Q3 2023 OFG Bancorp Earnings Call
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[music].
Good morning, Thank you for joining O F. G. Bancorp's Conference call. My name is James I will be your operator today.
Our speakers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the board of Directors and Maritza Arismun Chief Financial Officer.
Presentation accompanies today's remarks, it can be found on the homepage of the OSB web site under the third quarter 2023 section.
Call me feature certain forward looking statements about managements goals plans and expectations.
They are subject to risks and uncertainties outlined in the risk factors section of O F. G. S. T. 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'll be a question and answer session and instructions will be given at that time.
I'd like to turn the call over to Mr. Fernandez.
Good morning, and thank you for joining US we are very pleased to report our third quarter results.
All our businesses performed well and we continue to generate steady year over year revenue and earnings growth.
Highlights include increased loan balances stable core deposits with low cumulative beta increased operating leverage and strong credit performance metrics.
Our digital first strategy continues to attract customers and speed the transition of routine transactions from in branch digital platforms. It makes it easier for customers to do their banking I'm for us increase efficiency and engaging more business development activities.
In Puerto Rico consumer liquidity is sound and the economy is doing well.
As always thanks to our team for helping our customers and the communities we serve I choose their financial goals.
Please turn to page three for a summary of our third quarter results.
First looking at the income statement earnings per share diluted was <unk> 95 cents, an increase of 9% year over year.
Total core revenues were $172 $2 million up 10% compared to last year.
Net interest margin was five 8% provision was $16 $4 million and noninterest expenses were $92 million.
Pre provision net revenues totaled $82 $3 million up 18% year over year.
Now turning to the balance sheet total assets increased to $10 $3 billion from last quarter.
Based on our growth outlook for next year, we will remain above $10 billion.
Customer deposits were stable and approximately $8 $5 billion.
Loans held for investment totaled $7.3 billion up 2% from the second quarter.
New loan production was approximately $563 million in line with the last five quarters.
Investments increased $2 $1 billion in cash declined to $533 million.
Moving to capital on the CET, one ratio was 14.0% to 3% level with the second quarter, we bought back about 74000 OMG shares in the third quarter.
Please turn to page four for an update on our digital first strategy.
Looking at data year over year to date September compared to the same period a year ago.
87% of all routine rebuild customer transactions and 92% of all the retail deposit transactions are now being made through digital and self service channels.
This is being driven by 11% growth in digital enrollment, 14% growth indeed alone payments, 5% growth in kiosk usage and the success of our recently deployed Oriental servicing portal.
The portal is a cornerstone of our self service strategy.
Customers can manage all loan and deposit accounting one place. The portal now enables digital account opening for checking savings and Cds.
Playing for and accessing loans, managing automatic loan payments and downloading a wide variety of bank letters and tax documents that customers in Puerto Rico frequently request in our branches or by phone.
New features to the portal will continue to be added on a regular basis.
All of this continues to validate our strategy and investments in technology as I have mentioned before they help us provide more value added service increase our efficiency and assign more staff for new business development activities.
Having said that branches continue to be an important component of our island wide sales and service network.
During the third quarter, we opened a new branch in.
An area with good commercial and retail opportunities.
You probably already know.
I'd always a growing high net worth suburb of San Juan that has attracted many new restaurants from the mainland we already have a 9% market share there and we think we can grow further.
These developments, both digital and physical continue to better position us to serve our customers and communities and grow our businesses.
Now heres money tend to go over the financials in more detail.
Thank you Jose.
Please turn to page five to review our financial highlights.
Let me start with low dose CT revenue net interest income and so the one $142 million an increase of one 5%.
Person from the Civil War.
This reflected the full effect.
Most of the fed 25 basis point increase in the second quarter the Firestone.
Of the 25 basis point increase in the third quarter.
Deal on higher loan balances in particular, but El Rey.
Yes.
Higher balances and yield on investment securities.
It's probably about $1 million.
Banking and wealth management revenues were 34.
$4 million approximately level with the second.
Yes.
Non interest income totaled about $300000.
Compared to a loss of about eight.
800000 in the second quarter, not do their lease sale $200 million, but actually Ho Hum.
Uh huh.
This is Jesse ratio was two point that at 6%.
The continued growth are strong.
Got it.
Non interest expense totaled $90 million $1 million.
The second quarter.
Let us know what gain on the sale of close real estate parcels.
Upset by lower G&A expenses.
With that non interest expenses.
What I liked about $90 million to $92 million next quarter and next year.
Suzanne for some continued in the low to mid 50% right.
Oh, there for four months metrics remain high.
Turn on average asset was one point, 76% pretty thorough nowadays Stanley won't come on equity was 17 point, 59% and book value per share was $21.
Please turn to page five to review our operational highlights.
Oh, it's loan balances increased $188 million from the second quarter.
Deanna balance increased $144 million.
Growth continues to reflect increases in light vehicle and U S commercial launch.
Auto and consumer loans.
This was partially offset by the continued it.
C zone on the residential mortgages.
No Neil was seven point, 84% up eight basis points from the second quarter.
Just like that increases somebody already for my son in law and hired deals on new auto consumer and commercial loans.
Average core deposits increased $90 million from the second quarter, while D. N. A fetus that's worth approximately level with the you weren't there yet.
He does he bought it declined $110 million.
<unk> increased $73 million.
And Gordon and increased $30 million.
The thing is it C Ashish.
And do you foresee unless Nashville.
Boy deposit cost was 90 basis points compared to 69 in the second quarter.
