 million gain from higher rates on interest, earning assets, partially offset by $2 $5 million in higher cost 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 you can feel not interrupted business.
The annual recognition of insurance Commission was $1 million.
Well $1.2 million lower than a year ago due to fear not related claims.
Yeah, our year banking and wealth management revenues declined $4 million. This reflected lower wealth management revenues due to lower equity market valuation.
It also reflected the lower and want insurance commissions.
Looking at the efficiency ratio.
Was 54 point, 45% in the fourth quarter.
That's another nice improvement from the third a year ago quarters.
Similar to the last few periods it reflect our positive operating leverage.
Non interest expenses totaled $92 million, that's $4 million higher during the third quarter.
That reflects higher compensation expenses due to hourly salary increases implemented in the third quarter.
Increases in hearing performance bonuses and other technology stuffing.
It also reflects increased amortization related to new digital projects and with US here again youre not 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 fifties.
I saw some age on it we sold our retirement plan administration business during the fourth quarter.
This was reduced.
Wealth management revenues by about $2 million.
Which would 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 continued to exceed our target ranges.
And on average assets was 186% that is up 28 21 basis point from the third quarter.
Return on tangible common equity was 20 point, 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 <unk> compared to the third quarter.
This reflects increased retained earnings and other comprehensive income.
Yeah.
Please turn to page six to review our operational highlights.
Looking at average loan balances they increased $72 million from the third quarter.
And the loans held for investment increased $150 million.
Compared to the third quarter 2022, known growth reflected increased balances of commercial auto and consumer loans and of Patriot loans increased two 3% from the previous quarter and six 8% year over year, we're extremely pleased with our performance this year.
Looking at loan yield.
He was 732% that is up 43 basis point 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 especially then some mortgages.
Looking at average core deposits.
They decreased $165 million from the third quarter.
End of period deposits declined $287 million.
That reflects commercial with ROA of $172 million, which included $59 million in government funds.
It also reflects retail we though it was off $150 million, which included $37 million transfers to Orient that wealth management operation.
Looking at core deposit cost.
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 especially if I deal, but amateurs and migration from savings accounts into time deposits.
Of the 11 basis point increase six basis points came from government deposits.
So far in this rate cycle, our deposit beta has been 7%.
We expect deposit cost to increase given the magnitude and the speed of it forms the recent unexpected increases.
But we believe that through these interest cycle, they will continue to be below mainland level.
Looking at new loan origination.
$616 million compared to $511 million in the third quarter.
This reflected the strong production of commercial loans in Puerto Rico.
The main one.
It also reflected continued high levels of auto loans at a record of $221 million.
Yeah.
Looking at net interest margin that was five point, 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 deal growth of the investment portfolio also had a higher yield on higher do you get on cash.
This was partially offset by decrease in cost of funds.
Please turn to page seven to review, our credit quality and capital is strange.
Net charge offs, they totaled $11 million in the fourth quarter.
<unk> reflects the $5 million for auto loans $4 million for consumer loans and $3 million for a commercial loan previously reserved.
Looking at provisions for credit losses.
That provision was one it was $8 $8 million.
That reflects the $9 $2 million in high employee higher provision due to the increased loan volume. It also include a net release of $400000 mainly related to reduction in the qualitative adjustment due to improve upon the macroeconomic environment in Puerto Rico as well as I say.
Delinquency trends.
Fourth quarter, and I want to call. It ex PPP was 224% that's down nine basis points from the third quarter.
Looking at non performing loans.
This bolt on nonperforming loan rate was 161% that's down 10 basis points from the third quarter and 37 basis points from a year ago.
Oh at all because I think it was a stable without rebound from the last quarter effects of Fiona.
Yes.
Looking at some of our other metrics the CET one ratio was 13, 64% that's up.
Starting point.
38% in the third quarter.
Well that and stockholders equity was $1 billion up $49 million from the third quarter, the tangible common equity ratio increased to 959%.
Now here is wholesale.
Thank you Marisa please turn to page eight 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 door uncertainties from fed rate hikes inflation.
A possible mainland recession, we should benefit from a full year.
Higher loan balances and rates combined with a relatively low deposit beta 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.
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.
Thank you have a question at this time, please press star one on your telephone keypad.
If you wish to remove yourself from the queue. Please press star two.
Mhm.
We'll take our first question from Alex <unk> with Piper Sandler.
Good morning. This is theater I'm filling in for Alex toward all today, how are you guys doing.
Good how are you doing.
Good thanks.
