OFG Bancorp
NYSE:OFG
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OFG Bancorp
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Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Ashley, and I will be your operator today. Our speakers today are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors and Maritza Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks that can be found on our Investor Relations website on the homepage in the What's New box or on the Quarterly Results page.
This call may feature certain forward-looking statements about management's goals, plans and expectations. These statements are subject to risks and uncertainties outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.
All lines 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.
Good morning, and thank you for joining us. Please turn to Page 3 for our conference call presentation. We had another outstanding performance in the third quarter earning $0.81 per share. This reflects several factors: Our consistently growing recurring net income, our larger scale, our focus on increasing digital utilization and customer service differentiation, and Puerto Rico's nascent economic and post-pandemic recovery. All this continues to validate our optimism on Puerto Rico's economy and OFG's future.
Our third quarter results confirm this across all businesses. Total core revenues were $135 million, a 4% annualized increase compared to the second quarter. Net interest income increased to $103 million, in part that benefited from a 17% decline in cost of funds. Banking and financial services revenues rose 3%. Provision for credit losses was a $5 million net benefit as asset quality continued to trend to levels closer to U.S. peer banks. Non-interest expenses fell 5%, reflecting in part reduced credit-related expenses, and pre-provision net revenues increased to $56 million from $52 million in the second quarter.
Looking at the September 30 balance sheet, customer deposits increased $154 million to $9.2 billion, reflecting even greater liquidity on the part of both commercial and consumer customers. As a result, both cash and assets grew. Loans held for investment declined $87 million. Excluding PPP loan forgiven, they increased $5 million. New loan origination remained strong at $556 million, ex-PPP originations now totaled more than $1.6 billion as of the nine months, that is up 69% compared to the same period last year and 79% compared to the same period in 2019 pre-COVID.
During the third quarter, we also successfully executed on our capital actions. We acquired $40.2 million of shares as part of our current $50 million buyback program. We increased our common stock dividend to $0.12 per share from $0.08 in the first and second quarters, and $0.07 in the year-ago quarter, and we completed our $92 million redemption of all preferred stock.
Please turn to Page 4. At OFG, we believe better banking is built upon fulfilling our purpose, mainly helping our customers, our people and our communities achieve their financial wellbeing. During the third quarter, for our customers, we continue to demonstrate our agility by launching the first digital residential mortgage process in Puerto Rico. With one click and in just minutes, a customer can get a prequalification letter, access valuable information about the mortgage process and apply online all in one place.
We also quickly process forgiveness for our PPP customers. We have now processed forgiveness for 91% of first and 25% of second round PPP loans using our proprietary all-digital system. We believe faster, better solutions like these show our retail and commercial customers the value of doing business with Oriental. Online and mobile banking 30 and 90-day utilization levels continue well above pre-pandemic levels. This continues to validate our longstanding digital strategy and its growing acceptance by our customers in the market in general.
For our people, we have decided on a mandatory COVID vaccination policy to keep our customers and people safe. We have also implemented a hybrid work model to increase flexibility for our people. And as we mentioned on the previous slide, we have increased the hourly base pay rate for non-salaried staff.
For our communities, PASH Global and Oriental closed on a $15 million financing for a joint venture between PASH and PUMA Energy. This is enabling 200 PUMA gas stations in Puerto Rico to install solar panels to produce and consume solar energy. This project is the first of its kind and scale on the island. We have also been working on several new corporate social responsibility programs. One program launched in the third quarter is a farming developing program with the Puerto Rico Conservation Trust to help several communities achieve economic sustainability.
We are extremely proud of these achievements. At the end of the day, there is nothing more rewarding than being part of a team that delivers on its purpose. This quarter's overall performance energizes us at OFG to work harder and to aspire for more.
Now, here is Maritza to go over the financials in more detail.
Thank you, Jose. Please turn to Page 5 to review our financial highlights. Total core revenues were $135 million. That is an increase of about $1.4 million or about 4% annualized from the second quarter. This is as a result of positive impact of $1.8 million decline in cost of funds, a $1 million increase in core non-interest income and $800,000 increase from cash and investment securities and $730,000 as a result of one additional day. This more than offset a $2 million decline from PCD loans and a $700,000 loan prepayment that benefited fee income in the second quarter. The PCD decline was due to a combination of lower volume, mainly from mortgage paydowns and lower rates.