This increase of 21 basis points, mainly relate so six basis points due to higher rates on government policy.
Point in time deposits four basis points on commercial and now I'll say recycling and four basis point, it really doesn't know I'm saving cycle.
As of the third quarter, our cumulative deposit beta has been 19%.
Excluding government deposit it was 14%.
Through this cycle, we continue to think our cumulative deposit beta of about 25% by the end of this year.
I always thought it was what $264 million while deanna.
It was $452 million.
The increase reflects our asset liability management that they used during the quarter.
Net interest margin was five point, 80% that compares to $5 90 in the second quarter.
Our effective tax rate was 32%, which we should be our rate for the next for for the year.
Please turn to page seven to review, our credit quality and capital strength.
Net charge offs totaled $18.8 million.
That compares to $6 $6 million in the second quarter.
Because that's what it included about $7 million as opposed to the U S announced previously a substantially reset.
This compares to the second quarter, which included a $4 million recovery from the sale of older fully charge off auto and consumer loans.
Provision for credit losses totaled $16.4 million. This included more than $11 million due to increased loan volume.
$1 million in quantitative adjustment, mainly related to the auto loan portfolio and $700000, but specific to set for the sale of a small portfolio of nonperforming, Puerto Rico small business commercial loans.
Oh at all that it continues to be strong.
Early and total delinquency rates were two point, 75% and 30 points 78, respectively.
Non performing loan rate at 133% wasn't it was in the lower ranges seen over the last five quarters.
Looking at some of our.
Because the metrics both on a stockholders equity was $1 $1 billion in D. C and D. C is ratio was 974%.
Yeah.
To sum up during the third quarter, we saw steady revenue growth from higher yields and higher loan I figured it'd be back.
Good luck.
Driven by auto commercial and consumer lending.
Deposit cost increased from higher average balances during the quarter on higher rate.
But beat us remain well below peers.
C N O feeders for deposit balances or narrow with the second quarter safe conditions remain benign may charge off were higher due to U S commercial launch.
And expenses were in line with our expected range now here at Tulsa.
Thank you Maria Zhang Please turn to page eight our outlook has not changed from the second quarter call. The economy continues to do well supported by the flow of federal funds to rebuild the islands infrastructure as well as additional federal funding from the inflation reduction on the cheap sacks with this as a backdrop consumers continue to deploy.
Their liquidity and U S private capital on local businesses are investing to acquire expand and grow their operations on the island how.
Having said that we continue to keep our eye on the potential impact of interest rate changes inflation and a possible mainland recession.
Also while it's unlikely to affect Puerto Rico directly the recent incursions in Israel and the mountain events in the Middle East region leave us with a heavy heart on our wishes for an early end to the fighting for peace, we can't help but be concern about the possible global economic let me, let me vacations as well all in all we re.
Main optimistic about Puerto Rico strength, and its continued decoupling from mainland economic uncertainties.
Now turning to our G.
And to sum up on my end, we had another excellent quarter, confirming our operational and financial strategies results benefited first and foremost from our efforts over the years to grow our commercial and consumer business capabilities, which are helping us gain market share and increased capital.
Second from our stable low cost core deposit base and third from our new Oriental servicing portal and other technology investments, which have increased the use of customer self service channels, allowing our teams to spend more time on new business development activities.
Operator: Good morning. Thank you for joining OFG Bancorp's conference call. My name is James, I will be your operator today. Our speakers are Jose Rafael Fernndez, Chief Executive Officer and Vice Chair of the Board of Directors, and Maritza Erismendi, Chief Financial Officer. A presentation of companies today is remarks. It can be found on the homepage of the OFG website under the third quarter of 2023 section. This call may feature a certain forward-looking statements about management's goals, plans, and expectations.
Externally we benefited from the positive days are more resilient economic environment in Puerto Rico.
All this translates into a strong commercial lending pipeline for us into the fourth quarter and into 2024.
Our ability to continue to deploy innovations to better serve as the banking and financial needs of our customers.
Against the higher base this should be sold and continued growth across most of our businesses next year.
In closing I want to reemphasize that our performance could not have been possible with the hard work and purposeful commitment of all our team members, we are thankful to them for executing our corporate vision.
Operator: These statements are subject to risk 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 background noise. Out of the speakers or marks, there will be a question and answer session. Instructions will be given at that time.
This ends our formal presentation, operator, let's 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 Press star two.
Operator: I now like to turn the call over to Mr. Fernndez.
Our first question, Dave will come from tumor Fraser Lear with Wells Fargo Securities.
Jos Fernández: Good morning and thank you for joining us. We are very pleased to report our third quarter results. All our businesses perform well and we continue to generate steady year-over-year revenue and earnings growth. Highlights include increased loan balances, stable core deposits with low cumulative data, increased operating leverage, and strong credit and performance metrics. Our digital first strategy confused to attract customers and speed the transition of routine transactions from in-branch to digital platforms. This makes it easier for customers to do their banking and for us to increase efficiency and engage in more business development activities. In Puerto Rico, consumer liquidity is sound and the economy is doing well.
Hi, good morning.
Good morning, maybe.
Starting on Oh, maybe merismus comment around deposit beta expectation and still calling for 25% beta by year end I mean that.
That sounds pretty conservative, but then maybe thinking in a longer term just starting at such a low base and a higher for longer environment is the expectation that deposit betas and deposit costs continue to migrate higher just given such a low start.
Base or do you still see some abatement there are as we get a quarter or two past the final rate hike.