Just wanted to start off I know you guys mentioned that you expect deposit betas to be lower than the last recycle, but given you know the rising deposit costs do you see increased pressure in any specific segment of deposits in the island.
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 Orange juice.
Deposit betas in the last cycle it was somewhat 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.
I'm very little but whatever it is he's 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 would be the commercial.
Losses across the board, but in particularly the higher balances accounts.
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 you know moving forward.
So on the on the commercial book, we're seeing rates on the 6% handle more or less north of six and a half a month.
I'm talking about larger type of loans.
And then.
Small commercial closer more to the 7% seven in a quarter.
Okay.
And lastly, I know you've you've had your efficiency ratio target of around 54% also curious to know where do you see going moving forward throughout the year.
So in terms of the efficiency ratio yes.
Yes, yes.
We are targeting mid fifties. So you should expect our efficiency ratio around those levels and this is this is the way we think about this and take this opportunity to give you a little bit of Omar Saad.
Thought process here for 2023, we see loan growth.
Around 3% to 4%.
For the year.
Interest rates started to slow down loan growth and 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 with 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 Marty mentioned.
So net interest expenses of around 90 $92 million per quarter, we keep on investing on our end.
Network optimization self service and process improvement and technology and people and talent and recruitment of additional team members.
That puts it around the mid Fifty's range for the efficiency ratio.
Got it okay. That's all for me thanks for answering my questions.
Yeah. Thank you for your questions.
We'll take our next question from Tim our Brasilia.
Hi, good morning.
Hi, good morning.
Maybe circling up on the loan commentary and your expectation for 3% to 4% growth next year, I mean, you've been calling for slowing loan growth here now for a couple of quarters, especially on the auto side and trends seem to be going in the opposite direction, how much of that 3% to 4% is more wishful thinking versus what you are currently.
Are you seeing in the specifically on auto are we close to an equilibrium there or is there still a big delta between a supplier and the increased demand.
So.
You bring a very good point on your correct also.
We've been kind of guiding towards a slowdown in loan originations, particularly on the auto side and hasn't played out.
<unk>.
We continue to feel that the level of <unk>.
Cars inventories in the island at the level of new auto sales are starting to stabilize.
And and I think the fact that interest rates are going up and the fact that that might have on slowing down the economy. During 2023, we should see a slow down.
We've been running for a couple of quarters, but we want to not be wrong.
On the wrong side of the equation here. So we have been also prudent on the auto lending side.
On the.
Other buckets on the commercial side interest rates also play a game here in terms of the demand for commercial loan. So so we're also seeing good pipelines, but not as strong as they were last year. So we were confident that we will continue to have.
We have good strong generation of.
Origination of loans on the commercial and auto.
At the same levels of 2022.
Okay and.
Your competitor.
Ported yesterday.
Auto balances actually I think has shrunk a little bit I'm just wondering is there.
Kind of a changing of the guard in the auto market on the island or I guess, what are you seeing from a competitive standpoint in that asset class.
I can't speak for for our competitors, but I can tell you that this is a very competitive market and I do not see any change of guard.
It happened.
Happening in the near term, we see very strong competition and certainly.
The largest competitor is it.
Formidable competitor.
Got it and then as you think about funding the loan growth is the expectation.
We should continue to see the bond book being used as a source of funds.
For both loan growth and then I guess, maybe looking at the deposit base would love to hear your thoughts on what you think deposit balances due.
If we're in a higher for longer type fed environment.
Yeah.
I could not hear well the first part of your question, but the second part of your question in terms of deposit balances.
First I think we will see it transition some of those deposits either to wealth management, which we have seen so far I think for 2022 the full year.
Deposits transferred to our wealth management unit was around 100 million Bucks. So.
That's one thing that we're seeing already clients with higher deposit balances putting money in the investment.
Treasuries or whatnot.
One one.
Shifts that we saw I think we're also seeing a shift from savings to Cds to longer term Cds.
<unk> 18, 24 months. So we will continue to see that and as I mentioned I think someone else.
Asked me earlier about.
Deposits I think commercial deposits large balance commercial deposits were also.
Look at different ways to optimize their returns. So that's kind of what I see in terms of balances I think internally, we will have a little shifts there.
And we will then have to retain our customers and deal with them on a.
Customer.
Relationship perspective.
As we look into.
Higher higher cost of deposits.
Got it and then the <unk>.
Part of my question tying this all together should we expect the bond book to continue funding the loan growth, meaning assets stay flat, even though loans grow the 3% to 4% or are you.
<unk>, an environment, where you actually grow the asset base.
And above that $10 billion.