Non-interest expenses totaled $79 million. That is a decrease of $3.8 million from the second quarter. The third quarter included a $2.2 million benefit in credit-related expenses. This was mainly driven by gains on sales of real estate owned. The second quarter included a $2.2 million technology project write-down. The third quarter also included a combination of increased compensation from hourly staff on our previously announced cost savings. Overall, we continue to see recurring operating expenses in line with our previously announced plans for the year.
The higher revenues and lower non-interest expenses resulted in increased operating leverage. The efficiency ratio improved to 58.6%. This compares to 62% in the second quarter. Our goal is to continue to improve our efficiency ratio to the mid-to-lower 50% range. Return on average assets was 1.6%, return on average tangible common equity was 70.7%. We continue to build capital. Tangible book value per share was $18.59. This is an increase of 3% from the second quarter.
Please turn to Page 6 to review our operational highlights. Average loan balances totaled $6.5 billion. That is a decline of $133 million from the second quarter. This was due primarily to residential mortgage paydowns on PPP loan forgiveness. In turn, this was partially offset by new commercial and auto loans. The change in mix resulted in a 7 basis point decline in loan yields.
Higher levels of residential mortgage breakdowns reflected increased liquidity on the part of consumers. Our residential mortgage portfolio consists of legacy Oriental mortgage loans and mortgage loans from the BBVA and Scotiabank acquisition. Total new origination was $556 million, ex-PPP that is down $85 million from the second quarter, but it is up $109 million year-over-year.
We believe we are continuing to see generally a strong trends in mortgage, commercial and auto. We continued to see increase in demand from commercial loans to expand business operations, building new stores and warehouses, buying inventory or making acquisitions. Commercial portfolio [indiscernible] balance ex-PPP has increased two consecutive quarters. Average core deposits totaled $9.1 billion. That is an increase of 1.6% or $140 million from the second quarter. Increases in non-interest bearing accounts, savings accounts and non-accounts were partially offset by the decline in customer CDs.
Core deposit costs continue to fall. They were 30 basis points in the third quarter. That is a reduction of 8 basis points from the second quarter. This reflects general rate reductions and the continued maturity of older, higher price CDs. As a result of the increase in deposits, average cash balances totaled $2.7 billion. That is an increase of 7% or $180 million from the second quarter. The average investment portfolio was $750 million that increased $106 million or 70% from the second quarter. That includes the partial impact of $250 million of MBS purchases at the end of the quarter, taking advantage of market conditions.
Net interest margin was 4.12%, a decline of 10 basis points from the second quarter. The increased amount of cash reduced NIM by 6 basis points. Our current strategy is to continue to look for opportunities to deploy excess liquidity through lending, capital actions for investments.
Please turn to Page 7 to review our credit quality and capital strength. Asset quality metrics continue to trend positively. Our net charge-offs were 37 basis points. Third quarter net charge-off of $6 billion included $6.5 million for our previously reserved amount on our commercial loans. The yearly and total delinquency rates were 2.06% and 3.82%, respectively, some of the lowest levels in the last five quarters. The nonperforming loan rate on the non-PCD loan portfolio was 1.93%, it's lowest level in the last five quarters.
As a result of all of these, provision for credit losses was a net benefit of $5 million, that reflects $4.3 million of net reserve releases. Our allowance coverage was 2.82% on a reported basis and 2.88% excluding PPP loans. The CET1 ratio remains high compared to our U.S. peers at 13.52%. Stockholders' equity was $1.05 billion, a decline of $26 million from the second quarter. This reflected the redemption of Preferred Stock Series D and the common stock buyback. A good portion of this was offset by the increase in retainer. The tangible common equity ratio was 8.86%.
Now, here's Jose.
Thank you, Maritza. Please turn to Page 8 for our conclusion. As I mentioned earlier, we had a strong performance this quarter at all levels. Our performance and credit metrics continue to be equal to or better than Mainland peers. We executed most of our stock buyback program in addition to increasing our common share dividend and redeeming our preferred stock.
Looking at the big picture, Puerto Rico continues to benefit from federal reconstruction and COVID stimulus. But the relative economic impact here is more meaningful than in other U.S. jurisdictions, given the size of our economy and average incomes. As a result, we are continuing to see incremental business sector optimism, confirming Puerto Rico's economic revival.
Our plan is to continue to take advantage of our momentum in this improved economic environment. We intend to deploy excess liquidity for loan growth and/or capital return initiatives. We also intend to accelerate the speed of our transformation, further simplify operations and improve efficiencies, all part of our effort to serve customers faster and better, while helping them achieve their financial wellbeing. We at OFG are more than ready. Thanks to all our resilient team members for their continued dedication and commitment.