Jos Fernández: As always, thanks to our team for helping our customers and the communities we serve achieve their financial goals. Please turn to page three for a summary of our third quarter results.
Yep.
Thank you for your question.
You know the way we look at this is in terms of deposit costs and the corresponding beta.
Jos Fernández: First, looking at the income statement, earnings per share deluded was 95 cents and increase of 9 percent year-over-year. Total core revenues were $172.2 million up 10 percent compared to last year. Net interest margin was 5.8 percent, provision was $16.4 million and non-interest expenses were $90.2 million. Pre-provision net revenues total $82.3 million up 18 percent year-over-year.
First let's look at our market and the market. We're operating in certainly is.
Very different from the U S market and that gives us a different a very positive landscape to operate and that's number one.
Number two we also look at it from our business dropped in your perspective on our customer a kind of relationship perspective. So we also want to have some wiggle room to to be able to attract additional customers and also to.
Retain some good relationship customers, particularly on the commercial side. So so we're we're sticking with the 25% beta for for the end of the year.
Jos Fernández: Now turning to the balance sheet, total assets increased to $10.3 billion from last quarter. Based on our growth and outlook for next year, we will remain above $10 billion. Customer deposits were stable at approximately $8.5 billion. Loan's health for investment total $7.3 billion up 2 percent from the second quarter. New loan production was approximately $563 million in line with the last 5 quarters. Investments increased to $2.1 billion and cash declined to $533 million. Moving to capital, the CEP-1 ratio was 14.03 percent level with the second quarter. We bought back about $74,000 OFG shares in the third quarter.
And Oh, well, we'll take a look at it at the end of the year and see how how do we see it as interest rates would probably remain higher for longer.
And what impact would that have in our market, but as of now we feel that the with it with a 19% cumulative beta including government deposits.
Hmm.
Keeping that 25% beta for the end of the year is the prudent way to go.
Okay. What is the balance of government deposits at quarter end.
The bonds of government deposit is in the $350 million range.
Okay. So I guess as we're thinking about you know next quarter next year.
If deposit betas do lag if they do go up to that 25% maybe its not in <unk>, maybe it's <unk> or <unk> next year the growth profile still seems pretty strong is the expectation that you're able to offset this NIM compression with growth in NII continues to go higher or is that.
Jos Fernández: Please turn to page 4 for an update on our detailed first strategy. Looking at data year-to-date, September, compared to the same period a year ago, 87 percent of all routine retail customer transactions and 92 percent of all retail deposit transactions are now being made through digital and sales service channels. This has been driven by 11 percent growth in digital enrollment, 14 percent growth in digital loan payments, 5 percent growth in kiosk usage and the success of our recently deployed oriental servicing portal.
To be more challenging in the current environment.
Yeah. So so as you saw this quarter and you've seen so far this year, we have pretty good loan growth and we expect that to continue to build throughout the next year. So are our way of looking at this is if if the scenario plays out next year and where we need to.
Jos Fernández: The portal is a cornerstone of our self-service strategy. Customers can manage all loan and deposit accounts in one place. The portal now enables digital account opening for checking, savings and CDs, applying for and accessing loans, managing automatic loan payments, and downloading a wide variety of bank letters and tax documents that customers import to Rico frequently request in our branches or by phone. New features to the portal will continue to be added on a regular basis. All this continues to validate our strategy and investment in technology. As I have mentioned before, they help us provide more value-added service, increase our efficiency, and assign more staff for new business development activities.
Do you think about higher cost of deposits.
We will mitigate that with our loan growth from a net interest income perspective, so yeah, we might have a right.
Right now a lowered.
Lower trending NIM, but that does not necessarily mean, it will be a lower trending net interest income because we expect loan growth to compensate for that.
Okay, Great and then just lastly for me on the credit front, we saw a bump up in that charge offs Orissa merits I explained that in kind of a corresponding decline in allowance ratio I know, it's a hard question to really get a good answer for it but as you.
Thinking about this normalizing credit environment, how should we be thinking about net charge offs and then what's the allowance ratio is still well over 2% of law.
Is that pretty flat and kind of goes hand in hand with charge offs or is there maybe an ability to release some of those reserves.
Jos Fernández: Having said that, branches continue to be an important component of our island-wide sales and service network. During the third quarter, we opened a new branch in Dorado, an area with good commercial and retail opportunities. As you probably already know, Dorado is a growing high network suburb of San Juan that has attracted many new residents from the mainland. We already have a 9 percent market share there, and we think we can grow further. These developments, both digital and physical, continue to better position us to serve our customers and communities and grow our businesses.
As the broader Puerto Rico story continues to improve.
And well and thank you for your question.
This quarter included about $7 million in the charge of two loans that were previously reserved and we disclosed in our last call in the second quarter, we'll talk about it as long as that would put it in.
Cool.
And when we complete that restructuring you know if one of them during the quarter and it's quite it's about $4 2 million charge off the other one was transferred to held for sale at the end of the quarter and it took quite about $2.7 million in charge offs.
Maritza Erismendi: Now, here is Maritsa to go over the financials in more detail. Thank you, Jose. Please turn to page 5 to review our financial highlights. Let me start with total core revenues. Next, interest income total $132 million and increase of 1.5 percent from the second quarter. This reflected the full effect of the set 25 basis points increased in the second quarter. The partial effect of the 25 basis points increased in the third quarter.
That loan was already so honest already seen it so that the that that every center for already established in prior quarters. So it excludes that's two loss our net charge off and it was about 162 questions for the quarter, which compares really good with the prior quarters.