'twenty three so we're not seeing the the bond investment portfolio to grow from this level we see.
Our deposit balances.
Optimized with investment in our loan origination efforts. So at this point I think we were very patient about the last.
And the last part of the zero percent interest rate environment and kind of kept everything.
The liquidity in cash and we've been very.
Opportunistic in the last 12 to 15 months.
Holy but surely investing in higher yields we were very comfortable with our current position and we have some repayments that will probably mean best.
Yes, they come in but we are not expecting to grow the investment book.
Okay, and then last for me on credit quality net charge offs are in the mid 60 basis point range for the second consecutive quarter and you guys are one of the few banks to actually release reserves in the fourth quarter.
Maybe just some color on where you see net charge offs normalizing.
How close are we to that point and then how should we be thinking about the allowance ratio going forward.
Net charge offs for us are driven by by the consumer book and the order book and we saw the fourth quarter.
Starting to show more normal rate post pandemic.
Significantly below pre pandemic, but still morally.
More realistic way going forward so depending.
Depending on loan growth and depending on the macro.
Scenarios.
Our provision should be driven mostly by replenishing the charge offs from the consumer and the order book and it's a good guiding post to utilize the charge offs of the fourth quarter going forward and we'll be updating given the different.
Kind of variables of seasonal throughout the year.
Great. Thanks for the color and nice quarter.
You're welcome.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
We'll take our next question from Kelly Motta with K B W.
Hi, Jose.
Hey, Alan Murray.
Good morning.
Good morning Kelly.
Hey, guys.
It out.
Exiting the year at under 10 billion in assets again.
Can you remind us what that implies in terms of.
The implementation of absorbing the timing of that and also.
What what sort of impact that will have once it does go into effect.
Yeah. So.
Again, we did not cross the $10 billion.
By the end of the year, so durbin the effect of Durbin doesn't apply for 2023 as you pointed out and.
The annual cost for us estimated.
For Derby is $10 million. So we are we are.
We usually.
Six months after crossing the 10 billion on December 31st So for this year it would have been around $5 million, but yearly would be $10 million.
Great that's super helpful.
I know we've talked at length about the decline in deposits in that.
Nellix is going down as customers use their funds and search for higher rate.
Wondering if there was any kind of decline around yearend too.
If durbin with a factor at all in some of that decline you should perhaps anticipate coming back as we look into <unk> and built into them.
Sort of the size of the balance sheet with that.
Yeah. So that's a good point.
That was more of the case at the end of 2021 2022, we started the fourth quarter or the lower asset level than 2021. So it was more natural end of the year clients utilizing mostly commercial clients utilizing their funds at the end of the year end.
And we did not have to.
Breath.
At all to be below $10 billion. So it's part of the natural attrition that we're seeing.
From higher interest rates and clients reallocating their their cash to higher yielding.
Investments.
Got it that's really helpful.
And I think and please correct me if I'm wrong, but I think you had mentioned that.
Client accounts are still.
Like the overall balance of each accounted.
On average running higher than where they were pre COVID-19 do.
Do you have any sense of you know.
Obviously.
There has been a search in and run off of it.
For rates, but most of that occurred so far in the piece of that pressure.
Pressure on the overall overall level of deposits will start to wane.
Wane a bit or is there any any way, we can kind of ballpark.
The pilot that could still.
At risk of running off but you know more likelihood right.
Kelly I am sorry, but I could not understand your question can you repeat it again.
And I'm, sorry, I, just I think in your presentation.
Please correct me, if I'm wrong, but client account balances are still generally higher than where they had been.
Pre COVID-19, obviously as rates have risen there has been.
Pressure on excess deposits if they they look for a higher rate just wondering in terms of maybe core checking accounts. If you have a sense of.
Whether or not the bulk of the pressure.
The search for yield and higher rate has it has occurred or if.
If there's any way to ballpark, how much could still be at risk of you know.
Potentially being accepted.
Understood.
So.
The way we look at this is we.
After or during the pandemic, we build up around a $1 billion of additional customer deposits.
And that's kind of how.
How does the balance sheet was impacted so far I think we're at the early.
Early stages I cannot say here in the market in Puerto Rico that we've.
We've had the same kind of behavior.
I've seen on our peers in the state so the.
<unk> of the Puerto Rico market, having a slower beta it's playing out and I think you will continue to play out, but having said that I think commercial accounts and.
I think also.
Yeah.
The move towards Cds from savings he is going to still play out at least the first half of this year.
And its rate cycle hikes or.
One expects.
It's still early.
I hope I think.
Got it that's helpful. I appreciate the color.