This ends our formal presentation. Thank you for listening. Operation, please begin the question-and-answer session.
[Operator Instructions] And we'll take our first question from Alex Twerdahl with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Alex.
Good morning.
The first off, Jose, I was hoping you could give us a little bit more color on what you're seeing in terms of loan growth, sort of what happened, and I guess really I'm most interested in commercial, but also would be interested in some of the other categories, but what happened during this quarter in terms of things like line utilizations? Is there any construction component in there? And what do the pipelines look like heading into the last three months of the year?
Yes. So first off, Alex, I think when you look at on the commercial side particularly, we need to think about loan growth. Looking at several components, you alluded to some of them. Number one is certainly production and our production levels continue to remain strong, so we feel optimistic with what we have accomplished so far in terms of our commercial portfolio and how we've grown that vis-a-vis last year and vis-a-vis 2019. So clearly our scale and the acquisition that we did at the end of 2019 is adding additional capabilities for us to have higher production.
In terms of paydowns, we certainly are seeing excess liquidity in the market and we are still seeing higher levels of paydowns than we've seen in years passed and we expect that to – maybe we may at this level for the rest of the year and hopefully we'll see some changes and progress on that next year. In terms of line utilization, it remains very low again due to the high liquidity levels that are right now in the market. So right now, we are probably close to 25% of the normal utilization on the lines. That's what we are seeing.
And then lastly, the pipelines. I think when you look at our pipeline on the commercial side, we see strong pipelines and we see businesses getting ready for continued economic growth. And when you look at it all, I went through four components, right, production, paydowns, utilization and pipeline. Right now, what I see today, positive on production, positive on pipeline, line utilization on paydowns are putting pressure on loan growth.
I expect sometime in the 2022 to continue to see positive production, but then positive trends on paydowns and utilization, so that with a strong pipeline, we can see loan growth. So I'm optimistic. I think what we are building today, it's going to pay off in the next several years as the economy becomes more sustainable in its growth.
Great. And has anything changed in terms of your thought process around the mortgage portfolio? You had some pretty strong gain on sale on mortgage this quarter, but is there any change in the appetite to keeping some on the balance sheet?
So what we saw this quarter was a slower level of refi's. So our production came in lower than prior quarters in this year, particularly because of a slower refinancing activity. But that also plays positively on the book, right? So instead of having $100 million of slowing in repayments from the mortgage portfolio, we only had around $62 million, so give and take. And then on the fee side, on the mortgage banking activities, we are also seeing that our servicing portfolio remains steady and we are getting good valuation on the servicing asset as well as the sales of our originations where we are generating good gains there. So I don't see a change going forward on that side.
Okay. Switching gears a little bit to talk about capital. You guys announced the $50 million share repurchase since the last conference call, which is great, maybe a little bit lower than some investors would have expected. But when you combine it with the $92 million payoff for the preferreds earlier this year and the dividend, it gets your total capital return for this year above what or potentially above 100% of earnings. Can you talk a little bit about sort of what the target capital levels are in terms of the common equity Tier 1? You're still pretty elevated at 13.5% and sort of what the appetite is for buybacks, go out from here and then considering that you've made pretty good headway through the $50 million when we should expect or when we can expect that to be readdressed by the Board?
Yes. So first off, you are correct. We returned capital across the Board this year above 100% of our earnings. So we are executing pretty aggressively on that side in 2021. When you look at 2022, we'll take a look at our capital activity and capital actions – potential capital actions in the January Board. So that's kind of in the beginning of the year and we finished through the budget process, which we're in the middle of it right now and have a clear picture on what's the size of what we should be executing during 2022.
Longer term, and again, we feel that we should not be doing above 100% of our earnings given the levels of CET1 that we have right now in the high 13%. But longer term as trends in credit continue to inch closer to the peers in the state or peers in the States, then our capital levels should not have much different from the operating capital levels at our peers in the U.S. are operating one. So CET level closer to 11% or so, that's kind of a good target to have going forward.
And so I think we have good momentum on our capital actions and the optimism that we're seeing in the island, we wanted to continue to be confirmed. We want to feel more and more incrementally comfortable with that economic revival that we are each quarter seeing improve. And based on that, we'll execute on the capital actions. But we are clear that like we did this quarter, where we're buying our stock back at between 8x and 9x earnings. So that's to me significant discounts from some of the peers in the States. And I think it is very good return for our shareholders still to be buying that stock.