And that's the way I look forward I think we are starting to see a more normal isolate what else charge offs compared to 2021 'twenty two.
And but we need to keep monitoring that trends to see what would be the normal trend and we think that the credit conditions continue to be benign, but the haynesville.
Maritza Erismendi: A higher deal on higher loan balances in particular, variable rates and new loans, higher balances and yield on investment securities, and one extra rate, which are at around $1 million. Bancorp and wealth management revenues worth $3.4 million, approximately, level with the second- and year-of-a-go quarters. All of non-interest income total about $300,000. This compares to a lot of about $8,800,000 in the second quarter due to their least sale of a $200 million Treasury note.
Compared to a bit of a pandemic levels and that's how we see it.
Great. Thank you for the color on the questions.
Yep you're welcome.
Our next question will come from Alex <unk> with Piper Sandler.
Hey, good morning.
Good morning, Alex.
First off just you know it sounds to me Jose now like Youre fairly committed to being above $10 billion and I'm just curious how youre thinking about the overall strategy the overall growth strategy.
That's no longer sort of an upper level on an assets you know how you think about you know how the balance sheet my transition over the next couple of quarters as you as you continue to deploy.
Maritza Erismendi: The efficiency ratio was 32.36%, reflexes continue to grow short operating leverage. Non-interest income total $90 million, $1 million higher than the second quarter. These reflexes lower gain on the sale of a close real estate partially upset by lower G&A expenses. To expect non-interest expenses to continue to average about $90, $92 million, next quarter and next year, the efficiency ratio should continue in the low to meet 50% range. Other performance metrics remain high.
The excess capital you have.
Yeah. So yeah look the way we look at the $10 billion Mark. This year. He is very different from the prior two years, when we manage below the $10 billion, Mark and and he has everything to do with where interest rates are and.
And how how the kind of how the balance sheet from the loan side as well in terms of loan growth and also the on the deposit side. How it is playing out we feel that.
It makes sense for us to cross it in right now and and just.
Maritza Erismendi: Pteron average assets was 1.76%, Pteron average salary will come on equity was 70.59%, and Pteron's value per share was $21.1.
Make sure that we are taking.
Take advantage of the opportunities to grow the balance sheet from a loan side, particularly here in Puerto Rico, and ER and that's what we're committed to do we see good opportunities on the commercial side as well as on the retail side. So so managing it into next year.
Maritza Erismendi: Please turn to page 5 to review our operational highlights. Average loan balances increased $188 million from the second quarter. The end of serious balance increased $144 million. Growth continues to reflect increases in Puerto Rico and U.S, commercial loans and retail photo and consumer loans. This was partially offset by the continued regular pay down on the residential morbidious. Low yield was 7.84% off a basis point from the second quarter. These reflected increases from variable rate commercial loans and higher deals on a new order of consumer and commercial loans.
You know I'm not sure what what exactly you mean by the question on how to manage it into next year, but I can tell you that we will have on our balance sheet will be a.
North of that $10 billion and he will be impacted by the expected loan growth.
Goodbye.
<unk> guided to.
Original remarks, so if there's a follow up please feel free because I am not sure if I understood. Your question.
Yeah, I mean, it looks like you know sort of just high level on the balance sheet that you guys added some borrowings and interest rates. Some security as you know I don't know if leverage is the right term there or maybe it's just sort of at a mixed match and timing, but I guess as you look to grow loans. Yeah. How are you thinking about funding. It you know the complaint.
Maritza Erismendi: Average core deposits increased $90 million from the second quarter, while the end of period balance was approximately level with the June Terrier. The retail deposits declined $100, $2 million, commercial increased $73 million, and government increased $30 million. We continue to see a shift to 30% on wealth management. Core deposits cost was $90.8 points compared to 69% in the second quarter. This increase of 21 basis points mainly relates to 6 basis points due to higher rates on government deposits, 6 basis points in time deposits, 4 basis points on commercial now and savings accounts, and 4 basis points in retail now and savings accounts.
Got it I got I got it now I get it so.
That's a very valid and good question I like the way we look at this is.
The scenario of interest rates that we are using and we expect our interest rate forecast is for interest rates on the fed funds side to remain you know kind of plateauing at this levels and five in a quarter five one and a half and we also expect into 2020 for interest rates to start picking down the second half of the.
Yeah. So when we look at that scenario and us being an asset sensitive bank.
We felt that it was prudent to.
Putting some now with MBS is yielding 560 and north of that with short duration for fine up four or four and a half five years duration. It will be prudent for us to protect ourselves in an environment, where interest rates started moving down just recall a year in.
Maritza Erismendi: As of the third quarter, our cumulative deposit data has been 19 percent, excluding government deposit, it was 14 percent. Through this cycle, we continue to assess a cumulative deposit data of about 25 percent by the end of this year. Our sales were 264 million dollars, while the end of the data was $432 million. The increase reflected our asset liability management strategies during the quarter. Net interest margin was 5.80 percent, that compared to 5.90 in the second quarter.
And a half ago, we get dollars cash.
And we did not go long in duration.
And that was the prudent right thing to do I think that in my in our in our scenario and the way we look at interest rates today are the right and prudent thing to do is to to go longer on duration take advantage of the higher yields might not be optimal because life is not perfect right.
But but it certainly helps us mitigate potential.
[noise] recessionary environment in the states and the AR and the resulting lower interest rates on the the fed we are financing that also with short term federal home loan advances and repos and today the spread is not that significant but again based on our <unk>.