All the color there.
Next turning to capital, it's nice to see.
The dividend.
Dividend announcement, just wondering on kind of.
How you guys are viewing the buyback and that's what what's keeping you out of the market and what.
What would be the.
Circumstances that would get you back in.
And buying your stock again.
So I think throughout the last couple of years, you have seen us move more towards increasing our dividend then doing the buyback we feel that.
Longer term investors are.
Better served by us increasing the dividend and having a higher payout from a from a dividend perspective, and certainly a higher yield. So that's one reason. The other reason is also that we want to be opportunistic and be cognizant of the environment. We operate in where the macros are somewhat uncertain and interest rates.
Going up and we want to make sure that we don't deploy.
Our our cash into buybacks too soon and and just being.
I mean prudent Kelly, having said that there is an opportunity for us to go in and buy back shares we have the authorization and we will execute accordingly.
Got it understood.
Thank you. Thank you for your expenses I. Appreciate the range you gave I think it was I still look back and I know, maybe 90 to 93.
What sort of builds of that incorporate in terms of.
I know there is there are some technology initiatives that you're working on and how confident do you feel that I know you've raised the minimum wage how can make you feel like.
Share repurchase.
Care Bye.
Capture.
A couple of factors here that I want you to consider and that are I think different than in the U S market number one the Puerto Rico market comes from a significantly.
Significantly lower.
Rate per hour in terms of that.
Employee.
Compensation.
On the hourly.
So the versus the U S. So as.
As you've seen from US we have been gradually increasing.
The hourly rate for for hourly employees simply because we need to make sure that we serve our customers well and that we use the attrition or the turnover that we were seeing I think that goes across the entire market in Puerto Rico. So the the level of hourly pay in Puerto Rico starts.
This cycle at a significantly lower level than in the U S and it's catching up so that's one component of why Youre seeing higher noninterest expenses on the compensation side number two.
We've also realized that we need to recruit.
Talent that has the skills that we and we need to compete and that we need to help us continue our transformation and.
And our investments in our digital first vision, so we need people with analytical skills, we need more talent with technology background. So that we can leverage the technology and the investments that we're making so that is another component of.
Increases in noninterest expenses and lastly, we're making investments in technology, we've been doing this and if you look back for the last five years.
We are being very methodical in how we look.
Look at the branch network, how do we look at transaction already and those branch networks and how do we leverage technology to.
Provide self service digital.
<unk> for our customers and.
We certainly coming in Puerto Rico market that is significantly behind the curve as opposed to the U S market. So that's kind of the kind of the the.
The reason why you've seen us, making these investments and making sure that we are.
Full about them vis vis our strategy and and that's the rationale behind us making these investments having said that we're very cognizant about mid range 50 efficiency ratio and we will like to leverage the higher interest rates and.
A higher a better economy in Puerto Rico to maintain a positive operating operating leverage as we had for the last several years.
Thank you. Thank you so much for all the color there I'll step back.
Thank you Kelly I hope that was helpful.
Again, if you would like to ask a question.
Star then the number one on your telephone keypad.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad.
We'll take our next question from Alex <unk> with Piper Sandler.
Hey, guys I just have a follow up I know you guys mentioned.
The technology investments and efforts you have in 2023 just.
Just wondering if you could reveal like what direction.
Like other technology efforts, it is and specifically what the.
Whether they're the technology initiatives.
And investments you're making for the year are.
Yeah. So so we're making investments as we've mentioned in interactive teller machines, we're making investments in.
Digital.
E solutions.
And upgrading our digital platforms for our customers, we should be launching some of those in 2023.
We've been looking at process improvement and how do we leverage technology to simplify processes. So we should see also efficiencies there we look at our underwriting and we're looking at how do we.
More efficient in terms of.
Sooner underwriting.
It processes. So all those things are being looked at and investing in for the last couple of years and we continue to.
Look at them and again we.
We feel that.
Oh. This is done for two main reasons, one is to deepen the relationships with our customers.
And also too.
By improving the customer experience and number two by also growing our market share in the market in the products or services that we offer.
And that is something that how we measure ourselves right. So so.
So far we are very.
Optimistic.
Courage was the progress we've made and look forward to two.
2023 that continues to confirm that progress.
Got it thank you.
Youre welcome.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
At this time there are no further questions I will now turn the call back over to Jose Fernandez for closing remarks.
Thank you operator, and thanks again to all our team members for their hard work and dedication. We are extremely proud of what we have accomplished and we have more to deliver thanks to all our stakeholders who have listened in today looking forward towards Mexico.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
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