Totally agree. Switching gears to the ACL, how should we think about it from here? You guys are still above your CECL day 1 by my calculation, yet net charge-offs are now running well below where they were prior to that CECL implementation. So kind of what's holding the reserve up at this point and kind of where the milestones to expect that ACL to drop lower?
Yes. So let me give you a big picture, and if I miss anything, Maritza will correct me and get into the details. But the big picture is how we look at ACL is based on our methodology. Our methodology has several components, charges-offs, book balance and the macroeconomic kind of scenarios and projections. Those macros still have risk embedded in it and for Puerto Rico particularly. You've got COVID and it's got still all the issues referring the coming out of the bankruptcy and a lot of stuff.
So from our side, the macroeconomic scenarios still have some embedded risk in it that are preventing us from releasing some of that coverage that we have – that we serve that we have.
Also, I think we do also have a higher proportion of auto loans and I mentioned charges. We are having right now net recoveries and I don't – we don't think that we should be looking at our ACL from the current state where we're seeing net recoveries and that will project going forward. That's not sustainable longer term. So we will have certainly a level of charges at some point in time on our consumer portfolios. Will they be back to what they were prior to COVID, we don't expect that. We expect the trends to be completely – consistently more positive or better than what we saw in 2019 before COVID, but we also think that those portfolios will stabilize and start showing some levels of charges at some point in 2022. So that's kind of our big picture. Did I miss anything, Maritza?
No, I think the essence of what we're doing right now. So…
It sounds like from what you said on the macro side that if we do get to bankruptcy resolution by the end of this year and it seems like that we're getting pretty close to that, correct me if I'm wrong, that we could see that at least that piece of the equation change favorably in the next quarter?
Yes, I mean that's one of the components, it's pretty noisy here on the ground. There is a lot of noise regarding that. And I know the political processes are also uncertain. So that's kind of how we see it. Alex, but at the end of the day, I think it's a good problem to have.
Agreed. And then talking about the NIM for a little bit, I was hoping Maritza, I'm not sure if you said in your prepared remarks if you had the impact of PPP fees in the third quarter and then also what remains of PPP fees that have yet to be recognized?
Well, yes, for this quarter, I will talk about the net impact of PPP because at the end, we did have higher fees for the quarter. It was about $1.2 million, but that was offset because of volume factor. We have lower balances there and [debt repaid] and the net impact of PPP within the NII will be above $400,000. So volume factor mitigates a little bit increase in the fees. And I don't have the unamortized portion here with me, but as Jose mentioned, a big portion of the PPP first round program with 95% has already been paid off. So it should not be significant among that is remaining on the books because mostly the second round that was lower than the first one.
Okay. And then I miss what you said about the mortgage-backed security purchases you did towards the end of the quarter. Do you say its $250 million of mortgage-backed securities you did during the quarter? Could you talk little bit more about that?
Yes. By the end of – it was mostly during September that we did the acquisition. We take advantage of higher rates in the market and we acquired $250 million MBS.
Okay. And then in terms of the – when I look at the balance sheet, I still see over 20% cash. And what's your appetite for MBS is, how willing are – like how much of that are you willing to ladder out in the next call it six to 12 months?
It's all being opportunistic about how interest rates fluctuate from here and throughout the next several quarters. We recognize that we have excess cash, but at the same time, we don't want to kind of go long on mortgage-backed securities with low rate. So when we see an inching up of rates, we go in into the market and buy some. As we see interest rates trending upwards, we'll be more consistent in our purchases of MBSs going forward. We also want to make sure that – we think deposits will stabilize. We had a good increase in deposits again this quarter, which is good for us, but we need to kind of feel more comfortable also on how is that going to play out next year as COVID stimulus starts to flow out and what is the need on businesses to use that cash. So we just want to be careful there too. But I agree with you, we have a significant portion of our balance sheet in cash and we need to kind of put it to work sooner rather than later.
Yes. And then on the same sort of lines of deposits, time deposits, you saw some – I guess some flow out. Can you just remind us what's maturing in the fourth quarter and into next year in terms of time deposits, so we could see reprice lower?
Yes. For this last quarter, there is about $100 million that will mature and next year, it's about $400 million. So that's the runoff of the portfolio.
The biggest...
And do you have the rates...
Okay, go ahead.
Sorry, Alex. I was speaking when you started to speak. So you need to repeat the question.
I was just going to ask what the rates were on that $100 million in the fourth quarter and the $400 million for next year.