Maritza Erismendi: Our effective start rate was 32 percent, which should be our rate for the next four for the year.
Maritza Erismendi: Please turn to pay seven to review our credit quality and capital strength. Net charge of total 18.8 million dollars, that compared to $6.6 million in the second quarter. The third quarter included about $7 million for two U.S loans previously and substantially reserved. This compares to the second quarter, which included a $4 million recovery from the sale of older fully charged of auto and consumer loans. Provision for credit losses total $16.4 million.
Gas on our expectations of a second half of next year interest rates starting to trickle down we will have R. R.
Cost of borrowings would be the key.
Aligning in that scenario, so that's kind of the picture and that's how we looked at this and we will continue to manage the balance sheet in that fashion, because our capital is clearly being deployed first and foremost for them for our loan growth and there are opportunities that we're having in it.
Maritza Erismendi: This included more than $11 million due to increased loan volume $4 million in quantitative adjustment mainly related to the auto loan portfolio and $700,000 for specific sales for the sale of a small portfolio of non-performing political small business commercial loans. Overall, credit continues to be strong. Early and total delinquency rates were 2.75 percent and 30.78 percentively. The non-performing rate at 1.33 percent was in the lower ranges seen over the last five quarters.
So that's kind of how we're looking at this and again I answered a question earlier on deposits.
Very much.
Focused on also retaining good banking relationships on the deposit side.
Yeah.
Okay. That's that's good.
Just expanding on your comments on loan growth and the strong pipeline into the fourth quarter. In 2024, you know I think some of us have been talking about the the metro piece. This a deal that was announced earlier. This week and you guys are listed as a bank that would be potentially participating in some of the financing can you talk a bit about your appetite for.
Something like that and sort of how big of a piece you might be willing to take on.
Maritza Erismendi: Looking at some of our other capital metrics, total stock quality was 1.1 billion dollars and the CCE ratio was 9.74 percent. To sum up, during the third quarter, we saw a sterile revenue growth from higher deals on higher loans and security balances. Good relationships driven by order of commercial and consumer lending. The profits cost increased from higher average balances during the quarter and higher rates, but data's remain well below peers. N-of-feet-of-feet-of-score deposits were approximately leveled with the second quarter. Great conditions remained benign. Make sure to offer higher due to two U.S, commercial loans and expenses were in line with our expected range.
So so the way we look at it is we were part of a a three bank market pretty much and and we we were very much a part of the community. So we need to be an important participant in those type of prioritization certainly depends.
On who how where and and and and and what's right in terms of the the opportunity well, yes. We are a participant we're not a significant participant my ignore stretch of imagination, but we are certainly a.
Solid participant for our size and our and our appetite.
It's it's also our way of contributing to our two lead reconstruction on improvement of the infrastructure in Puerto Rico.
Okay, and then I guess as we think about the loan mix going into next year. As you know this year than in past years auto has been a very big component of that do you expect that to continue or do you think we'll see a little bit of a mix shift over the next call.
Jos Fernández: Now here is hosted. Thank you, Marita.
Jos Fernández: Please turn to page 8. Our outlook has not changed from the second quarter call. The economy continues to do well supported by the flow of federal funds to rebuild the island's infrastructure, as well as additional federal funding from the inflation reduction and the chiefs act. With this as a backdrop, consumers continue to deploy their liquidity and US private capital and local businesses are investing to acquire, expand and grow their operations on the island. Having said that, we continue to keep our eye on the potential impact of interest rate changes, inflation and a possible mainland recession.
More commercial so yeah. So that's a question you guys ask me every quarter and every quarter I say, well I'm happily surprised that non auto loan growth continued to.
The main line.
I think we're starting to see that plateauing in terms of in the latter part of the third quarter. We started to we started to see a little bit of a slowdown I think its more from competitive forces or anything else, but we're monitoring it and we would probably you're going to see not not a significant drop.
Jos Fernández: Also, and while it's unlikely to affect what Toreco directly, the recent incursions in Israel and the mountain events in the Middle East region live us with a heavy heart and our wishes for an early end to the fighting and for peace. We can't help but be concerned about the possible global economic ramifications as well. All in all, we remain optimistic about what Toreco strength and it's continue to be coupling from mainland economic uncertainties.
But it is starting to put towards this levels and trickle down into 'twenty 'twenty four that's kind of the way we look at the auto lending business right now.
Great. Thanks for taking my questions.
Youre welcome Alex.
Yes.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad.
Hear from Kelly Motta with K B W.
Jos Fernández: Now, turning to RG and to sum up on my end, we had another excellent quarter confirming our operational and financial strategies. Results benefited first and foremost from our efforts over the years to grow our commercial and consumer business capabilities, which are helping us gain market share and increase capital. Second, from our stable low cost core deposit base. And third, from our new Oriental Services portal and other technology investments, which have increased the use of customer sales service channels, allowing our teams to spend more time on new business development activities.
Hey, al good morning.
Hi, Kelly how are you.
Great.
I loved the detail on slide four it seems like this digital first strategy is really.
A nice penetration here just wondering with the success you're having there is there are opportunities to gain greater efficiencies and potentially.
Allocating branch personnel and how youre thinking about that wrong.
It took to some other investments you may be making.
Thank you Kelly I you know we've been going at this for the last four or five years right. We've been telling them would be investing in the technology we are deploying.
Jos Fernández: Externally, we benefited from the positive and more resilient economic environment in Puerto Rico. All this translates into a strong commercial lending pipeline for us into the fourth quarter and into 2024. And our ability to continue to deploy innovations to better service the banking and financial needs of our customers. Against a higher base, this should be solved in continued growth across most of our businesses next year.
Dollars into into kind of.
Adding capabilities towards.
Commercial lending and consumer lending and certainly it's starting to pay off and you're starting to see not only the adoption levels going up and not only the a consolidation of the portal is as a vehicle to serve our retail customers.
Jos Fernández: In closing, I want to re-emphasize that our performance could not have been possible with the hard work and purposeful commitment of all our team members. We are thankful to them for executing our corporate vision.
We're also a.
Providing similar type of innovations on the commercial side and working on them and more to come. So those are the dollars that we're investing in and as you saw today married some mention our guidance for expenses next year, we're keeping it at the same level and this is the beginning in our minds at the beginning of all.
Operator: These ends our formal presentation operator. Let's start at the Q&A. Thank you. If you have a question at the time, please press star one on your telephone keypad. If you wish to remove yourself, NICU, press star two.
Timur Braziler: Our first question day will come from Timur Razelir with Wells Fargo Securities. Hi, good morning. Good morning.
So starting to.
Extract some efficiencies from the investments we've made in technology not all of them will trickle down to our reduction in non interest expenses. Because we also want to utilize some of those efficiencies to continue to innovate and continue to bring.
Maritza Erismendi: Maybe starting on maybe Merissa's comment around deposit data expectation and still calling for 25% data by year end. I mean, that sounds pretty conservative, but then maybe thinking in a longer term, just starting at such a low base in a higher for longer environment, is the expectation that deposit betas and deposit costs continue to migrate higher, just given such a low starting base, or do you still see some abatement there as we get a quarter to pass the final rate hike?
Technology that will help the market that we operate in here, which is significantly different than the way customers behave then in the states. So.
Some of them some of what you're seeing already into 2024 includes some of the efficiencies that we're seeing and are of the opinion in general is working into 2024 to let out additional efficiencies but.
Again, we're in a very.
Happy and.
I'm excited about the innovations that we're bringing in and how the customers are adopting them and where you're going to continue to do so because that's the way we can differentiate from from our.
Maritza Erismendi: Thank you for your question, Timur. The way we look at this is in terms of deposit costs and and the corresponding data. First, let's look at our market, and the market we're operating in certainly is very different from the US market, and that gives us a different, a very positive landscape to operating. That's number one. Number two, we also look at it from our business strategy perspective and our customer relationship perspective.
Competitors in the island.
Thanks for all the color Jose Rafael.
Could you switching to capital levels remained.
Very strong you're seeing really nice loan growth and I think he picked away a little bit off the buyback this quarter can you just.
With the stock, where it's trading here remind us your comfort and appetite wanes with buyback.
Maritza Erismendi: We also want to have some wiggle room to be able to attract additional customers and also to retain some good relationship customers, particularly on the commercial side. We're sticking with a 25% beta for the end of the year, and we'll take a look at it at the end of the year and see how do we see it as interest rates would probably remain higher for longer, and what impact would that have in our market. As of now, we feel that with the 19% cumulative beta, including government deposits, keeping the 25% beta for the end of the year is the put in way to go.
Okay.
Towards capital return.
The back half of the year and beyond.
So Kelly capital for US has Uh huh.
Number one.
Yeah.
It's gonna be used for loan growth and the opportunities that present ourselves and we're going to deploy that capital there I alluded earlier to.
Alex asked a question on the investment that we made him an M. B S. S. It's part of you know how how we're managing capital.
But also I I, we we are very much focused on our dividend growth and our buyback we're gonna be having that discussion.
January Board, and we will update but our expectation is for us to capital manage as we've done in the past where there are opportunities here in the market in Puerto Rico, which we are seeing we will deploy that capital for loan growth and then at the same time looked at dividend growth and buybacks and so.
Maritza Erismendi: Okay, what is the balance of government deposits, Ecuadorian? The balance of government deposits is in the $350 million range.
Maritza Erismendi: Okay, so I guess as we're thinking about, you know, next quarter, next year, if the positive beta do lag, if they do go off to that 25%, maybe it's not in 4Q, maybe it's 1Q, or 2Q next year, the growth profile still seems pretty strong. Is the expectation that you're able to offset this minimum compression with growth and NII continues to go higher, or is that going to be more challenging in the current environment?
In the script and the plan has not changed from prior quarters on the capital management front.
Thank you so much last thing on the margin I appreciate the color on the MBS purchases.
In terms of loans and loan yields can you remind us where new loan originations, but rates are coming on at.
That'd be helpful. In terms of the how how to think of that margin. Thanks.
Maritza Erismendi: Yeah, so as you saw this quarter and you've seen so far this year, we have pretty good known growth, and we expect that to continue to build throughout the next year. So our way of looking at this is, if the scenario plays out next year, where we need to think about higher cost of deposits, we will mitigate that with our loan growth from a net interest income perspective. So yeah, we might have right now a lower trending name, but that does not necessarily mean it will be a lower trending net interest income because we expect loan growth to compensate for that.
Yeah. So the way we look at this on the short term and we'll update you in the fourth quarter call in terms of 2024, but but the way. We're looking at this is that on the short term NIM might be trending slightly lower from from these levels, but ah, but as I mentioned not necessarily a may interest income.
Maritza Erismendi: Okay, great.
Just simply because we're expecting additional loan growth so.
In the in the near term we are seem to be plateauing slight.