For the fourth quarter, it is about 80 basis points maturity; next year, it's lower, it's about 75 basis points in average for the year and we see those CDs being replaced at 30, 35 basis points, that is the average cost that we have right now.
Okay. Just a couple more questions that I had just in terms of modeling fee and fee revenues. It looks like the banking service revenues have stabilized a little bit over $80 million. We don't really have a clean quarter post Scotia. So is that $18 million, is that the right level to use?
Yes, we certainly see businesses and consumers having more activity and after COVID and Puerto Rico's COVID situation has turn extremely positive after the vaccination. So what we're seeing is opening up of the economy, we are seeing more activity and therefore banking fees are kind of leveling at the $18 million a quarter. We do have some seasonality in some of the quarters throughout the year, but in terms of activity, but we feel that $18 million is a good number.
Okay. And then finally on expenses, Maritza, you talked about sort of the recurring expense being in line with previous expected expense levels. Can you just remind us what the – when you talk about that guidance, exactly, what it says?
Can you repeat the question again, sorry.
I think in your prepared remarks, you said that expense levels were consistent with previous expected expense levels or something along those lines. And I was hoping you could just remind us in terms of the run rate for expenses. How you guys are thinking about the run rate from here?
Yes. Well, yes, the recurring operating expenses, we see them between $79 million, $80 million a quarter, but keep in mind that we will continue to invest in technology and developing the digital transformation, but we still think that we would be able to absorb those incremental. So run rate right now is almost $80 million to be in the baseline, okay.
Perfect, I think that's all my questions. Thanks for taking the time.
Thank you, Alex. Have a good day.
[Operator Instructions] And we will take our next question from Steven Martin with Slater. Please go ahead.
Thanks a lot. Most of my questions have been answered, but want to give you three and they are somewhat related. You talked a little about your transformation and accelerating the speed. Can you talk about that? And your customer facing technology, which I know is very important to you, and some of the changes, what is working well and what is it? And related to that, you've mentioned acquisitions before on how would they play in given that you have excess capital and plenty to catch?
Well, thank you for your question. Regarding our transformation that I mentioned on my remarks. In terms of what we're trying to achieve is basically trying to make sure that we focus on the customer experience, trying to be more agile and faster on how we serve our customers and certainly bring them added value to help them achieve their goals, right. So that's very general, but at the end of the day, everything that we're doing in terms of our people, in terms of our digital strategy and in terms of our, how do we analyze the data that we have to actually make a difference and be able to serve our customers better and differentiate ourselves against the local competitors.
That's kind of on the transformation and that transformation requires that not only be the front end of the equation is agile, fast and speedy, it requires also that the back-end too, and as you probably can understand, it's harder to push the back to the speed of the front. So to me that's the biggest challenge we have and we're pushing hard.
And again, we see that also in terms of our business model and how do we continue to transform our business model to be different and add value to our customers and the customer experience on the commercial side as well as on the individual side. So that's what I'm referring to.
And in the process, we will also be kind of changing and transforming our distribution and it's not a – the approach is not a traditional branch model. So we've got several other components that include technology as an integral part of that distribution model and that's kind of how we're seeing that. So that's what I'm referring to and that's why Maritza mentioned about the investments that we're making. So what we're trying to achieve here in terms of efficiency too is how do we kind of make the right investments in the transformation that we're trying to achieve, as well as keeping expenses under control and trending lower. So that's the answer for the first question.
The second question. I don't recall exactly what you asked me. So if you can repeat. I'll appreciate it. And then the third question you asked something about acquisitions and looking into future acquisitions, while the market here in Puerto Rico has already been consolidated. And as you know, we were an important part of that. We finished the acquisition of Scotia and integration of Scotia already and the scale that we have now is showing on the production side on the loan book and as well as on the deposit side. So we do understand that our growth coming in Puerto Rico is going to be coming from our larger scale and the positive economic momentum and our ability to differentiate from our competitors. So forgive me for the second question because I don't recall.
No, I think you've got the second question – the first and second together because it was transformation in technology. And I think you answered them both at the same time.
Okay. Perfect.
I appreciate the answers. Thank you very much.
Okay. Thank you very much.
[Operator Instructions] And it does appear that there are no further questions at this time. I will turn the call back over to management for any closing remarks.
Thank you, operator. Thanks again to all our team members, who have helped our customers through the pandemic and worked so hard. Thanks to our stakeholders, who have listened in. Looking forward to our next call. Have a great day.
And this does conclude today's program. Thank you for your participation. You may disconnect at any time.