Downturn on the on the NIM a 'twenty 'twenty four is still out there. So we'll see we'll see in the fourth quarter call. How we looked at mean for 2024.
Maritza Erismendi: And then just lastly for me, on the credit front, we saw a bomb up in that charge office in America to explain that and kind of the corresponding decline in the balance ratio. I know it's a hard question to really get a good answer for, but as you think about this normalizing credit environment, how should we be thinking about net charge office, and then would the allowance ratio still well over 2% of loans? Is that pretty flat and kind of goes hand in hand with charge office, or is there maybe an ability to give loans reserves as the broader Puerto Rico story continues to improve?
We are.
Early indicators are that that we're gonna be he nailed it pretty good shape with regards to NIM in 2024.
Okay. Thank you so much.
Thank you.
Once again, if you would like to ask a question press star one on your telephone keypad will pause for a moment.
At this time there are no further questions I will now turn the call back over to Mr. Fernandez for closing remarks.
Thank you operator, thanks again to all our team members and to all our stakeholders, who have listened and looking forward to update you in January .
Maritza Erismendi: Well, thank you, Simu, for your question. And, you know, this quarter included about $7 million in the charge of two loans that were previously served, and we disclosed in our last call in the second quarter, we talked about this loan that was coded in La Crueville, and we complete the restructuring of one of them during the quarter, and it requires about $4.2 million in charge of. The other one was transferred to helpful sale at the end of the quarter, and it requires about $2.7 million in charge of.
A great weekend.
This does conclude today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yeah.
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Maritza Erismendi: That loan was already sold on October 18, so that a reserve were already established in prior quarters. So, if you exclude that too long, our net charge of is about $1.62 per cent for the quarter, which compared really good with the prior quarters. And as we look forward, I think we are starting to see a more normalized labor of charge of compared to $2.1, $2.2.
Uh huh.
Uh huh.
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Maritza Erismendi: Thank you. But we need to keep monitoring that trend to see what would be the normal trend. We think the critical condition continues to be 9 important people compared to the pandemic levels, and that how we see it.
Uh-huh.
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Timur Braziler: Great. Thank you, Philip Haller, and the questions. Yeah, you're welcome.
Alexander Twerdahl: Our next question will come from Alex Twerdahl with Piper Sandler. Hey, good morning. Good morning, Alex.
Okay.
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Jos Fernández: First off, just, you know, it sounds to me Jose now like you're fairly committed to being above $10 billion, and I'm just curious how you're thinking about the overall strategy, the overall gross strategy, if that's no longer sort of an upper level on assets, you know, how you think about, you know, how the balance sheet, my transition over the next couple quarters as you as you continue to deploy the excess capital you have. Yeah, so yeah, look, the way we look at the $10 billion mark this year is very different from the prior two years where we managed below the $10 billion mark, and it has everything to do with where interest rates are and.
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Jos Fernández: And how the balance sheet from the loan side in terms of loan growth and also the deposit side, how is playing out. We feel that it makes sense for us to cross it right now and just make sure that we take advantage of the opportunities to grow the balance sheet from a loan side, particularly here in Puerto Rico. And that's what we're committed to do. We see good opportunities on the commercial side as well as on the retail side.
Uh huh.
Mhm.
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Jos Fernández: So managing it into next year, you know, I'm not sure what exactly you mean by the question on how to manage it into next year, but I can tell you that we will have our balance sheet will be north of the $10 billion, and it will be impacted by the expected loan growth. I've guided to my original remarks. So if there's a follow-up, please feel free because I'm not sure if I understood for your question.
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Okay.
Mhm.
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Jos Fernández: Yeah, I mean, it looks like, you know, sort of just high level on the balance sheet that you guys added to borrowings added to some securities. I don't know if leverage is the right term there, or maybe it's just sort of a mixed match in timing, but I guess as you look to grow loans, how are you thinking about funding it, you know, the component. Yeah, I get it. I get it.
Jos Fernández: Now I get it. So that's a very valid and good question. The way we look at this is the scenario of interest rate that we are using, and we expect our interest rate forecast is for interest rates on the Fed from side to remain, you know, kind of plateauing at this level, five and a quarter, five and a half. And we also expect into 2024 interest rate to start picking down the second half of the year.
Jos Fernández: So when we look at that scenario and us being an asset-sensitive bank, we felt that it was prudent to put in some now with MBSs yielding 560 and north of that with short duration for four or four and a half, five years duration, it will be prudent for us to protect ourselves in an environment where interest rates start moving down. Just recall a year and a half ago, we kept dollars cash and we did not go long on duration.
Jos Fernández: And that was the prudent right thing to do. I think that in our scenario and the way we look at interest rates today, the right and prudent thing to do is to go longer on duration, take advantage of the higher yields. It might not be optimal because life is not perfect, right? But it certainly helps us mitigate potential recessionary environment in the states and the resulting lower interest rates on the Fed.
Jos Fernández: We are financing that also with short-term pedohomo advances and repels. And today the spread is not that significant. But again, based on our forecast and our expectations of a second half of next year interest rate starting to tickle down, we will have our cost of borrowings would be declining in that scenario. So that's kind of the picture and that's how we looked at this. And we will continue to manage the balance sheet in that fashion because our capital is clearly being deployed first and foremost for long growth and the opportunities that we're having. So that's kind of how we're looking at this. And again, I answered a question earlier on deposits. We're very much, focused on also retaining good banking relationships on the deposit side. Okay, that's, that's good.
Jos Fernández: You know, just expanding on your comments on long growth and the strong pipeline into the fourth quarter in 2024. You know, I think some of us have been talking about the the Metro Peacetus deal that was announced earlier this week and you guys are listed as a bank that would be potentially participating in some of the financing. Can you talk a bit about your appetite for something like that and sort of how big of a piece you might be willing to take on?
Jos Fernández: So so the way we look at it is we we're part of a with three bank market pretty much and and we we we're very much part of the community so we need to be an important participant in those type of prioritization certainly depends on who how aware and what right in terms of the the opportunity. But yes, we we are a participant who are not a significant participant by no stretch of the imagination, but we are certainly a solid participant for our size and and our appetite. We think it's also our way of contributing to to the reconstruction and improvement of the infrastructure in Puerto Rico.
Jos Fernández: Okay, and then I guess as we think about the long mix going into next year, you know, this year and in past years auto has been a very big component of that. Do you expect that to continue or do you think we'll see a little bit of a mix shift over the next couple more to more commercial. So yeah, so that's a question. You guys ask me every quarter and every quarter I say, well, I'm happily surprised that long long growth continued to to remain, right?
Jos Fernández: I think we're starting to see that plateauing in terms of the latter parts of the third quarter, we started to we started to see a little bit of a slowdown. I think it's more from competitive forces than anything else, but we're monitoring it and we're probably going to see not a significant drop, but it's starting to plateau at this level and and trickle down into 2024. That's kind of the way we look at the auto lending business right now. Great, thanks for taking my questions. Yeah, you're welcome Alex. Again, if you'd like to ask a question, press star, then the number one on your telephone keypad.
Kelly Motta: We're now here from Kelly Mata with KBW. Hey, all good morning. Hi, Kelly. How are you? I'm great. So I love all the detail on sites for it seems like this digital first strategy is really a nice penetration here.
Jos Fernández: Just wondering with the success you're having there, is there opportunities to gain greater efficiencies and potentially, you know, we're allocating branch personnel and how you're thinking about that relative to some other investment you may be making. Yeah, thank you, Kelly. You know, we've been going at this for the last four or five years, right? We've been telling we've been investing in the technology. We're deploying dollars into into kind of Adding capabilities towards commercial lending and consumer lending and certainly it's starting to pay off.
Jos Fernández: And you're starting to see not only the adoption levels going up and not only the consolidation of the portal as a vehicle to serve our retail customers, we're also providing similar type of innovations on the commercial side and working on them and more to come. So those are the dollars that we're investing, and as you saw today, Maritza mentioned our guidance for expenses next year, we're keeping it at the same level.
Jos Fernández: And this is the beginning, in our minds, it's the beginning of us starting to extract some efficiencies from the investments with mating technology. Not all of them will trickle down to a reduction in non-interest expenses because we also want to utilize some of those efficiencies to continue to innovate and continue to bring technology that will help the market that we operate in here, which is significantly different than the way customers behave than in the States.
Jos Fernández: So, you know, some of what you're seeing already into 2024 includes some of the efficiencies that we're seeing. And our us, the team in general, is working into 2024 to add additional efficiencies. But again, we're very happy and excited about the innovations that we're bringing in and how our customers are adopting them, and we're going to continue to do so, because that's the way we can differentiate from our competitors in the island.
Jos Fernández: Thanks for all the color of the FAO. So, to the capital level to remain very strong, you're seeing really nice long growth, and I think you picked away a little bit at the buyback this quarter. Can you just, with the stock we're trading here, remind us you're comfort and appetite with buybacks and how you're looking towards capital or turn towards the back half of the year and beyond. Yeah. So, Kelly, capital for us has, number one, it's going to be useful long growth and the opportunities that present ourselves, and we're going to deploy that capital there.
Jos Fernández: I alluded earlier to Alex's question on the investment that we made on NBSs. It's part of how we're managing capital, but also we are very much focused on our dividend growth and our buyback. We're going to be having that discussion in the January board and we'll update, but our expectation is for us to capital manage as we've done in the past, where if there are opportunities here in the market in Puerto Rico, which we are seeing, we'll deploy that capital for long growth and then at the same time look at dividend growth and buybacks. So, the script and the plan has not changed from prior quarters on the capital management.
Maritza Erismendi: Thanks so much.
Maritza Erismendi: Let's see on the margin. I appreciate the color on the MBS purchases. In terms of loans and loan yields, can you remind us where new loan originations, what rates are coming on at? That would be helpful in terms of how to think of the margin. Thanks. Yeah, so the way we look at this on the short term and we'll update you in the fourth quarter call in terms of 2024. But the way we're looking at this is that on the short term name might be trending slightly lower from from these levels, but but as I mentioned, not necessarily a major income, just simply because we're expecting additional loan growth.
Maritza Erismendi: So in the in the near term, we are seeing the plateau and slight downturn on the on the name. 2024, it's still out there. So we'll see, we'll see in the fourth quarter call how we look at mean for 2024. But we are early indicators are that we're going to be in a pretty good shape with regards to name in 2024. Okay, thank you so much.
Maritza Erismendi: Thank you.
Operator: Once again, if you would like to ask a question, press star one on your telephone keypad. We'll pause for a moment.
Jos Fernández: At this time, though, I know for the questions, I'll now turn the call back over to Mr. Fernandez for closing remarks. Thank you, operator. Thanks again to all our team members and to all our stakeholders who have listened in looking forward to update you in January.
Operator: Have a great weekend. This does conclude today's conference calls. Thank you for your participation. You may now disconnect.
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